Basic Overview of the Arizona Bankruptcy Means Test and reaffirmation…..

Am I eligible to file a Chapter 7 Bankruptcy case?

Eligibility requirements for all bankruptcy chapters are found in § 109 of the Bankruptcy Code.  With the exceptions of railroads, banks, or insurance companies, any person or company may generally file for Chapter 7.

Means Test—what is it?

In 2005, BAPCPA reformed the bankruptcy code to prevent consumer abuse of Chapter 7 and included, among its many amendments, a test to determine whether a debtor could make meaningful repayments to its creditors.   If it is determined that a consumer debtor can make meaningful repayments, then abuse of Chapter 7 is presumed, and the debtor must instead make payments under a different chapter.  This test became known as the “means test,” and is codified at 11 U.S.C. § 707.

A word of caution:  the text of § 707 is not easy reading.  However, it may help to navigate if one keeps in mind the global reason for why it was adopted—to prevent abusive bankruptcy filings!

What are the steps determine Chapter 7 eligibility under the means test?

First, the current monthly income (“CMI”) of the debtor must be calculated.  Under § 101(10A), CMI is defined as:

(A) . . . the average monthly income from all sources that the debtor receives (or in a joint case the debtor and the debtor’s spouse receive) without regard to whether such income is taxable income, derived during the 6-month period ending on–

(i) the last day of the calendar month immediately preceding the date of the commencement of the case if the debtor files the schedule of current income required by section 521(a)(1)(B)(ii); or

(ii) the date on which current income is determined by the court for purposes of this title if the debtor does not file the schedule of current income required by section 521(a)(1)(B)(ii); and

(B) includes any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor’s spouse), on a regular basis for the household expenses of the debtor or the debtor’s dependents (and in a joint case the debtor’s spouse if not otherwise a dependent), but excludes benefits received under the Social Security Act, payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes, and payments to victims of international terrorism (as defined in section 2331 of title 18) or domestic terrorism (as defined in section 2331 of title 18) on account of their status as victims of such terrorism.

Hence, the CMI can generally be found by adding the monthly income received by the debtor in the preceding 6 months to filing for bankruptcy, and then dividing this number by 6.

Second, the debtor’s monthly allowable expenses are deducted from the CMI.  These expenses are determined by looking at the state standards for exemptions or the federal standards (if the state is an opt-out state).  In Arizona, such deductions include food, clothing, health care, housing and utilities, mortgage and non-mortgage expenses, transportation, taxes, life insurance, education, and child care, among many others.

Third and finally comes the actual substance of the test:  an income screen is performed on the newly adjusted CMI (the “net” after deductions).  This screening is made by comparing the debtor’s income to the median income for similarly sized families in the same state.  If the debtor’s income exceeds the median income, then abuse is presumed and the Chapter 7 case must be dismissed or converted into Chapter 13 (or in some cases, a Chapter 11 case may be warranted).  If the debtor’s income is less than the median income for the state, then no abuse is presumed and the debtor may proceed under Chapter 7.

If abuse is presumed via the means test, is that the end of the line?

No, not necessarily.  Under the Code, the presumption of abuse may be rebutted by demonstrating “special circumstances.”  The Code gives two examples of such special circumstances: (1)  a “serious medical condition” or (2) an order to active duty in the Armed Forces.

I recently moved.  How do I determine what state exemptions I am entitled to?

Under § 522 of Code, the applicable state law is the debtor’s domicile for the past 730 days.  If that time period is not continuous, then the applicable state law is where the debtor spent the majority of their time for the 180 days preceding the 730 days.  Note how difficult that makes it for one to move to a state just to take advantage of better exemptions!

Reaffirmation Agreements—what are they?

Section 524(c) of the bankruptcy code allows a debtor in bankruptcy to waive an agreement with a creditor for a debt that is wholly or partly dischargeable.  The reason a debtor would want such a debt to survive the bankruptcy is because it allows the debtor to keep an asset that would otherwise belong to the bankruptcy estate.  These agreements are generally called “reaffirmations agreements,” and they are enforceable under nonbankruptcy law.

Is there any way to get out of a reaffirmation agreement?

Yes.  Pursuant to § 524(k), a debtor may rescind a reaffirmation agreement at any time before a discharge is made, and up to 60 days after the discharge.  Notice must be given to the creditor that the reaffirmation agreement is rescinded.

What is the difference between a reaffirmation agreement and redemption?

In a redemption, the debtor simply agrees to pay the remaining amount owed to the creditor for the asset the debtor wishes to keep.  Here, the debtor will likely make a lump sum payment to the creditor, whereas in a reaffirmation agreement, the debtor agrees to keep making payments for the asset, usually under the same or similar conditions as the original contract.

What is the difference between a reaffirmation agreement and a ride-through?

In a ride-through, the personal liability of the debtor is discharged and the lien on the property still remains in full force.  So long as the debtor keeps making payments, the property may not be foreclosed.  Under a reaffirmation agreement, the debtor will still have personal liability for any deficiency between the sale of the asset and the amount of the debt.

It should be noted that a debtor may no longer seek a ride-through on a personal property asset simply by failing to make a statement of an intention to reaffirm.  See Dumont v. Ford Motor Credit, 581 F.3d. 1104 (9^th Cir. 2009). Under Dumont, if a debtor fails to make a statement to reaffirm or redeem, the personal property may be repossessed even if the debtor is current on all payments.