Bankruptcy

One More Means Test Problem

By Gene Wedoff

Another example of questionable legislative drafting in BAPCPA--the 2005 amendments to U.S. Bankruptcy Code--appears in an opinion of the Ninth Circuit BAP issued last month, In re Weigand.   At issue is whether ?current monthly income? (CMI) includes the gross receipts from a debtor?s business or rental property or only includes the net income--gross receipts reduced by by business or rental expenses.  There can be a big difference between the two possibilities.   One Mary Kay saleswoman, for example, reported net income of $150 on weekly gross receipts of $620.  On an annual basis, that would be $32,240 in gross receipts versus $7,800 in net income.  The difference matters.  If a debtor?s CMI is greater than the median household income for the debtor?s state, there are two negatives.  First, the debtor has to fill out the complex statement of deductions from income to determine whether a means test presumption prevents the debtor from obtaining a Chapter 7 discharge.  Second, in Chapter 13, the debtor has to propose a five-year rather than a three-year repayment plan.  $7,800 doesn?t come close to any state's median income; $32,240 actually exceeds some of them.  It's pretty certain that counting gross business and rental receipts would make many debtors "above median" who otherwise wouldn't be.  So, are gross receipts part of CMI?

The official forms say no--CMI includes only net business or rental income.  (See, for example, Lines 4 and 5 of the Chapter 7 means test form.)  The Committee Note for these forms gives the basis for this determintion: the Census Bureau's median income figures--to which CMI is compared--are themselves based on net business and rental income, as reflected in the Bureau's definition of "Income in the Past 12 Months". 

But BAP disagress in Weigand.  Why?  Because § 1325(b)(2)(B), a pre-BAPCPA provision of Chapter 13 retained by BAPCPA, provides that the ?disposable income? of a debtor engaged in business should be calculated by deducting from the debtor?s income ?expenditures necessary for the continuation, preservation, and operation of such business.?  The BAP?s ?plain meaning? interpretation of this provision says that gross receipts must be income, because it wouldn?t make sense to deduct business expenses if they weren?t income to begin with.  But there is no parallel to § 1325(b)(2)(B) in the Chapter 7 means test, so "plain meaning" could conceivably require that in Chapter 7 gross receipts must be included in CMI without any deduction for business and rental expenses.

The Rules Committee will have to determine to what extent the means test forms should be changed to accommodate the BAP?s interpretation.

Full post as published by Credit Slips on May 06, 2008 (boomark / email).