The Harsh Real-World Impact of the Bankruptcy “Reform” Means Test

“The means-testing provisions of the bill
will bring some rationality to this system.”

Prof. Todd Zywicki,
National Review Online,
March 15, 2005

If this is “rationality,” perhaps we should prefer insanity.

The three detailed posts on the Bankruptcy “Reform” Means Test have dealt with how the bill defeats “rationality” in defining and mandating the calculation of:

- Income
- Statewide Median Income
- Expenses

Income–Instead of a reasonable estimate of projected future income, the Bill requires that a filer use the average of the past six months’ income, regardless of current circumstances (layoff, job loss, disbility, extended illness, etc.).

Statewide Median Income–The Bill’s use of statewide medians instead of metro-area medians and other subtle calculation tricks result in only 40%-45% of the population being “automatically” able to file for Chapter 7 if they get into serious financial circumstances, instead of the 50% that the use of the word “median” would cause you to expect.

Expenses–Instead of real numbers reflecting what the individual or family actually spends, the Means Test dictates that expenses used in a filing be, for the most part, based on the same standards the IRS uses to collect delinquent taxes. I estimate that this will usually cause filers to underreport monthly expenses by about $300-$500 compared to what they actually will incur, and by much more in higher-cost areas.

All of this means that filers will be:

- Often forced to report more monthly income than they can hope to earn in the future.
- More likely to be part of the 55%-60% of the population that is excluded from “automatic” Chapter 7 consideration because of “above median” earnings.
- If earning above the median, forced to report a lower level of expenses than they will actually incur, and to show that they have mythical money available to pay to unsecured creditors that really isn’t there.
- Because of that mythically available money, sometimes forced into Chapter 13’s partial-payment regimen when a “rational” income-expense analysis would have qualified them for Chapter 7.
- When placed into Chapter 13, forced by the Means Test calculations to make monthly payments to creditors with money that, as noted, isn’t available, making it very likely that their attempt to carry out a Chapter 13 will fail.

Other than that, I don’t have any problems with the Means Test (/sarcasm).

This monstrosity should never have gotten this far. Politology noted earlier this month how and why it has, and why this bill’s progress and apparently imminent passage shows that the system is more broken than most on the center-right and center-left will admit:

To put it simply, this bill illustrates our broken Congress. A representative government exists so we can empower our representatives to make the decisions that we don’t have to think about. They are to make decisions on behalf of the public, on behalf of the people.

But the people did not lobby for this bill. Furthermore, this bill is not a necessary sacrifice, like taxes for defense, or laws for the public good.

Congress will pass this bill, and it will only pass for one reason - they are able to sneak it by us and reward their lobbyists. The only way to oppose a bill like this is to attain critical mass in public opposition. But the bill is not sexy. It is politically boring. It hurts the public, but quietly. And therefore, it doesn’t capture the public imagination, and the public gets abused by Congress.

It proves that our representative government does not function as it should.

The Means Test is one of the primary building blocks of the true intentions of the “reform” architects, which are, as I have noted and will continue to note until people catch on:

- To discourage people in trouble from filing (most of them, they hope), so they can claim victory when the bankruptcy stats go down.
- To force as many of the poor souls who do file as possible into Chapter 13’s payments regimen.
- To force those who are in Chapter 13 to pay so much every month that they have to radically adjust almost everything in their lives–in other words, to PUNISH them.

You also have to wonder whether the lending industry will consider their work done when this bill passes.