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Monday, June 7, 2010

U.S. Supreme Court means test decision

Good news for consumer debtors in chapter 13 bankruptcy cases. The United States Supreme Court has taken the teeth out of one of the major components of the bankruptcy reform legislation that was enacted back in October of 2005. The case is Hamilton v. Lanning 560 U.S. ___ (2010) decided just today and distributed as a slip opinion.

Means testing is a fairly convoluted formula that took a look-back at the household income of a person filing bankruptcy to determine if they qualified for a chapter 7 bankruptcy case from an income standpoint or in a chapter 13 case where the debt was being reorganized it determined how much had to be paid in to the trustee on a monthly basis. Fundamentally it was a piece of flawed legislation from the start and it has taken this long for these piece of it to work it way through the judicial appellate process to be decided once and for all by the highest court in the nation.

The obvious problem was what number to use in putting a case together to propose the payment. Did we use the fairly mechanical means test formula? That was where we took the last six months income and divided by six...subtracted out those expenses that were allowed which were an amalgamation of certain IRS standard expenses for household expense and then certain expenses that were allowed by the statute that were different per the individual....such as taxes withheld, secured debt service, priority debt services (taxes mostly), medical expenses over the IRS standard limit, daycare, etc. Whatever was left over was termed disposable income. That, of course, flew in the face of the "real" numbers for what people were making currently...and what their actual reasonable and necessary living expenses were especially if there had been a change in the income since the applicable means testing period...the prior six months.

Thankfully, it appears now we've pretty much come back full circle to the old way of doing things. What do the debtors actually make? How much income is left over after considering the necessary and reasonable living expenses? That is what the payment is...this is called the "forward looking approach"--as opposed to the "mechanical approach" which was a cockamamie (not really a legal term) number we'd always end up with based on the non-sensical formula that the government and the finance/banking industry came up with.

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