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Means-Measuring versus Means-Testing

posted by Stephanie Ben-Ishai
As readers of the Credit Slips blog are well aware, a central feature of BAPCPA was means-testing.  Means-testing requires all debtors to calculate their estimated ability to pay (according to complex formulae) and to file these calculations with their Chapter 7 petitions.  A failure to do so results in automatic dismissal of their petition.  In contrast, the Canadian approach is to focus on means-measurement.  That is, for liquidation bankruptcies, the bankruptcy trustee on the basis of regulations set by the Office of the Superintendent in Bankruptcy (OSB) sets the amount debtors are required to pay (if any) during the bankruptcy period.  For debtors who are required to pay under the current means-measurement tests, the reforms will increase the period of repayment.  The reforms do not seek to introduce means-testing into the Canadian system.

Functionally, the key difference between means-testing and means-measurement is that means-testing, as put into place in the United States, creates a hurdle at the front end for all debtors filing for liquidation bankruptcies.  The means-testing calculation results in a more complex and time-consuming bankruptcy process, which in turn drives up the fees of filing for bankruptcy, even for those bankrupts who clearly meet the test.  The result is that an increasing number of debtors are not able to afford bankruptcy.  At the ideological level, means-testing operates on a presumption of abuse.

I have asserted that Canada’s resistance to adopting the American means-testing model is a laudable feature of the reforms.  I argue that the Canadian means-measurement approach, while not without its own flaws, is more effective than the American model at putting into practise the objectives articulated by proponents of means-testing in the United States.  See “The Canadian Consumer Bankruptcy Discharge” in Stephanie Ben-Ishai and Tony Duggan, eds. Canadian Bankruptcy and Insolvency Law: Bill C-55, Statute C.47 and Beyond (Toronto: LexisNexis Canada Inc., 2007).

Means-testing and means-measuring serve different purposes under the American and Canadian regimes:  under the BAPCPA, the purpose is to deny debtors relief if they fail the means-test, while in Canada the object of the means-measurement test is to ensure that the surplus income received by the bankrupt during the bankruptcy period, and prior to discharge, is made available to the estate.  The Canadian means-measurement approach is more effective at putting into action the key objective set out by the proponents of means-testing in the United States than the United States system itself.  That is, means-measurement focuses specifically on “can pay” or so called undeserving debtors and imposes a tax on them for the privilege of escaping their commitments.  At the same time, because debtors with surplus income are still able to move through the bankruptcy process, they are not directly prevented from accessing the fresh start offered by a liquidation bankruptcy or forced into an enforced payment plan.

With respect to the claim that means-testing, by increasing the likelihood of repayment of debts, decreases the cost of borrowing, it is questionable whether means-measuring will achieve this objective.  In the past, surplus payments had only a trivial impact on disbursements to creditors.  However, with the introduction of a longer payment period, this may change.  In addition, by imposing a longer payment period for debtors with surplus income, it is likely that a larger number will turn to consumer proposals.  Some American commentators suggest that this will increase the likelihood of repayment.  At the same time, the greater flexibility offered by the current Canadian approach allows debtors with a modest surplus income to make payments for a short period, and to earn their discharge without forcing them into making unrealistic consumer proposals.  As the longer payment periods apply equally to debtors regardless of the amount of their surplus payments, debtors at the low end may turn to consumer proposals, which they are unable to complete successfully.  It will be important to monitor whether the number of consumer proposals increases with the enactment of the reforms, and the success rate of these proposals.  

A key issue in the American consideration of means-testing – the use of discretion – is also at the heart of the Canadian reforms.  Similar to the American concern with the use of judicial discretion and the resulting lack of uniformity, a concern existed with respect to the trustee’s use of discretion in extending the surplus payment period.  The Personal Insolvency Task Force report states that “[t]he discretion afforded to trustees allows debtors to ‘shop’ for a trustee who will not require any additional payments,” creating a situation in which the imposition of shorter payment periods would result in a personal gain for trustees.  The use of bright line rules for the repayment period minimizes the ability of debtors to choose trustees on the basis of their position on repayment periods and introduces a more standardized approach.  At the same time, there remains a degree of discretion left to trustees in applying the directive to the debtor’s specific financial situation, determining if surplus payments are required and, if so, in what amount.  Arguably, this aspect of the Canadian system retains the “human side of the law” that has been lost in the American approach to bright line means-testing.  In addition, a comprehensive mediation process is in place to address situations where the debtor and the trustee cannot agree.  Of course, to the extent that some level of discretion is preserved for trustees, there remains anxiety around uniformity with regard to surplus payment amounts.


Wow...that just clicked for me! It is so true that Means Testing presumes that the debtors are Guilty of "Abuse" until proven innocent through means testing.... great post....

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