Dec 10, 2010

Common Chapter 7 Bankrutpcy Means Test Issues

Chapter 7 bankruptcy is a marvelous remedy allowing the vast majority of people who use it the luxury of canceling many thousands of dollars worth of debt simply by disclosing their property, debts, and income on a set of official forms, making one personal appearance in court (usually lasting a minute or two), and waiting 60 days after the appearance to receive a final discharge from the court. In these types of cases, self-representation works beautifully.

But sometimes Murphy's Law strikes and a successful outcome requires a lawyer's help. The most common outlier issues in Chapter 7 bankruptcy deal with the means test itself. (To learn more about the means test, see my previous blog post, Why the Means Test Separates the 80% From the 20%.)

Ownership Expenses for Cars

For instance, a successful result in the means test may depend on whether you can claim the "ownership" expense for one or more of your cars. Most but not all courts have ruled that you can't claim the ownership expense unless you are making purchase or lease payments on the vehicle. For people with two cars who aren't making payments on them, this judicial interpretation could deprive them of close to $800 worth of expense deductions and easily be the difference between passing and failing the means test. Fortunately the U.S. Supreme Court will finally decide this issue sometime in 2011.

Mortgage Deduction

Another means test issue is whether you can claim a deduction for your mortgage if you have stopped making payments or you plan on moving out of the house. Although it is counterintuitive to count mortgage payments as expenses when you won't be making them, the courts have mostly decided that you can deduct them -- based on how the statute is written. The Supreme Court's future decision on the car ownership case may also clear up this mortgage deduction issue.

Number of People in Your Household

A third common means test issue has been how to count the number of people in your household. The bankruptcy law doesn't define this term and courts are all over the place about whether members of your household must be dependents or whether people living under the same roof also count. Of course the number of people in your household will often determine whether you pass or fail the means test.

There are many more issues about the means test have shown up in Chapter 13 cases. See for a database of Chapter 13 court decisions about these and other issues.