Bergen County, NJ Bankruptcy Blog

Tuesday, May 12, 2015

Means test: The double standard that makes it harder for consumers to qualify for a chapter 7

Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, a consumer having a high income may find it more difficult to qualify for a chapter 7 bankruptcy. What's higher income?  As of the writing of this blog, in the state of New Jersey, a single person can qualify by having annualized earnings of $60,265 or less, while a married couple may be limited to $70,845. For a family of 4, that amount would have to be $89,413 or less to qualify. The annualized income is determined by taking the last six calendar month's income, and multiplying by two. 

The test determining whether one is able to file is referred to as the "means test."  If you do not pass the "means test," the bankruptcy filing is presumed to be an "abuse," subjecting the case to dismissal by the bankruptcy court.

If a consumer's income is higher than those limits, he or she still may "pass" the means test under a rather complex formula taking into account the bankruptcy debtor's expenses, calculated based upon IRS standards.

The means test applies only to debtor's whose debts are primarily consumer debts.  This means if you are a consumer, and you make too much money, you probably cannot file a chapter 7 bankruptcy.

But what about a person whose debts are mostly business related?  Does that mean that such person can discharge his or her debts, even when there is sufficient income to pay the creditors?  

A recent decisions in an Oklahoma bankruptcy court says "yes."  In the case of In re Bushyhead, 2015 WL 213569 (Bankr. ND Okla 2015), a married couple suffered a business failure leaving them with over $400,000.00 in debt.  The husband was able to bounce back, finding a job which paid him $350,000 annually.  With that kind of income, one might assume he would have the ability to pay his creditors back.  Certainly, if he were a consumer debtor, he would never have passed the means test, and would be ineligible to file a chapter 7 bankruptcy.

 A motion was filed to dismiss the bankruptcy case, with the trustee arguing that the case was filed in bad faith, since the debtor made no effort to even try to pay his debt.

 Despite these objections, the court denied the motion, allowing the debtors to obtain their discharge despite their high income.  The court held that bad faith was not grounds to dismiss the bankruptcy case when it involved non-consumer debt.   Neither was the debtors' ability to pay.  The court found that a non-consumer bankruptcy case could be dismissed only for causes specifically provided in the Bankruptcy Code, or "where the debtor has taken advantage of the court's jurisdiction in a manner abhorrent to the purposes of chapter 7," which the court held would occur in only a very few limited circumstances.

A word of caution here.  This is one bankruptcy court's opinion, which can be overturned on appeal.  Other courts have held differently, and there is no reported decision governing the bankruptcy courts in the state of New Jersey on the subject.  However, it is very clear that there is a statutory double standard when it comes to qualifying for a chapter 7.   There are limits that apply to a consumers income, while no such specific limits apply to a business debtor.

Bottom line is, it is much easier for a person with high income to discharge debts through a chapter 7 if they are the result of a failed business, as opposed to consumer credit card debt.

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