Means Test or Mean Test?
The new (but not necessarily improved) Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) becomes effective Oct. 17. Most of the publicity surrounds the “means” test, which debtors must pass if their income is higher than the state median for their household. The test has sometimes been referred to by consumer advocates as the “mean” test.

The premise is that if a debtor’s income is over the state median for their household, then they should make their best effort to repay some or all of their creditors. This “best efforts” repayment bankruptcy is a Chapter 13, a much more complex and drawn out process than the straight Chapter 7. A Chapter 13 works something like this: The debtor takes his monthly income, deducts allowable expenses, and then the net disposable income is used to repay creditors over a period of three to five years. Currently, most Chapter 13 trustees in Los Angeles have been allowing reasonable actual expenses, thereby allowing confirmation of plans with a minimum of monthly payments to creditors. However, the new

BAPCPA will only allow expenses according to a much more strict set of IRS guidelines.

Many debtors will now be forced to pay more than double the normal attorneys’ fees for preparing and filing a Chapter 13, and pay a large portion of their income to creditors over a three- to five-year plan, during which time the debtor is under court scrutiny.

The new BAPCPA also places onerous burdens on the attorney representing the debtor. The debtor’s attorney must sign the petition, certifying that the information contained in the petition is correct. The debtor’s attorney must, at a minimum, perform a reasonable investigation into the circumstances that gave rise to the petition, and that such petition is well grounded in fact. Also, the attorney must certify that they have no knowledge after an inquiry that the information contained in the petition is incorrect. The debtor’s attorney must reimburse the trustee for legal fees if the case is improperly filed as a Chapter 7.

A much less publicized portion of the new BAPCPA laws took effect immediately upon passage last April. Section 308 of the new BAPCPA reduces a debtor’s homestead exemption by the value of property transferred within the last 10 years with the intent to hinder, delay or defraud creditors. A homestead exemption entitles a debtor to keep from $50,000 to $125,000 of equity in their residence. Section 308 is an extremely relevant provision for the Asian community, where many debtors and general practitioners who represent them operate under the mistaken notion that quick and dirty quitclaims and transfers are often substitutes for legitimate transactions.

What will this mean for the Korean American community? While some individuals will still qualify for Chapter 7 bankruptcy, many will be forced into a Chapter 13, forcing many debtors to repay their creditors. Fees will likely increase as the army of general practitioners and paralegals who filed the occasional bankruptcy will not want to risk sanctions or the steep learning curve involved in filing a Chapter 13. Creditors and collection companies will likely be emboldened by these tough new laws to harass consumer debtors into paying their debts. The “mean” season is upon us. Be ready to weather the storm.