Understanding the Chapter 7 Means Test: Important Cases and Legal Analysis

The means test is a key element of the Bankruptcy Code that determines whether a debtor is eligible for Chapter 7 bankruptcy, which allows for the discharge of unsecured debts. The test evaluates a debtor’s income to see if it is above or below the median income for their state, and if it is above, the debtor may be required to file for Chapter 13 bankruptcy, which requires a repayment plan. The following cases highlight the importance and complexity of the means test in bankruptcy law.

  1. Hamilton v. Lanning (2010) The Supreme Court’s decision in Hamilton v. Lanning clarified the use of the means test in bankruptcy cases. In this case, the Court held that the means test is only a presumption of abuse and can be overcome by showing special circumstances that justify lower expenses or higher income. This decision was important because it allows debtors to present evidence of changes in their financial situation, such as a job loss or increase in expenses, that can impact their eligibility for Chapter 7 bankruptcy.
  2. Ransom v. FIA Card Services, N.A. (2010) The Ninth Circuit’s decision in Ransom v. FIA Card Services, N.A. addressed the issue of calculating the debtor’s disposable income in the means test. The court held that the debtor can deduct the actual expenses for certain items, rather than the standardized expense amounts listed in the Internal Revenue Service guidelines. This decision was important because it allows debtors to deduct actual expenses for things like healthcare or childcare, which can significantly impact their disposable income.
  3. In re Kagenveama (2012) In the case of In re Kagenveama, the Ninth Circuit held that income from Social Security Disability Insurance (SSDI) is not included in the means test. The court found that Congress did not intend for SSDI income to be included in the means test, as it is not considered part of the debtor’s disposable income. This decision was important because it clarified that certain types of income, such as SSDI or veteran’s benefits, should not be included in the means test calculation.
  4. In re Flores (2016) The Ninth Circuit’s decision in In re Flores addressed the issue of whether the means test applies to above-median income debtors who have primarily non-consumer debts. The court held that the means test does not apply to these debtors, as they are not subject to the presumption of abuse that the means test creates. This decision was important because it clarified that above-median income debtors who have primarily non-consumer debts may still be eligible for Chapter 7 bankruptcy.

Conclusion The means test is a complex and important aspect of bankruptcy law, and the above cases demonstrate the various issues that can arise in its application. Debtors and their attorneys should be aware of these cases and their implications when considering bankruptcy options.