Was there ever a time when you were late on a bill because you just didn't have enough money to pay it? Most people have been there at some point in their lives and survived it.
Bankruptcy Quiz: Passing the Means Test
Leon D. Bayer
Copyright Bayer, Wishman & Leotta, 2006. All rights reserved.
Was there ever a time when you were late on a bill because you just didn’t have enough money to pay it? Most people have been there at some point in their lives and survived it. Salvation may come in the form of a tax refund, a new job, or a bail-out from relatives. One way or another, most of us manage to weather the storm. But what happens when a personal money problem has grown into something so big that it has no end in sight? Suppose there is no money to pay rent, the car payment is overdue, and the kids need a doctor? When things get as bad as that, you just might start thinking about bankruptcy.
Filing bankruptcy usually brings people immediate, automatic relief by stopping the pressure from bill collectors. In 2005 approximately 2 million people actually resorted to filing for bankruptcy protection.
There are three life altering events that seem to put people at a higher risk of bankruptcy: unemployment, serious illness, and divorce. Tell me, who hasn’t experienced at least one of these? There is a lesson here. This can happen to anyone, it can even happen to you. Too many people are live ‘paycheck to paycheck’, and they have no real savings to survive a financial emergency.
Most people who can’t pay their debts are in that predicament because they got divorced, lost a job or became too ill to work. They didn’t choose that fate, and almost all of them incurred their debts during a time when they had the money to pay back everything they borrowed. As we all find out, things in life can change. Very few of us are blessed with a lifetime job, a lifetime of good health, and a lifetime of happy marriage. The loss of just one of these pillars can be financially devastating, and leads many people down a path that results in filing bankruptcy.
In the early stages of a debt crisis, people are usually in denial that they have a debt problem. They borrow from “Peter to pay Paul,” often taking cash advances or transferring debt balances from one credit card to pay off another. In the later stages of a debt crisis, the game becomes a miserable struggle of juggling overdue payments. Debtors desperately negotiate with bill collectors for more time to pay up by making new promises that are often impossible for the debtor to keep. For most folks who wind up in bankruptcy, this is the point where the house of cards finally crumbles down on them.
In the end game of the debt struggle, the tactics of many bill collectors are a humiliating verbal assault that leaves many debtors holding their phones and weeping in tears. Despite laws banning such tactics, some bill collectors barrage the debtor with harassing phone calls at home and work that are cunningly designed to scare the daylights out of you. The final collection pitch is often a forceful combination punch that threatens the debtor with fearsome legal actions, combined with insults and heaps of personal abuse. In a society that measures your personal success by the amount of your money, very few people that can stand up to this kind of pressure without cracking. This is the point when many debtors make the unwanted decision to throw in the towel and file for personal bankruptcy. What else can they do if they really can’t pay?
Bankruptcy laws in the U.S. have evolved over time to provide a safe harbor where the honest but unfortunate debtor may be allowed to discharge most kinds of debts. The actual process entails a fairly complex legal inquiry that is conducted in a United States Bankruptcy Court. In simple terms, the process takes place by demonstrating that one’s debts were incurred under honest good faith circumstances and that one is truly unable to pay back any of the money. Debts that are owed for family support, taxes, intentional wrongs and educational loans are generally not discharged and will usually remain owing. There is also a bankruptcy procedure that may allow someone to reorganize and pay back what they owe over time, with much better terms and sometimes with no interest.
A complex new bankruptcy law took effect on October 17, 2005. The new law contains a “means test” that seeks to artificially determine who is entitled to be forgiven, and who isn’t. The new law divides everyone into two classes: Those who earn above the median level of income in the state where they live, and those who earn below it. For those with an income below their statewide median and who have comparatively simple debt problems, a bankruptcy case generally works out to produce a result that is pretty much the same as what it used to be, (albeit with a lot more legal work and expense than there ever used to be.)
