Means Test Calculations and
Household Income Changes
By using a six month look-back to calculate a debtor’s household income, the Bankruptcy Code leaves open the possibility that Chapter 7 might be denied to a bankruptcy filer who has recently suffered a job loss or salary cut. For example, it is entirely reasonable that an individual who earns $100,000 annually, but who loses his job would be a candidate for bankruptcy within a month or two after losing that job. Under a strict reading of the Code, this individual could not file until his rolling six month average dipped below the household income threshold for his county of residence and family size.
Similarly, a “look-back” budget in a Chapter 13 case might suggest that a Chapter 13 debtor has “disposable income” whereas in reality income reduction or increased expenses has eliminated some or all of the calculated disposable income.
Recently, two different bankruptcy judges in the Northern District of Georgia have been asked to decide which numbers control in a Chapter 13 case - the six month look back numbers or the “real life” numbers that reflect current reality.
Fortunately, in both of these cases, the judges have rejected the Chapter 13 trustee’s arguments and have held that the debtor’s actual income and expenses control. In both of these decisions, the judges note that Chapter 13 by its nature is a “forward looking” repayment plan. If debtors were held to have disposable income based on a calculation using income and expense figures from the six month period prior to filing, it is likely that a large percentage of Chapter 13 plans would eventually fail since both income and expenses are likely to change over the course of a three to five year payment plan.
You can read more about these decisions and other means test decisions in attorney Scott Riddle’s Georgia Bankruptcy blog.
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