The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") presented sweeping changes to the Bankruptcy Code. (1)
Three years after the passage of BAPCPA, the changes it brought remain misunderstood by much of the legal community. One of the most pervasive and disturbing misconceptions surrounding the Act is that it rendered relief under Chapter 7 of the Code unavailable to most debtors. (2) This misconception is so widely held that it made its way into the ISBA's Legal Health Checkup:
[M]ost bankruptcy filers won't be allowed to use Chapter 7 (where most overdue bills and credit card debts are cancelled). Instead, they'll have to "reorganize" their finances and pay back what they owe according to a schedule ordered by the United States Bankruptcy Court. (3) Contrary to popular opinion, bankruptcy relief under Chapter 7 is still widely available. This article seeks to explain the real impact of 11 USC section 707(b)(2), the "means test" that was allegedly going to eliminate Chapter 7 bankruptcy.
How the means test works
Dismissals of Chapter 7 cases are governed now, as before the passage of BAPCPA, by 11 USC section 707. (4)
11 USC section 707(b)(1) allows for the dismissal of Chapter 7 bankruptcy petitions when the court finds that granting the debtor a discharge would be an abuse of the chapter's provisions. For example, the court might well find that granting the debtor a discharge under Chapter 7 would be abusive when a debtor's income significantly exceeds his or her monthly expenditures. In such cases, the court would rule that because debtors have the ability to repay their debts, they should be required to do so.
The means test, (5) contained in section 707(b)(2), creates a mathematical formula under which abuse may be presumed, creating a basis for dismissal under section 707 (b)(1).
Debtors seeking Chapter 7 relief are required to file a schedule of current monthly income and expenditures with their petitions. (6) The debtors' current monthly income is defined as their average income for the six calendar months preceding the date of filing, (7) meaning that if a debtor files on July 15, 2008, then his or her monthly income from January 1, 2008, to June 30, 2008, will be considered.
The first question to ask after calculating the debtor's average monthly income for the applicable period is to compare it to the median income for the state. As of this writing, Illinois' median income level for a single...