Judge's Ruling Could Affect Guture Chapter 7 Means Tests

January 16, 2013

Judge's ruling could affect future Chapter 7 means tests

In November 2012, a federal bankruptcy judge in Florida issued a ruling that challenges the conventional wisdom regarding the means test when a bankruptcy filer converts his or her bankruptcyfrom a Chapter 13 to a Chapter 7.

Defining Chapter 13, Chapter 7 and means testing

Before delving into the bankruptcy judge's decision, it is important to understand a few key bankruptcy concepts. Chapter 13 and Chapter 7 bankruptcies are both ways for filers to relieve themselves of the burden of their debts. Chapter 13, also known as the wage earner's plan, helps those with an income develop three to five year repayment plans to pay their debts, after which their remaining debt is discharged. Chapter 7 bankruptcy, on the other hand, results in an immediate discharge of most debts.

One way to qualify for Chapter 7 bankruptcy is if the filer's income is at or below his or her home state's median monthly income. Florida's state median income is $40,029 for a single earner.

When a Chapter 7 filer makes more than the state median income, he or she must pass the means test, a complicated test that is designed to prevent people with high monthly incomes from abusively using bankruptcy to get rid of their debt. If found a chapter 7 bankruptcy filing is found to be abusive, the filer can agree to convert the Chapter 7 bankruptcy to a Chapter 13 bankruptcy. Otherwise, the case is dismissed.

Most federal courts have interpreted the statute that determines when the means test is used as applicable to all Chapter 7 bankruptcies, regardless of how they originated. For example, these courts believe a filer must pass the means test if he or she initially files for Chapter 7 bankruptcy or if he or she converts a Chapter 13 bankruptcy to a Chapter 7 bankruptcy. This interpretation of the statute is at the heart of the bankruptcy judge's ruling last year.

The ruling's case history and judge's decision

In late 2012, a federal judge in Florida ruled that failing the means test after converting a Chapter 13 bankruptcy to a Chapter 7 bankruptcy is not presumed to be abusive under federal bankruptcy law. This decision is only held by a minority of federal bankruptcy courts across the country.

The case that led to the judge's decision involved a filer who had originally filed for Chapter 13 bankruptcy. She then lost her job and was unable to make payments under her Chapter 13 repayment plan. She decided to convert her Chapter 13 bankruptcy to Chapter 7 bankruptcy.

After the conversion, the filer was able to secure employment. Her new income caused her to fail the means test that determines whether or not filers qualify for debt discharge under Chapter 7 bankruptcy. The bankruptcy trustee in charge of the filer's case moved to dismiss it, arguing that the filer's conversion to Chapter 7 could be presumed to be abusive since the filer no longer qualified through the means test.

The bankruptcy court judge disagreed and threw out the trustee's motion. The judge explained that the statute that requires filers to pass a means test does not apply to cases where a Chapter 13 bankruptcy was converted to a Chapter 7 bankruptcy. The judge's ruling may help those who convert their Chapter 13 bankruptcies to Chapter 7 bankruptcies avoid a conversion back to Chapter 13 if they become reemployed.

If you are considering bankruptcy, contact an experienced bankruptcy lawyer who can help you understand if bankruptcy is a good option for you.

Article provided by B&B Law Group
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