This morning an attorney contacted me about a problem he was having with getting his Chapter 13 Plan to balance. I had him email me the petition so I could pull it into the software program and hopefully figure out what the problem was.
The solution turned out to be very simple. This attorney was making the same mistake other attorneys make. Therefore, I decided to write this short article to help other bankruptcy attorneys and virtual bankruptcy assistants not duplicate this same mistake and learn from the errors of others.
Understanding the Role of the Means Test
The first step is to understand that the Means Test is a completely different animal compared to the Chapter 13 Plan. In fact, the Means Test has nothing to do with the Chapter 13 Plan. The only purpose of the Means Test is to determine (according to IRS income and expense guidelines) if a debtor qualifies to file a Chapter 7 or Chapter 13. In order for the Means Test to make this determination, it needs to know the income and expenses of the debtor.
Solving the Attorneys Problem
The attorney who called me this morning had made the mistake of not understanding what the Means Test really was. On both the mortgage and the two automobiles, he had checked the box to EXCLUDE the debts from the Means Test. This means that the Means Test had made no allowance for the home and cars the debtor owned. Of course this threw off the entire petition in relation to the other income and expenses also. In fact, it was so far off that the debtor was shown to file a Chapter 13.
After UNCHECKING the box and allowing the mortgage and automobile debts to be included IN the Means Test, the problem was immediately solved. In fact, this easy change made such a difference in the case that the debtors now qualified for a Chapter 7. This saved them over $112,000 instead of being stuck paying $112,000 back over a period of 60 months.
Lesson to Be Learned
Never exclude a debt from the Means Test unless the debtor is surrendering the asset. The purpose of the Means Test is to calculate 6 months of average expenses. If the debtor will no longer be making payments on a particular debt, there is no reason for it to be included on the Means Test as an average and ongoing monthly expense.
Do You Have a Problem Case?
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