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Means test applied to determine debtor’s eligibility under Chapter 7

In the case of In re Johnson, the U.S. Bankruptcy Court for the Northern District of Indiana held that it was proper for the debtor to include mortgage payments in his means test calculation, even though the debtor intended to surrender the property. The court also rejected challenges to the debtor’s cell phone and cable/phone expenses and his voluntary 401(k) contributions absent proof that they were not reasonable or necessary. However, the court ruled that the debtor’s filing was an abuse under Chapter 7 where the debtor’s auto loan was nearly paid off, freeing up additional funds that could be used to pay at least 25 percent of the debtor’s unsecured creditors’ claims.

Bankruptcy law provides a “means test” for determining a debtor’s eligibility for relief under Chapter 7 (liquidation) or the debtor must file under Chapter 13 (wage-earner repayment plan).


The debtor was a 52-year-old truck driver with an adjusted gross income of $63,955, who was in good health and had worked steadily for the past three years.

Mortgage payments on property to be surrendered

The court ruled that the debtor may claim a deduction for monthly mortgage payments even though the debtor intended to surrender the property encumbered by the mortgage. The court stated that payments for secured debts which are contractually due during the 60-month period following the date of filing of the bankruptcy petition must be included as deductions for purposes the means-test calculation and that there no exceptions under the Bankruptcy Code provision. The debtor’s plans to keep or surrender the property are immaterial.

Cell phone and cable/phone expenses and voluntary 401(k) contributions

The court also rejected the bankruptcy trustee’s challenges to certain monthly expenses of the debtor as being excessive. With regard to a monthly cell phone bill of $125 and a monthly cable/phone bill of $150, the court held that the trustee failed to meet its burden of proof regarding the debtor’s reasonable needs for such services, whether alternatives or options were available to the debtor, and the costs of obtaining such alternatives.

The trustee also objected to debtor’s voluntary contribution of $706.25 per month to his 401(k) retirement account. The debtor argued that these contributions were needed to prepare for his retirement as he might have as little as 10 years left before retiring and he currently had less than $13,000 accumulated in retirement savings. The court rejected the trustee’s challenge, citing a lack of proof by the trustee regarding the debtor’s future retirement needs, the resources that might be available to the debtor to meet those needs, and the extent to which changes to the debtor’s contributions would affect that availability.

Budgeted payments for auto loan that was nearly paid off

The debtor’s budget included $200 per month for car payments. However, since the outstanding principal balance on the auto loan was only $826, the loan would soon be paid in full, which meant that the debtor would soon have an additional $200 per month available. This was more than enough to pay at least 25 percent of the claims of the debtor’s unsecured creditors. This ability alone was held to be sufficient grounds for a finding of abuse of Chapter 7. The trustee’s motion was granted and the court ordered the debtor’s case dismissed unless the debtor voluntarily converted his case to Chapter 13 within 14 days.

Filing the appropriate type of bankruptcy is crucial to acquiring financial relief. Individuals facing bankruptcy are urged to seek the advice of a competent attorney experienced in such matters in order to protect their legal rights.