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Questions and Answers (Q & A) about the New Bankruptcy Law Amendments (continued)

32. Please explain what New Law provision requires“means testing”, and HOW the means testing is done under the New Law:

a. Means testing is mandated by New Law 11 USC §707(b)(2) et seq. For each Chapter 7case, §707(b)(2) et seq. requires doing a calculation to determine if the debtor has a surplus of income over expenses per month.

b. Some expenses are actual expenses, but many expenses are NOT actual expenses, but instead are figures from IRS tables, which are what the IRS thinks are the “average” for what a debtor or family should be paying for things like housing and a car and food.

c. It’s a lot easier to understand how the “means testing” goes by using a FLOW CHART. Please turn in materials to the FLOW CHART, which I will use to explain how the means testing works under the New Law:

NOTE TO PANELIST: “TALK” your way through each item on the flow chart, here pasted in:

Flow Chart of How to Do “MEANS TESTING” required by 11 USC §707(b)(2) of New Law, to Determine Whether Granting Debtor Relief Under Chapter 7 is “an abuse” of Chapter 7; and of 707(b) Motion Procedure
prepared by Kathleen P. March, Esq., The Bankruptcy Law Firm, PC

Is Debtor an individual whose debts are more than 50% consumer debt?

↓
Not individual, or more than
50% of individual's debt is business debt
STOP A §707(b) "Abuse of Ch7Motion
can only be brought against "an individual
debtor whose debts are primarily consumer
debts", per 11 USC §707(b)(1)
↓
Individual with more than
50% consumer debt
(Proceed with means testing)
↓
↓
_________________↓

↓
↓

What is debtor's/debtor family's Current Monthly Income (6 months of income ending on petition date(w/ specified exclusions) ÷ 6 = monthly income) Compared to CALIFORNIA MEDIAN INCOME (as reported by US Census Bureau, adjusted using Consumer Price Index) for Single Debtor / Family of Family of Size of Debtor's family (husband, wife, kids, other dependents)?

↓
↓
Below Median
STOP

↓
↓
Above Median?
↓
↓

From the debtor's current monthly income, SUBTRACT the debtor's monthly expenses calculated as required by 11 USC §707(b)(2)(A)(ii)(I) through (V), which uses theoretical amounts specified by IRS tables for certain expenses(e.g., housing, utilities, transportation), with some IRS adjustment for region, and uses debtor's actual reasonable expenditures for certain other expenses (medical, child's school up to $1500 per year per child, etc.) This calculation will give you debtor's monthly disposable income (referred to as "surplus" in Chapter 13 slang)

 

 

 ↓
↓

 

 

How big is the debtor's / debtor's family's monthly net disposable income (aka "surplus")?

 

 ↓
↓
↓
↓

 
↓
↓

If Surplus Under $100/mo;
STOP

IF $100 to $166.67/mo
↓

If GREATER than $166.67/mo
↓

 

↓

PRESUMPTION ABUSING
Ch 7

Ask will this surplus x 60 months (5 year plan)
Either pay 25% to general unsecured claims,
or pay$10,000 [§707(b)(2)(A)(i)(I)&(II)]

Do not file a Chapter 7 for this client as you, the attorney may be sanctioned when 707(b) abuse motion brought and

↓
No

↓
Yes

Debtor loses that Motion
↓

STOP

PRESUMPTION ABUSING Ch 7 →
Do not file a Chapter 7 for this
client as you, the attorney may
be sanctioned when debtor loses
707(b) abuse motion

707(b) Motion will be Brought by
US Trustee unless Debtor
Convinces US Trustee that "Special Circumstances"of debtor rebut
Presumption of abuse of Ch7

Despite PRESUMPTION ABUSING CH 7, debtor at 341a exam can argue debtor has SPECIAL CIRCUMSTANCES [11 USC §707(b)(2)(B)] that REBUT presumption of abuse of

↓
↓

↓
↓

UST Agrees Special Circumstances
and files UST (first) Statement with
Court will say Abuse Not Presumed

OR

UST Disagrees Special
Circumstances and files UST
(first) Statement with Court saying Abuse Presumed

↓

↓

Per 11 USC §704(b)(a)(A), in every Chapter 7 case, within 10 days after 341a meeting US Trustee must file with Court a Statement as to Whether or Not the Debtor’s Case would be presumed to be an abuse of Chapter 7, per 707(b), and then Court sends copy of Statement to all creditors within 5 days after US Trustee files statement with Court. Then per 11 USC §704(b)(2), not later than 30 days after the first statement is filed, the US Trustee must either:

↓

↓

UST files (second) Statement
w/Ct, stating the reasons a 707(b)
NOT Appropriate

 

__________

OR

 



______________
UST files a 707(b) Motion
NOTE: In addition to UST filing 707(b) Motion any creditor, or Chapter 7 Trustee may file 707(b) Motion if debtor's income greater than median CA income
__________↓

↓

↓

No one brings a 707(b) abuse Motion

OR

Someone brings a 707(b) abuse Motion

↓
STOP
↓
_________________↓______

 

↓
↓
Debtor Opposes Motion
↓
↓
↓

 OR

↓
↓
Debtor "chooses"
to Convert to Chapter 13
before Motion ruled on

Debtor bears burden of proof to rebut presumption of abuse of Ch 7

↓
Judge Rules Abuse of Ch 7
("An abuse"; no longer "substantial abuse")
Debtor attorney ordered to pay
attorneys fees, costs, civil penalty
per 11 USC §707(b)(4)
Debtor can still convert to Ch 13
or Debtor's Case will be Dismissed
↓
Creditors are Happy : Chapter 13
plan will require 5 years of Payments

↓
Judge Rules No Abuse of Ch 7
Debtor gets to stay in Ch 7; May
awarded attorneys fees per §707(b)(5).
Debtor's attorney doesn't get sanctioned;
but still suffers traumatic stress syndrome
from experience and changes careers,
reducing number of available debtors' attorneys
↓
Creditors are Happy: Fewer debtor's
attorneys will make it harder for future
debtors to file bankruptcy

As you are talking your way through the flow chart, panelist asking questions should ask you the following:

33. Is there a “magic number” under the means testing formula, below which the debtor is allowed to file Chapter 7?

a. There are at least 4 magic numbers:

i. First, if the consumer debtor’s income is below the state median, means testing is NOT required. The petition preparation software–Collier, EZ Filing, Bankruptcy Plus, etc. will plug in this number for your state, and the IRS numbers, and help you do the means testing calculation.

ii. Second, if the debtor’s monthly surplus, caclulated as specified in secdtion 707(b)(2) is less than $100 per month, there is not presumption the debtor is abusing Chapter 7 by being in Chapter 7.

iii. Third, if the monthly surplus is OVER $166.67 per month, calculated as specified in the means testing formula of 707(b)(2) et seq., there is a presumption the debtor is abusing Chapter 7, unless the debtor can show “special circumstances”.

iv. Fourth If the debtor has a monthly surplus between $100 and $166.67 per month, calculated using the formula specified in 707(b)(2), then you have to determine whether that surplus, multiplied by 60 (a 5 year plan is 60 months) would pay 25% of debtors unsecured debt, or $10,000, and if either, there is a presumption of abuse of Ch 7.

(Section 4 of 10)
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