Means Test - Passing, but increase in income after 6 month lookback period

[Throwaway92]

Hello All,

I have a unique situation concerning the Chapter 7 means test (Colorado). I am a high income earner and I was laid off from my previous job which resulted in 1 month of no income (January). I have a new job that I started in February and with my current income I still am over the median income for means test purposes. If I file a Chapter 7 case July 1, my 6 month CMI will include 1 month of no income (January), and 5 months of my new income (Feb-Jun). This average will bring my income low enough (still over median) where my expenses will then be enough for me to pass the means test.

My question is - What impact does my current higher income have moving forward? Will they strictly only go off of the 6 month lookback period that I filed? or will they look at current and future income based on the new job I got in February and force me into a chapter 13? (My new income is too high and expenses do not offset enough to pass means test)

Any help is appreciated.

[despritfreya]

It does not appear that the Means Test is the problem. The problem may be Schedule I and J. The Means Test is a look back analysis. Your budget as described on Schedule I and J is a look forward analysis. How much money is left over as reported on I and J? Remember, expenses listed on J need to be reasonable. You are not spending $300 per month for recreation, if you get my drift.

Des.

[Throwaway92]

despritfreya thank you. How much is too much leftover? I will have a couple of hundred dollars (200-400). Do they follow the 25% of your unsecured debt formula? Or is it completely subjective ?

Thanks

[justbroke]

Short answer: They follow both. The presumption arises once the DMI is greater than $136.25 per month (or 60 X DMI is less than 25%, whichever is greater). At no time, though, can the DMI can exceed $227.50 a month... regardless of the 25% calculation. So basically DMI must be no greater than 136.25 or 25% of 60 times the DMI.

Long answer: They make it so difficult to find this and the Means Testing is buried under many paragraphs in the code.

The original amount, for means testing, was determined in 2005 and it is periodically automatically every three years in April. The last updated was effective April 1, 2019. (The next adjustment would be April 1, 2022.)

A presumption of abuse arises when the "disposable monthly income" (DMI) is at greater than $136.25 per month (or 8,175 / 60 months). The presumption can be overcome but not if the DMI exceeds $227.50 per month (or $13,650 / 60 months).

Federal Register Last Update for Bankruptcy Dollars:
https://www.federalregister.gov/docu...4a-of-the-code

[Throwaway92]

Thanks justbroke. So to try and make it black and white - I need my DMI to be no more than $227.50 regardless of income? There is no situation where I can surpass that and still do chapter 7?

some of my expense at the moment are malleable (health insurance and health costs) which is why I’m unsure what my dmi will be at the moment.

[justbroke]

Yes. DMI can't exceed $227.50 (period) to remain in a Chapter 7. (Very generally speaking and it may be different for someone below-the-median income, and whether this DMI appears on the Means Test or Schedule J.)

[Throwaway92]

I want to make sure I am not confusing the 2 factors here.

Step 1 - I pass means test based on last 6 months of income being negative when including all means test allowed expenses.

Step 2 - The DMI based on Schedule I and J, NOT on the means test calculations is what will be considered when assessing whether it is below $227.50 or not.

Schedule J contains more allowable expenses vs means test calculations which is why I want to confirm. If Step 2 is based off of the means test calculations then I am dead in the water as my income will go up

[justbroke]

There are two parts to the Means Test (MT). The first part of the MT is whether or not your "current monthly income" (CMI) is below the median income for the State in which you file/live. If your CMI is lower than the median income, then you are said to be under-the-median income and you do not have the means to fund a Chapter 13 (a/k/a passing the means test).

The second part of the MT happens if you are over-the-median. This second part of the MT is done by assessing your allowed expenses against your CMI. The allowed expenses are formulaic and based on the IRS'Collection Financial Standards
(CFS). The United States Trustee consolidates the CFS into a manageable thing known as the means testing allowances (see https://www.justice.gov/ust/means-testing/20210515 for cases after 5/15/2021). That process, the mechanical test, yields two numbers.

One is the "disposable monthly income" (DMI) and the other is calculated to determine if multiplying the DMI by 60 (months) yields a value greater than your scheduled unsecured claims (creditors). You are said to overcome the presumption of abuse if that final number is greater less than $136.25 (as of 4/1/2019) and you don't have enough "means" to pay 25% of the unsecured debt. Or, you are said to overcome the presumption if both the 25% amount and your DMI does not exceed $227.50 (as of 4/1/2019).

Yes, means testing is a little complex, arbitrary, and confusing. The bottom line is generally the bottom line; more than $227.50 in DMI and you do not qualify for a Chapter 7.

Many courts think of the MT as a bright line test to determine quickly whether the debtor may qualify for a Chapter 7 discharge. These courts then look to Schedule I and Schedule J to a more forward looking view of your actual income and expenses. This is because the MT is weird and looks backwards in time, whereas Schedule I and J consider today, now, and the future.

When looking to Schedule J, the disposable monthly income cannot exceed the $227.50 (as of 4/1/2019). If it does, the United States Trustee could seek dismissal (or the debtor can voluntarily convert).

Generally speaking, the United States Trustee usually doesn't bother under-the-median filers even if their Schedule J shows DMI exceeding $227.50. The extent to which they'll ignore DMI over $227.50 is too much of a guess. Could it be $300, or $400 before they are concerned? I have no idea.

I just wanted to show you how it works and how it is a bit complex. But, generally, for under-the-median cases, there usually isn't an issue because the CFS expenses would normally consume all the disposable income anyhow.

