New Bankruptcy Laws Means Testing

Why new bankruptcy laws create the "mean testing" standard

As proposed, new bankruptcy laws under the Bankruptcy and Abuse Prevention Act contains many formulaic management techniques. One of these formulas presumes abuse based upon financial means of a debtor. A three pronged formula is provided by these new bankruptcy laws for an automatic presumption of abuse according to § 704(b)(2), if monthly income, reduced by expenses, multiplied by 60, is not less than the lesser of either (A)(1) the greater of 25 percent of general unsecured claims, or (A)(2)) $6,000, or (B) $10,000.

Confusing? Not really. Let's walk through slowly.

A hypothetical married couple that each earn minimum wage generates $1,785 gross household income per month. Then subtract $1,175 for allowed expenses according to the new bankruptcy law proposal incorporating IRS living allowances. Next, multiply that remainder by 60 to derive $36,600 as a test measure to determine eligibility for federal debt relief.

This couple's test measure under new bankruptcy laws is over the $6,000 limit of part (A)(1), also over the 25% unsecured limit if they owe less than $146,400 in unsecured liability as provided in (A)(2), and finally, is also over the $10,000 maximum limit provided in (B) above.

The formula imposes a "less than the lesser" standard under these new bankruptcy laws. This standard requires passage of all three prongs of the test to avoid automatic presumption of abuse, which in turn, eliminates all possibility of federal debt relief in three different ways. In application, spouses who each earn minimum wage fail all three prongs of the test created by new bankruptcy laws and are automatically presumed financially abusive and extravagant unless they jointly owe at over $146,400 in unsecured liabilities as a starting point.

Magic of legislative math - new bankruptcy laws eliminate debt relief without a word

Calculate mo. interest at typical credit cards rates on $146,400. The interest alone - approximately $2,318 - is far above the combined mo. net income of both spouses. Lenders usually refuse loan requests if current payments exceed 33% of net mo. income. To borrow $146,400 this couple would need approximately $7000 in monthly take home pay (requiring over $120,000 income during the preceding year) to file Chapter 7.

By using harsh formulas rather than plain language, new bankruptcy laws eliminate the possibility of Chapter 7 for most individuals. Minimum debt requirements eliminate low income individuals. Further, if disposable income exceed $166 per month, new bankruptcy laws also bar filing Chapter 7 for wealthy individuals. Challenged, average or wealthy - all individuals face equally overwhelming odds seeking debt relief through Chapter 7.

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