Bankruptcy

Dismissals Of Chapter 7 Bankruptcy As Abusive When Debtor Passes Means Test

By Jonathan Alper

Many bankruptcy debtors do not understand eligibility for Chapter 7 bankruptcy. They rely  too much on the means test, and they assume that if they are exempt from or pass the means test they automatically are eligible for Chapter 7. The means test is one test of Chapter 7 qualification but it is not the only applicable standard. If a debtor passes the mathematical means test analysis he avoids a presumption of abuse; the law creates a presumption that debtors who cannot pass the means test should not be filing Chapter 7 bankruptcy. However, the means test is not the only test. Debtors who pass the means test, or are exempt from the means test, may still have their Chapter 7 filing dismissed or converted to Chapter 13 if the totality of circumstances of their financial and family situation shows that their Chapter 7 is an abuse of the bankruptcy system. A Chapter 7 filing is abusive if it was filed in bad faith or if the applicable circumstances show that the debtor has the ability to repay a significant portion of his unsecured debts.

Whereas all bankruptcy debtors with primarily consumer debts must subject their filing to the means test, the abuse test only applies when the United States Trustee, or other party to a case, files a motion to dismiss the case for abuse under Code Section 707(b). The abuse test is subjective. It is very difficult to predict with certainty whether a particular debtor above median income may be challenged successfully. Another point is that the means test formula looks only at your income and expenses prior to the filing date, but the abuse test may consider increases in income and actual or possible expense reductions following the bankruptcy filing. The point is that prospective Chapter 7 debtors who have relatively high incomes or live lifestyles which could be considered "extravagant" for someone in bankruptcy should be aware that their bankruptcy could be contested even if they pass the means test.

My experience with fellow bankruptcy attorneys leads me to believe that many attorneys either do not understand or give insufficient consideration to the issue of abuse under Section 707(b)(3). I think its important that relatively high income Chapter 7 filers understand this issue. I found one bankruptcy court decision that provides a clear and thorough explanation of the applicable tests and presumptions under the means test and the abuse test relevant to Chapter 7. In re Henebury, 361 B.R. 595. I better understood the law after reading this decision.

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

Full post as published by Florida Bankruptcy Law on May 03, 2009 (boomark / email).