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Bankruptcy Laws

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In 2005 Congress passed the largest piece of special interest legislation ever by the United States Congress, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The BAPCPA implemented considerable changes to bankruptcy laws. The original objective of the legislation was calculated by the sponsors of the legislation to reduce bankruptcy filings. The BAPCPA was intended to make it more difficult for debtors to file a Chapter 7 Bankruptcy.

The BAPCPA created a form called the Means Test to determine if a debtor has disposable income available each month to pay their creditors. One of the most important issues to discuss with a San Mateo bankruptcy lawyer is your gross income for the six-month period prior to the filing of your bankruptcy petition. The Means Test compares a debtors income against the median income of their state, if the debtor’s income is higher than the state median, then potentially an abuse can be found under §707(b)(2) of the Bankruptcy Code. If the debtors income falls below the median income of their state a safe harbor is created and no party is allowed to file a motion to find abuse under §707(b)(2).

A debtor’s income is defined by 11 U.S.C. § 101(10A) as the monthly average of the income received by the debtor during the six-month time period prior to the filing of the bankruptcy petition. Certain types of income, such as social security are excluded from the calculation of the debtor’s income. By taking the average income of the debtor during the six-month period prior to the filing of the bankruptcy petition, the average income of the debtor may be higher or lower than the debtor's actual income at the time of filing for bankruptcy.

The median state income is adjusted by family size in the Means Test. The Means Test therefore takes into account that a larger family will need a higher median income to pay for housing, vehicles, food and other necessary items to maintain their household. The IRS specifies the amount these deductions. While the Means Test uses IRS deductions, these deductions do not usually represent the debtor’s actual monthly expenses they incur on a monthly basis.

The IRS deductions used in the Means Test are defined in 11 U.S.C. §707(b)(2)(A), (ii)-(iv):

  1. living expenses specified under the collection standards of the Internal Revenue Service;
  2. actual expenses not provided by the Internal Revenue Standards including reasonably necessary health insurance, disability insurance, and health savings account expenses;
  3. expenses for protection from family violence;
  4. continued contributions to care of nondependent family members;
  5. actual expenses of administering a chapter 13 plan;
  6. expenses for grade and high school, up to $1,500 annually per minor child provided that the expenses are reasonable and necessary;
  7. additional home energy costs in addition to those laid out in the IRS guidelines that are reasonable and necessary;
  8. 1/60th of all secured debt that will become due in the five years after the filing of the bankruptcy case;
  9. 1/60th of all priority debt;
  10. continued contributions to tax-exempt charities.