April 18, 2014

Means Test Budget Serves as an Classification Tool, Not a Budget to Be Actually Used

Having run through several means test calculations over the past few days, it struck me that a lot of the misunderstanding about both the median income test as well as the means test arises from a fundamental misunderstanding in the press and the general public about what the results of a means test really signifies.

The means test, as you may know, involves the creation of a "budget" in which expense categories are limited to acceptable expense figures that are based on IRS derived numbers.  For example, under the current tables, IRS tables say that a family of 4 living in Fulton County may spend $1,529 for rent or a mortgage.  If the actual mortgage for that family of 4 is $1,900, then for means test purposes $371 (the difference between $1,900 and $1,529) is "disposable" and available to use in a Chapter 13 payment.

If you actually file a Chapter 13, however, you can claim the full $1,900 as your mortgage expense on Schedule J of your budget.  For Chapter 13 purposes, your budget must be reasonable and you are subject to the good faith requirements of the Kitchens case at its progeny.

The means test only serves to tell you (1) that Chapter 7 is or is not an option (2) if you have to file a Chapter 13, whether that Chapter 13 can be a 3 year plan or must it be a 5 year plan.

The "disposable income" bottom line of the means test has no correlation with a real life budget that you would actually file in your Chapter 13 case (or Chapter 7 case for that matter).  In fact, I would suggest that there is almost no likelihood that your Schedule I & J budget will match your means test budget.  I have actually been questioned about this by Chapter 7 trustees and my response has been to advise the trustee that the means test does not reflect a real budget and it was never intended to represent a real budget.  There is nothing in the Code to suggest that IRS budget categories should be use on Schedules I & J.

The judges in the Northern District appear to be on board with this understanding.  Both Judge Mullins and Judge Massey have ruled that the debtors' actual disposable income controls over the theoretical disposable income as determined by the means test.  Presumably this means that a Chapter 13 debtor can qualify for a 3 year plan based on actual disposable income even if the means test budget shows sufficient disposable income to mandate a 5 year plan. 

So, recognize the means test for what it is – a qualification tool, but nothing more.

[tags] means test, median income test, Judge James Massey, Judge C. Ray Mullins, means test in Georgia, means test 11th Circuit [/tags] 

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Jonathan Ginsberg practices consumer bankruptcy law in the Atlanta, Georgia area.

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