Happy Birthday to the “means test,” enacted in 2005 and the centerpiece of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).[1] In chapter 7 cases, the means test stands for the general proposition that consumers with the “means” to repay some or all of their debts are barred from filing. More accurately, debtors with family income in excess of their state median are subject to a “presumption of abuse.”[2] Such cases receive additional scrutiny from the U.S. Trustee (UST), which can result in a motion to dismiss.[3] Conversely, in chapter 13 cases, the means test helps determine the amount of money that over-median debtors should pay to their general unsecured creditors.[4]
Looking Backward (the History)
Repercussions from the fight to enact means testing linger on. Then-senator, now presidential candidate Joe Biden (D. Del.) joined the Republican majority in Congress to support BAPCPA. These votes earned him criticism in the 2020 democratic primaries, where fellow democratic candidates — most notably Elizabeth Warren — viewed the idea of making debt-relief more elusive to be a tear in the social safety net.[5]
As a whole, the academic community was also against the idea of means testing. In her 2007 article “The Law of Unintended Consequences,” Margaret Howard wrote, “Another possible goal of the 2005 amendments was to reduce judges’ discretion and to commit an assault on lawyers representing debtors. If so, those goals have certainly been achieved. The means test is an excellent example of a very successful effort to reduce judicial discretion (emphasis added).”[6] In her bankruptcy casebook, Sen. Warren describes the means test as “radical,” and states that it is “unprecedented ¼ to evaluate people to make sure they were ‘poor enough’ to be bankrupt.”[7]
Looking Inward (the Statute Itself)
Found primarily at 11 U.S.C. § 707(b)(2), the language of the means test is an undigested lump of legalese containing over 1,200 words, 10 sub-paragraphs and 17 subclauses. The complexity arises in part from the exceptions. In chapter 7 cases, debtors may still pass or bypass the means test in a variety of ways:
- If their debts are primarily business;[8]
- If there are special circumstances, such as a serious medical condition;[9]
- If their monthly net income is $136 or less;[10]
- If their monthly net income is between $137 and $227, but said amount would result in a repayment of less than 25% of debtors’ total unsecured nonpriority debt;[11] or
- If their current monthly income is less than the applicable state median state,[12] a subsection Warren puts on “the short list for worst statutory drafting ever.”[13]
Looking Upward (Case Law)
Two seminal Supreme Court cases interpreting the means test include Hamilton v. Lanning[14] and Ransom v. FIA Card Services[15]
Income Issues
In Lanning, the debtor filed a chapter 13 bankruptcy owing $36,793.36 in unsecured debt. Due to a one-time employer buyout, Lanning’s average income in the six months preceding the bankruptcy ($5,343) was much higher than what her current position paid (just $1,922/mo). Taking the change of income into account, the debtor disregarded the project disposable income provided by the means test and proposed a plan of minimal repayment ($144/month for 36 months). Over a plain-meaning dissent by Justice Scalia, the Supreme Court granted the debtor additional flexibility in determining how much to repay creditors. Justice Alito wrote, “The court may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation.”
Allowable Expenses
In Ransom, the debtor claimed on the means test an “Ownership Cost” allowance of $471/month for his 2004 Toyota Camry (owned outright), in addition to “Operating Costs.” This additional allowance resulted in approximately $28,000 being kept by the debtor and withheld from unsecured creditors. Once again over a Scalia dissent, the Court held that a car‑ownership cost allowance was available only to debtors who made loan or lease payments on a vehicle.
The Upshot?
In some instances, courts may bypass the plain language or straightforward calculations of the means test in favor of an interpretation that follows the purpose and objectives of BAPCPA.
Looking Forward (Recommendations of the Blue-Ribbon Panel)
The Final Report of the ABI Commission on Consumer Bankruptcy devotes 17 of its 200-plus pages to issues surrounding the means test. Although the report cites critical academic studies, there is no recommendation to repeal it.
I asked Eugene Wedoff, an ABI past president, whether there was any thought or debate during the meetings of the Consumer Bankruptcy Commission to doing away with the means test. He wrote:
[T]he answer is yes, we did consider the extent to which we should suggest changes in the means test, but we decided, in keeping with our overall aim of incremental rather than fundamental changes, that it was best not to propose elimination of means testing. We took the same approach to student loan dischargeability and exemptions, among other issues that we considered. A more extensive proposal might have been attractive to many of our members, but it would have alienated others, and the incremental approach allowed us to present a report unanimously approved by the full range of voting committee members.[16]
The Commission did put forth several “best interpretations” and “clarifying amendments.” For example, citing an unanswered question in Ransom, it recommends that above‑median debtors can only deduct payments on secured debt if they are reasonably necessary for the support of the debtor or dependents. It also recommends that the means test apply to cases converted from chapter 13 to 7 (in contravention of a literal reading) and that the “special circumstances” exception be given a more debtor-friendly gloss.
In conclusion, it is unknown how the means test will fare as it continues to age over time. There is no denying that in the 15 years since its implementation, the means test has had a significant impact on the lives of those consumer debtors whose cases have shaped current legal precedent.
[1]The means test appears in 11 U.S.C. § 707(b)(2)(A)(i): “In considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter, the court shall presume abuse exists if the debtor’s current monthly income reduced by the amounts determined under clauses (ii), (iii), and (iv), and multiplied by 60 is not less than the lesser of— (I) 25 percent of the debtor’s nonpriority unsecured claims in the case, or $6,000, whichever is greater; or (II) $10,000.”
[2]This presumption may be rebutted in a number of different ways.
[3]According to its 2017-2018 Annual Report, the UST in 2018 made 11 U.S.C. § 707(b)(2) inquiries in 9,293 cases and filed 1,365 Motions to Dismiss (MTD). The previous year, it was 9,566 inquiries and 1,429 MTD’s.
[4]The so-called projected disposable income (PDI).
[5]See “How Biden Helped Strip Bankruptcy Protection from Millions Just Before a Recession,” GQ Magazine, Oct. 23, 2019.
[6]31 S. Ill. U. L. J. 451 (2007).
[7] Elizabeth Warren & Jay Lawrence Westbrook. The Law of Debtors and Creditors: Text, Cases, and Problems (7th ed. 2014), p. 257.
[8]11 U.S.C. § 707(b)(1).
[9]11 U.S.C. § 707(b)(2)(B)(i).
[10]11 U.S.C. § 707(b)(2)(A)(i).
[11]Id.
[12]11 U.S.C. § 707(b)(7).
[13]Law of Creditors and Debtors, p. 258.
[14]560 U.S. 505 (2010).
[15]562 U.S. 61 (2011).
[16] Email from the Hon. Eugene R. Wedoff (ret.) to author, July 4, 2020 (on file with author). Quoted with permission.