(And yes, Schedule J is much more flexible in expenses. And remember that Schedule J doesn't even list all the different types of expenses which you may be able to claim. Should you choose to file on your own, I highly suggest determining whether there is a Pro Bono clinic in your bankruptcy court. They are regular attorneys and are very helpful.

[flashoflight]

Generally speaking, the United States Trustee usually doesn't bother under-the-median filers even if their Schedule J shows DMI exceeding $227.50. The extent to which they'll ignore DMI over $227.50 is too much of a guess. Could it be $300, or $400 before they are concerned? I have no idea.

JB, isn't the OP an above-median filter due to the schedule I&J? The chapter 7 filing would be bad faith/totality of the circumstances situation and I'd be shocked if the US Trustee allows OP to stay in a 7 without a fight.

[justbroke]

flashoflight I was making a general statement about the complexities of means testing. It is an abomination. It made things more complex rather than removing the complexity of determining whether a debtor is deserving of a discharge under Chapter 7.

Suffice it to say that I went into a lot of detail about how to navigate the means test.

In the end, everyone is vulnerable to the UST's wildcard... totality of circumstances and/or bad faith. (There are more exceptions when it comes to those with SSA or VA benefits and those that are non-consumer filers.)

[flashoflight]

justbroke I'm glad there is more discretion with I&J because I can make my own 13 a lot more comfortable while the means test is the gatekeeper to 7. I was within close firing range of a 7 while way above median, but I didn't feel like fighting the US Trustee vs easily skating through a 13. The 13 gave me a plan B to keep my house as well, which turned out to be hugely profitable. If I&J was the gatekeeper to 7 as well as the 13 budget, there would be a lot of expenses that don't count in a 13 because BAPCPA writers wanted to push all of the above median debtors into a 13.

With the OP's situation, I think a lawyer that practices a lot of 13s and difficult 7s would be highly advised. Maybe I'm wrong and the US Trustee won't be interested. But the lawyer who practices regularly in difficult 7s and 13s will know the lay of the land in Colorado.

[justbroke]

For Chapter 13s the judges like to say that the Means Test is only the beginning of the inquiry. With the Lanning decision from the Supreme Court -- confirming that Schedule I and J are forward looking -- Chapter 13s have been somewhat easier to navigate. Before Lanning may courts and Chapter 13 Trustees went by what was on the Means Test, which was absurd.

[bornfree2]

okay so now im confused. if i get a job that pays me minimum wage and my left over money after necessary expenses is over $136. then i dont qualify for Chapter 7... ?? Is the expenses actual or budget. Like i put off getting a dentist cause im broke so i cant include it in the budget? Or heaven forbid invest money in my own education to restart a career.

Who then can qualify for chapter 7?? Not even a homeless person cause then they wouldnt have rent as an expense and have tons of 'disposable' income right?

Im sure im misunderstanding this.

[justbroke]

This is why people hire an attorney. The Means Test was a disaster since it was introduced. There probably has been more litigation related to the means test, since 2005, than any other part of the code since the same period.

The presumption of abuse arises when the DMI is greater than $136.25 (as of 4/1/2019). A debtor can "overcome" the presumption of abuse if that don't have the means to pay 25% of the unsecured debt. But, and this is the kicker, once the DMI reaches $227.50 (as of 4/1/2019), the presumption can not be overcome.

So, technically your DMI should be $136.25 or less (as of 4/1/2019). If it is more than $136.25 but less than $227.50 (as of 4/1/2019), then you can overcome that presumption so long as you can't pay at lest 25% of the unsecured debt.

Yes, it's complex and this is where most fall into the dismissal (or conversion) scenario.

The definition of "presumption of abuse" just means that the debtor is said to be abusing the goal of a Chapter 7 and that the debtor could afford to pay their (unsecured) creditors a premium (something).

I must admit that I typed in a lot of information so as not to simply glare over the details.

(You can't include "future" medical needs unless it is consistent in the past and ongoing in the future. The need to get a crown/cap is not an expense that you can add. The expense of ongoing (continuing) use of portable oxygen and in-home nurse care is an expense which could be included. When the BAPCPA of 2005 was created, the goal was to push more people into Chapter 13s and take the guesswork away from the judges.)

Bottom line: if you're not a borderline Chapter 7, then there is no need to worry about anything that I mention. It is the borderline cases where the United States Trustee (UST) decides to start poking at the expenses. My goal to show exactly what goes into these decisions/cases is really raw material and just illustrates that some of the mechanical formulas in the Means Test don't automatically mean that the case won't be challenged by the UST.

I will stress, again, that under-the-median income debtors, they have less to worry about any of these things I mention unless they are showing really significant DMI. If you're making minimum wage, you are under-the-median income and would, in just about every scenario, not be subjected to the scrutiny that the over-the-median Chapter 7 debtors receive.

Many people, including myself who was 3X over the median, can obtain a Chapter 7 discharge.

[bornfree2]

This is why people hire an attorney. ...

I will stress, again, that under-the-median income debtors, they have less to worry about any of these things I mention unless they are showing really significant DMI. If you're making minimum wage, you are under-the-median income and would, in just about every scenario, not be subjected to the scrutiny that the over-the-median Chapter 7 debtors receive.

Many people, including myself who was 3X over the median, can obtain a Chapter 7 discharge.

Well the median test is $66k in california for my case, so minimum wage would come nowhere near that.

But then im reading that is just the first test, they get you on the second. Anyways much more for me to read on this. So so many traps along the way. Its rather shameful how lobbying got in there and hijacked this for the creditors advantage. Im sure i will live to see the day they lobby to harvest the poor man's blood and organs to pay off some of the interest. Ammurikaa!