Substantial Abuse Under The New Means Test

Under the new bankruptcy law the "means tests" evaluates eligibility for chapter 7 bankruptcy. The means test measures the debtor’s ability to repay debts by considering his total household income and expenses. Where a single debtor is unemployed, but his spouse is employed and makes substantial salary, the spouse’s salary could disqualify the unemployed debtor from Chapter 7 under means test formula.

I presently am preparing a bankruptcy for such an employed debtor with a gainfully employed spouse. Together, this couple makes a lot of money. However, the bulk of the unemployed debtor’s debts represented credit cards used to fund a failed business. Under the new bankruptcy law, debtor’s whose debts are primarily business debts are exempted from the means test. Therefore, the spouse’s income should not disqualify this debtor from filing chapter 7. However, under the old law a debtor’s bankruptcy might be subject to dismissal if it were found that the filing constituted a "substantial abuse" considering the debtor’s ability to repay debts. The extent to which the income of a non-filing spouse was considered in "substantial abuse" was not clear. This case will be interesting because it will present the issue of whether a debtor exempt from the means test by the business debt exception could still find his bankruptcy challenged as substantial abuse under the new law because of the income of his non-filing spouse.

posted by Jonathan Alper, asset protection and bankruptcy lawyer, Orlando, Florida