The means test was established to make sure that people who have the ability to pay their unsecured creditors money are required to make payments to the unsecured creditors. The means test is legislation that really back fired because someone did not pay attention to what the effect of secured debt was on the means test.
The means test allows the deduction of secured debt from available income before it is determined how much is left over for unsecured creditors. What this does is actually encourage debtors to have secured debt when they file bankruptcy. If the mortgage payment is higher than what rent would be, debtors are rewarded by being able to deduct that higher number from available income. If a debtor has a lower mortgage payment because they were frugal when they purchased and financed their home, then they may actually be punished by the means test.
The means test rewards the debtor who has a car payment. The more owed, the better. Buying a small car with a 200.00 dollar a month payment is not rewarded by the means test. Buying a car with a $600.00 dollar a month payment helps the debtor not have to pay unsecured creditors.
The means test which was became effective under the 2006 amendments to the Bankruptcy Code has actually punished people who tried to reduce expenses so that they could pay their debts. When debtors finally realize that they cannot pay their creditors and decide to file bankruptcy, even though they have paid more towards their debts they are punished.
If, however, someone has bought the cars, bought the house and lived well on credit cards, they then may be rewarded by being able to file a bankruptcy that pays unsecured creditors nothing.
The means test makes no sense. The means test made no sense when it was passed and it makes less sense now. Is it any doubt that the American People believe that Congress is broken? Let’s pass legislation that encourages people to try to pay their creditors and, if they cannot pay their creditors, allows people to obtain the “fresh start.”
Contact me, Nathan Davis, to go over your options and see how the means test may affect you.