Why the means test doesn’t apply (sort of) in chapter 13.
When most people think of the means test, they think of filing a chapter 7. They think of passing or failing the means test. Of being able, or being unable, to file a chapter 7 bankruptcy.
But the means test functions very differently in chapter 13 bankruptcy.
The means test was designed, among other things, to provide a formula to determine whether or not someone is eligible for chapter 7 bankruptcy relief. But, it really doesn’t work exactly as intended, in practice, in many cases.
Chapter 13 is a different kind of means test.
In chapter 13, the purpose of the means test is not to determine whether or not you can file a chapter 13 case, but rather, to determine how much money, hypothetically, you have to pay your unsecured creditors. The “answer” to the means test “question” is the percentage that is supposed to be paid to your unsecured creditors. But, as I said, this is not what happens in many cases, if you know what you are doing.
Unsecured creditors only get what’s “left over.”
This means that your priority creditors, like taxes and child support, have to be paid first, before anything is paid to the unsecured creditors. Also, your secured creditors have a priority higher than the unsecured creditors. And so do leases. Therefore, money to pay these classes of debt is subtracted from your disposable income first, before anything can be paid to your unsecured creditors.
But – sometimes there’s really not enough money to pay for your normal living expenses, much less pay anything towards your unsecured debts. Yet, frequently the chapter 13 means test formula says that there is money left over. This happens quite frequently. It results in an insufficient amount for you to live on!
Recall that the means test is a formula is calculated by using your income averaged over the six-month period of time prior filing a chapter 13. In many cases, this is not a true indication of the money that you will actually have available to pay for your living expenses after your cases filed.
So, if the means test indicates that you should have enough money left over after paying living expenses, priority debts, secured debts, etc, to pay 50% of your unsecured creditors but in reality, there is nothing left over to pay your unsecured creditors, does this mean that you cannot file chapter 13?
Happily, the answer to this question is no. You can still file a chapter 13 even if the means test amount is impossible to pay.
When, in chapter 13, the means test formula says that you should be able to pay more than you actually have money to pay, then you are allowed to “deviate” from the means test. This is done in the Cincinnati Ohio bankruptcy court and in the Dayton Ohio bankruptcy court, but the approach used in each of these courts a little bit different.
Depending on the circumstances, and the reason why there is less income available to pay than the means test says you need to pay, you can pay only what you are able to pay. But, you may have to report to the court if your income changes, if you get a raise, or if you get a big tax return. But the court will not make you pay money that you simply don’t have, just because the means test says that you do have the money. This is just common sense.
The other purpose of the means test of chapter 13 is to determine how long you have to be in a 13 plan. If your income is under the median income for your family size, then you need be in the plan for only 36 months.
If your 6 month average income at the time your case is filed is over the median income for your family size, then you have to be a plan for 60 months.
If you qualify for a 36 month plan, however, you can choose be in the plan for up to 60 months.
The practical reality is that most plans today are 60 month plans. Why would this be? The reason is – if you’re over the median income, the law requires you to be in the plan for 60 months. Your plan cannot be approved for a shorter length of time.
But, what if you’re “under median,” wouldn’t this mean that you would probably want to be in a chapter 13 plan for 36 months if you qualify for a 36 month plan? Perhaps, but in many cases, the reason that you qualify for 36 month plan is the same reason that you need to be in a 60 month plan.
Think about it.
If your income is below the median that means that you probably don’t have any extra money.
If your budget is tight, then you want your chapter 13 plan payment to be as low as you possibly can get it. The way to get your chapter 13 payment as low as you can possibly make it is by extending the plan for as long as you can, that means a 60 month plan is probably what you’re going to want to file.
But, even if you do file a 60 month plan, if your income is below the median and you qualify for 36 month plan, its legally possible to end your plan early, even as early as 36 months. So, sometimes people do end their plans early. No plan can end earlier than 36 months, with the rare exception of those plans which pay 100% of the debt back. These are rarely seen.
So, you see, the means test in chapter 13 has very little effect, as a practical matter, on the plan that you will file. It really depends on your income, your debts, the kind of debts you owe, and your family’s needs.
And this means that you need to use an attorney who is very experienced so that you can be confident you are getting the best results, and paying the absolute minimum that you can, legally, to your unsecured creditors. (but really there is much, much more than this to be considered – check out my other articles on this website for the many different things you can do with a chapter 13 plan!)
Because there are number of different interrelated factors which must be considered to determine the best way to put your chapter 13 plan together, you really need to consult with a board-certified specialist before making any final decisions.
I see so many missed opportunities for folks who could have obtained much, much better results in chapter 13, but instead filed a chapter 7. There are lots of reasons for this. But the biggest reason is that the attorney did not pick up on the fact that there are so many ways to approach financial reorganization.
They often approach a person’s financial problems mechanically.
Often, it seems, the approach they take is this: (a simplistic two-step analysis )
If someone is under median, file a chapter 7,
they have a foreclosure, and if they do, then recommend 13.
And they give it no more thought than that.
I can tell you from over 30 years of practice that this is a short-sighted, overly simplistic approach.
This is more, in my mind, like doing advanced tax planning. There are lots of deductions, strategies and planning moves you can make, to really get the best results. So, what may appear on the surface to be a simple chapter 7 in the eyes of an inexperienced attorney turns into a much better result for the client, when approached differently, by a seasoned and experienced expert.