The Means Test was another change that was added by the 2005 changes to the bankruptcy law.  It's designed to force those that make over a certain amount to file a Chapter 13 bankruptcy instead of Chapter 7 under the theory that if the debtor is making over a certain amount of money (the "mean"), then he or she should be required to pay more back.  The initial threshold inquiry is determined by an objective standard based on the location of the debtor and the number of the debtor's dependents.  If the debtor makes below the mean for that region and number of dependents, then the presumption of abuse does not arise.  If a debtor's income exceeds the initial threshold, then further analysis is necessary.  This analysis is accomplished through a fairly complicated formula laid out in Bankruptcy Form 22A (in the case of Chapter 7 filings) or Form 22C (in the case of Chapter 13 filings).  Deductions are allowed for numerous items, and it is still possible for the presumption not to arise. Finally, even if a presumption of abuse does arise, it is possible for a debtor to overcome this presumption with facts which overcome the presumption.  One final note - if a debtor's debts are primarily non-consumer debts, then the means test analysis is complete, and no further action is required on the part of the debtor.  A presumption of abuse could still be asserted by the trustee, but the presumption will not arise automatically by resort to a comparison of the debtor's income with a mean.  Future blog entries will focus on specific aspects of the means test.

One question I often get is whether or not a debtor must pay taxes on debt that is discharged in bankruptcy.  If a debtor negotiates with his or her creditors for a reduction in the amount of the debt, then this would normally be the case.  The debtor would receive a 1099 at the end of the year for what is known as cancellation of indebtedness income (or discharge of indebtedness income).  In the bankruptcy context, this issue is addressed in Section  108 of the Internal Revenue Code.  And thankfully the answer is a confident NO.  Section 108(a)(1)(A) specifically provides that indebtedness discharged in a Title 11 case (which covers all chapter of a bankruptcy filing) is not included in gross income.

Section 523 of the Bankruptcy  Code provides a laundry list of situations where a discharge is not allowed.  The text of the section is below.  The most common exceptions to discharge are:  (1) Child support or other domestic support obligations; (2) Taxes (although a discharge is possible for taxes under certain circumstances); (3)  Unlisted debts (although these can still be dischargeable in some cases).

 Here's a link to the full text of Bankcuptcy Code Section 523

http://www.law.cornell.edu/uscode/usc_sec_11_00000523----000-.html.

All individual debtors are required to obtain a certificate from an approved credit counseling agency prior to filing for bankruptcy.  This requirement was added by the changes made to the bankruptcy laws in 2005, and it applies to all individual cases (including under Chapters 7, 11, and 13).  The usual cost for the course is around $50.  The Department of Justice maintains a list of approved credit counseling agencies, which can be accessed at the following link:  http://www.justice.gov/ust/eo/bapcpa/ccde/cc_approved.htm.  On rare occasions, courts may allow for the waiver of the credit counseling requirement - after a showing of "exigent" circumstances.  But don't count on it.