The Means Test


The Huffington Post is reporting today that David Adkins (aka “Sinbad”) filed for Chapter 7 bankruptcy in California. Sinbad’s case, in my view, completely underscores the unfairness of the 2005 amendments to the bankruptcy code known as the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA“).  Prior to these 2005 amendments  people of all incomes could file for bankruptcy under Chapter 7. BAPCPA, however, restricted the number of people that could declare Chapter 7 bankruptcy. The act sets out a method to calculate a person’s income, and compares this amount to the median income of the person’s state. If the income is above the median income amount of the debtor’s state, the debtor is subject to a “means test.” For people subject to the means test, the test is calculated as follows. The debtor’s “current monthly income” is reduced by a set of allowed deductions specified by the IRS. These deductions are not necessarily the actual expenses the debtor incurs on a monthly basis. Some commentators have referred to these deductions as “presumed expenses”. The deductions applicable in the “means test” are defined in 11 U.S.C. § 707(b)(2)(A) and include:

  • living expenses specified under the “collection standards of the Internal Revenue Service”,
  • actual expenses not provided by the Internal Revenue Standards including “reasonably necessary health insurance, disability insurance, and health savings account expenses”,
  • expenses for protection from family violence,
  • continued contributions to care of nondependent family members,
  • actual expenses of administering a chapter 13 plan,
  • expenses for grade and high school, up to $1,500 annually per minor child provided that the expenses are reasonable and necessary,
  • additional home energy costs in addition to those laid out in the IRS guidelines that are reasonable and necessary,
  • 1/60th of all secured debt that will become due in the five years after the filing of the bankruptcy case,
  • 1/60th of all priority debt, and
  • continued contributions to tax-exempt charities.

If a debtor cannot pass this “means test,” then there exists a ‘presumption of abuse,’ which essentially means that the person’s Chapter 7 case could be dismissed, or converted to a case under Chapter 13. Only a handful of people are immune from the means test: soldiers who have incurred their debt while in defense of this nation, people on social security, and some people in the reserves or national guard. And- wealthy people like Sinbad.

According to Sinbad’s bankruptcy schedules, he grossed over $1 million in the six months leading up to his bankruptcy filling. After all of his business expenses (which includes around $14,000 in monthly legal fees, $14,000 in travel expenses, and $6,800 in ‘personal expenses) Sinbad claims to make, on average, $16,000 per month.  After all of his expenses, Sinbad clams to have no money left over to pay his bills. According to the U.S. Census, the median income for a family of two (presumably Sinbad and his wife) in California is roughly $64,000.  So- the question I hope everyone is asking is “How come Sinbad, with his alleged $192,000 per year, is able to pass the means test?” The answer: Most of Sinbad’s debts are “nonconsumer” debts. Most U.S. courts have held that if greater than half of the dollar amount of a person’s debt is non-consumer or business, the means test does not apply. Essentially- in 2005 Congress made it more difficult for everyone to file for Chapter 7 bankruptcy- except for soldier’s in active duty, retired people with social security as the only source of income, and people with ‘business debt.’ Out of the dozens of clients I’ve represented that own their own small business, only a handful have been able to be exempted from the means test. Congress gave wealthy ‘business owners’ like Sinbad a huge break and ordinary Americans the shaft.  I don’t fault Sinbad for obtaining the relief that he is entitled to under the bankruptcy code. I fault Congress for letting people like Sinbad out of their debts but not letting the electrician, construction owner, and several employees of the United States Air Force at Hill Air Force Base obtain the same relief. My clients were obliged to file under Chapter 13 to repay a portion of their debts. Why is Sinbad immune? No doubt- the answer lies with campaign finance and those who can throw dollars behind their voice. This is why I have, do, and always will be a advocate for rigorous campaign finance reform. It is the problem that will solve all the other problems. 

Everyone is entitled to the relief provided for them by law. If you have business debt that is crushing your finances, then you should obtain relief! If you have a small business or not; if you are crushed under business or consumer debt- call my office for a free consultation. 

About Jason

My name is Jason Richards, and I am an attorney in Northern Utah. I run my own practice and have offices in Ogden and North Salt Lake. I grew up in Ogden and attended local public schools. I graduated from the University of Utah Law School with a juris doctorate degree. My practice primarily centralizes on bankruptcy and debt collection. I also specialize in criminal defense and other areas of civil litigation. I represent clients who are suffering from crushing debt that seems hopeless. I have helped many people file for relief under Chapter 7 and Chapter 13 of the United States Bankruptcy Code. I have also helped dozens of clients renegotiate their debt and defend them in debt collection actions with ruthless creditors. If not dealt with promptly and aggressively, creditors will achieve their goal to collect. Bankruptcy is certainly not the solution for everyone. Everybody's situation is different. The best way for you to determine if it is right for you is by consulting with a local bankruptcy attorney. Bankruptcy has helped millions of Americans receive a fresh start and financial independence.
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