Written by Nick Plotkin
Nick is a graduating senior at Moses Brown School in Providence. He will be attending Brown University next year.
The Chapter 7 Means Test – An Unnecessary Burden
Chapter 7 Bankruptcy is a means provided by the U.S. government for debtors to shed their debts via liquidation of nonexempt assets. Many people face significant debt due to unfortunate circumstances such as job loss, expensive medical procedures, or major economic downturns that leave them with very little leeway to pay what they owe. Those who are approved for Chapter 7 Bankruptcy are able to wipe their slate clean and begin anew without the cumbersome burden of debt on their shoulders. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 implemented a means test preventing many people from filing for Chapter 7 on the basis of certain financial aspects, namely income. If an individual’s income is above the median for the state, it becomes significantly more difficult to file for Chapter 7. Many individuals with higher income are refused, even if their circumstances may be worthy of liquidation. Chapter 13 bankruptcy, which outlines a strict repayment plan over several years, may not be a feasible option for these people, either. They are stuck. The means test imposed by Congress is an unnecessary burden on those filing for Chapter 7 Bankruptcy and greatly hinders some people’s financial freedom. Abuse of the system could likely be prevented just as well on a case-by-case basis by a judge.
The means test itself is considered by many to be fairly arbitrary in nature in its requirements. For those who fail the initial income test, the road to Chapter 7 becomes arduous. A bankruptcy attorney is certainly required, and the complexity of the means test in many cases has forced these attorneys to raise rates. The test is a great burden on all parties involved, and making the process more expensive for the debtor further deters people from filing for relief. The only real benefactors are the credit card companies who lobbied for the bill in the first place. Their sizable lobbying effort has led to the questioning of whether abuse prevention was the real goal of the BAPCPA. In 2005, there probably were higher income individuals with disposable income who intentionally incurred debt and then filed for bankruptcy. Those people likely exist now as well. Despite its goal to reduce the number of abusers, the main consequence of the poorly designed means test is that middle income individuals under immense pressure from unintentionally incurred debts lose out on the opportunity to see a judge who can decide whether or not they are gaming the system.
These middle income individuals are the deadweight loss of the BAPCPA- those who need to liquidate to absolve debt but are refused by the means test. The United States prides itself on freedom as well as economic mobility. People can improve their standing economically by working hard to make more money. Bankruptcy, and specifically Chapter 7 Bankruptcy, allows people who lose their mobility due to debt to regain that freedom. People who are trapped by debt that they simply do not have the means to pay back should have access to some kind of aid from the government. The BAPCPA made it significantly more difficult for many to receive aid. One example of an unfair situation is a case of sudden job loss. This person may be in dire need of debt relief, but due to the means test requiring the previous 6 months of income to be averaged, could be well above the median and not qualify to file. They would have to wait several months for their average income to drop. Others may have medical bills stack up, something that often cannot be foreseen or planned for. Anybody who wants to file for Chapter 7 should be able to see a judge, who can then investigate any apparent abuse of the bankruptcy system. The means test is unnecessary and was passed with a great deal of support from the credit card lobby. A judge can learn the facts of a case and refuse Chapter 7 Bankruptcy to those who do not deserve it.
In history, debtors have often been punished legally for unpaid debt. Debtor’s prisons were commonplace in Europe throughout the 1800s. There was a stigma against those in debt, and they were often treated as criminals. In the U.S. today, filing for bankruptcy can be necessary for people who are in debt that do not have the means to pay it back. The means test as well as financial education program enacted with the BAPCPA have recreated the stigma against debt and deterred people from filing for bankruptcy. Those who need to start over financially can and should be afforded that opportunity, or at least the opportunity to have their case reviewed by a judge. The means test is an unfair and unnecessary barrier to Chapter 7 Bankruptcy.
nybankruptcy.com (bankruptcy quick links)