Passing the Means Test isn’t the End of the Story

Good news! You passed the Means Test!

Bad news! You underreported your expenses on Schedule J and the trustee has filed a Motion to Dismiss your Chapter 7 case!

Many debtors and their attorneys work hard to pass the Means Test, only to run into trouble with Schedules I and J: the debtor’s monthly income and expenses. This problem arises when Schedule I shows more income that Schedule J shows expenses, leaving a significant amount of excess monthly income. This is evidence of the debtor’s ability to fund a repayment case, and can form the basis of a motion to dismiss in a Chapter 7 case, even when the debtor passes the Means Test. See 11 U.S.C. 707(b)(3).

Avoiding an excess income issue is usually as simple as honestly reporting expenses. The first question is: “do you have money left over at the end of the month?” If the answer is “No,” then the mission is to accurately account for the debtor’s spending. Note that Schedule J is not constrained by the same IRS rules as the Means Test, and neither the Means Test nor the categories identified on the Schedule J represent an exclusive list of expenses. There are many categories of household, dependent, and personal expenses that are omitted or under-represented.

Likewise, the debtor’s Schedule J in a Chapter 13 case should show “just enough” available income to fund the proposed repayment plan. Showing too little leftover income will invoke a motion to deny confirmation due to an infeasible plan. See 11 U.S.C. § 1325(a)(6). Showing too much leftover income and the bankruptcy court may find that the debtor is not devoting enough money to repay creditors in the plan. See 11 U.S.C. § 1325(b)(1)(B).

Schedule J should tell the full story of your monthly expenses, and avoid an attempt to “tighten the belt” for the sake of looking good to the bankruptcy trustee. Showing how you are willing to sacrifice for the sake of your bankruptcy case usually works against you.