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US Trustee Report on Effects of Means Test

posted by Katie Porter

The U.S. Trustee recently released a report, Impact of the Utilization of Internal Revenue Service Standards for Determining Expenses on Debtors and the Court. This study was mandated by section 103(b) of BAPCPA. The U.S. Trustee contracted with RAND corporation to conduct the study, and Marianne Culhane and Michaela White were brought on as co-authors. As I've suggested before, these collaborations produce better studies that incorporate different viewpoints and methodologies. Compare the quality of this study with the Federal Reserve's "study" of credit card solicitations, which we highlighted about a year ago on Credit Slips.

The study is by no "means" (get it, hah!) the final word on the means test because the data come from only eight districts and the law on how to apply and calculate the means tests continues to evolve. Nonetheless, it is the most reliable national study that I have seen, and its findings are provocative. There is a lot to say about this study, but I start with the most basic point--how often do debtors come under the expense standards?

1) The IRS Standards probably come into play in about 7-8 percent of Chapter 7 cases. This seems to be the fraction of debtors in the sample that had above-median incomes. The EOUST's report to Congress that accompanies the study says that only about 10 percent of this 8 percent (hmmmm. . . .) had monthly disposable income that triggered the presumption of abuse. Two subpoints: 1)This "fraction of a fraction" presentation emphasizes how few families are at risk of "flunking" the means test. Note though that we are still probably talking about thousands of real families who have to litigate to rebut the presumption. 2) The study's methodology of examining cases does not permit any observation of how many families went straight to Chapter 13 just to avoid the presumption or did not file bankruptcy at all because of the means test or other BAPCPA effects. 

2) The IRS Standards apply in a significant fraction of  Chapter 13 cases. The range among the eight districts in the RAND study was 13-66 percent. My take on this--wowsers! This is serious, substantial variation among how many families are affected by the IRS Standards, and I bet in a fully national sample, the disparity would be even greater. The "it's got to be more fair because it's numerical" means test may be producing differential outcomes in this regard, or perhaps there are real regional differences in how easily people "can pay" at the time they file bankruptcy. More on this in a follow-up post, or take a look at the study yourself. It's going to be a big part of any further debate in Congress about consumer bankruptcy. 


Jonathan Ginsberg blogged recently about the effects of an extremely strict 5-year Ch 13 budget:

"Five Years is a long time for rice and beans" (audio blog)


The results of the report are of little surprise to those who regularly operate within the system. A number of studies issued before Congress passed BAPCPA warned that the means test would have little practical impact. That prediction is now being borne out.

I'm not surprised that means test issues are showing up with greater frequency in chapter 13. The interplay of the means test with the "best efforts" test in Ch 13 cases is especially intriguing (as the case law split has already indicated) because of the odd outcomes that can come from applying a retrospective means test formula (built on "current monthly income" -- the average of income received in the six months prior to filing) to a prospective best efforts analysis ("projected disposable income"). All the little "suppose" hypotheticals you can think of that might arise from the "look forward/look back" contradiction are already being played out in courts around the country right now. The disconnect looks to be unintended, but also looks like it can't be fixed without Congressional intervention.

"The effect? The effect is its pi%&#*@ me off!" to quote the kid in Ghost Busters who was the subject of the Electrocution experiment. All the Means Test did was make things more expensive. For republicans who supposedly stand for the concept of smaller government (which they don’t, they say they do but they don’t) they sure expanded governments roll in Bankruptcy via the new duties placed upon the US Trustee. If your means test data is different from the US Trustee and you ask the US Trustee how they came up the their figures, they will tell you well this and that doesn’t match up but if you ask them how they calculate they will tell you that they can't tell you! It’s a secret! They either can’t or won’t give you the formula. Which I thought was already written in the code..??

Funny story: Before the 2005 Bankruptcy Abuse Prevention and “Creditor” Protection Act was enacted, the US Trustee held a series of meetings to get local BK firms prepared for the coming changes. The District supervisor for the UST's office came down to talk to all of us. In a meeting room she wrote on the dry erase board, "I will pass the means test" like 20 times on the board. Reminiscent of the good ole days back in elementary school. Well before the meeting started, while she was not there I walked up in front of everyone and erased all of the "s" from means , just as I used to do in Elementary School. She thought it was funny and everyone else did also. Good thing she did not have me cleaning erasers after class. It really is a "Mean" test if taken on a whole in that it duplicated some of the safe guards the UST already had...

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