For those with an income above their statewide median, relief might still be granted but the bankruptcy calculus moves to a complex computation in which a combination of certain actual living expenses and certain hypothetical living expenses are subtracted from the debtor’s average monthly income that was received during the previous six months. This kind of debtor seeking bankruptcy relief might be required to give creditors all of the their projected disposable income for the next 5 years if the result of the “means test” shows that there would be even just a little bit of money left over. If they pass the “means test” they can proceed with the traditional bankruptcy case.
On the surface, this process may look fair enough. Those who can pay something shouldn’t get a free ride. But in reality, the new “means test” has some very serious failings. For one thing, the eligibility process is anchored on a mathematical model of certain actual and hypothetical living expenses. The hypothetical living expenses that the law requires the court to impose for conducting this “test” is mandated to be the exact same collection standards that the IRS currently uses as a punitive measure to collect money from tax evaders.
The “means test” is squarely at odds with the concept of giving deserving folks a fresh start. A bankruptcy system that determines eligibility by using the collection standards borrowed from the world’s largest collection agency, (the IRS) is neither reasonable nor fair because it is imposed upon people who could prove in court that they are “honest but unfortunate.” Even if the result of the “means test” shows that a person does have some left over income, that determination is still the product of using hypothetical expenses, rather than a person’s real expenses. In reality someone who is dead broke might show “disposable income” under the means test. That is because the means test was formulated by the IRS as a punitive tool to maximize debt collections, whereas modern American bankruptcy law was created to give people a fresh start.
Another pitfall for the unwary is that the “means test” relies on average income that the debtor received over the previous six months. Someone who has just lost a job probably doesn’t have as much income as they used to have even one month earlier. That’s one reason why they seek bankruptcy. A person who is suddenly out of work may be kept from filing what would have been a good faith bankruptcy case because the “means test” is imposed on their previous income, not the income that they have now. Moreover, the variance in “means test” median income from one state to another can be huge and makes for inherently unequal results.
Here is an astounding example: Because of inequalities in the “means test” an American citizen living in Connecticut can be allowed to file bankruptcy and still earn about $20,000 more than someone who fails the test and lives in storm ravaged Louisiana.
The median income cutoff to avoid the “means test” for a single person living in Louisiana is currently $31,968. The median income cutoff for a single person living in Connecticut is $51,877. The inequality is obvious, and it illustrates the silliness of using mechanical measurements to determine what is fair. Article 1, Section 8 of the U.S. Constitution requires that the bankruptcy laws passed by Congress are required to be “uniform among the states.” The misplaced reliance on median statewide incomes for the bankruptcy “means test” is hardly a “uniform law among the states” as the Constitution requires it to be. Bankruptcy relief for someone in Connecticut may be a world easier than it is going to be for someone living in post-Katrina Louisiana.
The stated goal of those who backed this legislation was to reduce the number of new bankruptcy cases. The problem with that approach is that it doesn’t reduce the number of people who actually need debt relief. It remains as true as ever that ‘you can’t get blood from a turnip.’
On the surface, the new law sounds like it should be a bill collector’s ‘dream come true.’ After all, the law was actually drafted at the behest of Big Money, (the credit card collection departments of the big banks and auto financiers). The real truth is that bankruptcy still exits, but to reduce the number of new cases Congress has made it vastly more complicated, and surely more expensive for those seeking relief. Expert bankruptcy attorneys have already learned how to guide their clients through the tangle of new rules and complex forms that are now required for every case. Those who brave the system without such help are courting disaster. The best advice for people with a serious debt problem remains the most obvious; get the best legal representation that you can find. Happy birthday, Bankruptcy!
Leon D. Bayer is a bankruptcy lawyer with 27 years of experience who primarily represents individuals in bankruptcy cases. He is a Certified Specialist in bankruptcy law and practices in Los Angeles, California. He is a partner in the law firm of Bayer, Wishman & Leotta. Email him at
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Was there ever a time when you were late on a bill because you just didn't have enough money to pay it? Most people have been there at some point in their lives and survived it.
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