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One More Means Test Problem

posted by Gene Wedoff

Another example of questionable legislative drafting in BAPCPA--the 2005 amendments to U.S. Bankruptcy Code--appears in an opinion of the Ninth Circuit BAP issued last month, In re Weigand.   At issue is whether “current monthly income” (CMI) includes the gross receipts from a debtor’s business or rental property or only includes the net income--gross receipts reduced by business or rental expenses.  There can be a big difference between the two possibilities.   One Mary Kay saleswoman, for example, reported net income of $150 on weekly gross receipts of $620.  On an annual basis, that would be $32,240 in gross receipts versus $7,800 in net income.  The difference matters.  If a debtor’s CMI is greater than the median household income for the debtor’s state, there are two negatives.  First, the debtor has to fill out a complex statement of deductions from income to determine whether a means test presumption prevents the debtor from obtaining a Chapter 7 discharge.  Second, in Chapter 13, the debtor has to propose a five-year rather than a three-year repayment plan.  $7,800 doesn’t come close to any state's median income; $32,240 actually exceeds some of them.  It's pretty certain that counting gross business and rental receipts would make many debtors "above median" who otherwise wouldn't be.  So, are gross receipts part of CMI?

The official forms say no--CMI includes only net business or rental income.  (See, for example, Lines 4 and 5 of the Chapter 7 means test form.)  The Committee Note for these forms gives the basis for this determination: the Census Bureau's median income figures--to which CMI is compared--are themselves based on net business and rental income, as reflected in the Bureau's definition of "Income in the Past 12 Months". 

But the BAP disagress in Weigand.  Why?  Because § 1325(b)(2)(B), a pre-BAPCPA provision of Chapter 13 retained by BAPCPA, provides that the “disposable income” of a debtor engaged in business should be calculated by deducting from the debtor’s income “expenditures necessary for the continuation, preservation, and operation of such business.”  The BAP’s “plain meaning” interpretation of this provision says that gross receipts must be income, because it wouldn’t make sense to deduct business expenses if they weren’t income to begin with.  But there is no parallel to § 1325(b)(2)(B) in the Chapter 7 means test, so "plain meaning" could conceivably require that in Chapter 7 gross receipts must be included in CMI without any deduction for business and rental expenses.

The Rules Committee will have to determine to what extent the means test forms should be changed to accommodate the BAP’s interpretation.

Comments

In re Weigand is clearly correct. The Code controls - not the Official Form. At least when the Official Form fails to reflect the plain language of the Code.

There are many debtors in Chapter 13 who are engaged in businesses that are far more lucrative than selling Mary Kay. Is a debtor with $40,000 a month in income, and $39,800 in "business expenses" really the type of poor schlub who should be considered "under the median" and entitled to file a 0% 36 month Plan based on $200 a month in current monthly income?

To the extent Congress had any coherent thoughts when they passed BAPCPA, they probably didn't intended that.

The other problem is - what the hell are allowable business expenses for purposes of determining the 'net income' provided by a debtor's business? Assuming that you aren't going to allow pure double counting (a vehicle expense taken as a deduction against business income, and then taken again as an ownership expense/secured debt payment) are you going to allow soft deductions like depreciation? At this point, there aappear to be no established standards as to what is an appropriate business expense for purposes of the Means Test.

The "Means Test" is possibly the dumbest bastardized legislation ever grafted onto a U.S. bankruptcy law. If it has any purpose other than allowing an average of $500 in additional phantom deductions to debtors with high incomes, that purpose has yet to become apparent. People with higher incomes who live cheaply - for example, by renting - get screwed and have to pay a higher percentage of their unsecured debts. Debtors with McMansions get to deduct their bloated mortgage payments (and other inflated housing expenses) from the amounts that should be used to pay unsecured creditors, and so are permitted to pay less through their Plans.

It's absurd. The Means Test winners are those high income debtors who have managed to put the greatest percentage of their disposable income into their 'dream' home and two luxury cars, all at the expense of their unsecured creditors.

But the most unfortunate thing about the Means Test is that when the rubber hits the road, the mortgage industry knows that the Means Test is pure crap. And that fact is going to prevent us, as a country, from fixing our little foreclosure crisis and the associated economic meltdown.

No legislation reducing secured mortgage debt to the value of the collateral based on need is going to be possible because the most obvious way to determine those who truly "need" to modify their mortgages is the Means Test. And the Means Test is little better than a random number generator with opaque parameters. Hardly the foundation that anyone - including the mortgage industry - would prefer to use as an eligibility standard for mortgage modification.

When you go from a coherent system of carefully crafted checks and balances (the old Code) to a poorly drafted, internally inconsistent mush of undefined gibberish (BAPCPA) - there is a cost.

Unfortunately, as a Nation, we are apparently going to have to forego any effective response to the foreclosure crisis because the legislation that Visa and Mastercard bought has too many gliches to be used to keep additional houses from flooding an already saturated housing market. And the people who could be paying mortgages - albeit at a reduced rate - are going to taken out of the housing market for a number of years based on their inability to modify their mortgage obligations in bankruptcy, forcing a surrender of their home to the foreclosure process.

More houses on the supply side, and less potential home owners/mortgage payers on the demand side - with nothing to slow down the foreclosure crisis other than "voluntary programs" designed to exclude most of those who are in trouble.

On one of my cases the department of justice objected to my deduction for voluntary child support, because it was not court ordered. I took it to trial and lost. Had to convert the case to a chapter 13 in which the plan did not allow for the debtor to take care of his children.

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