Bankruptcy

Surrendering Home Does Not Affect Means Test Calculation in Chapter 7

By Jonathan Alper

A prospective Chapter 7 bankruptcy debtor has substantial credit card debt and a large mortgage payment on a house that has lost its equity in the housing collapse. By depleting savings the debtor has managed to keep all payments current. He has little saving remaining to continue payments. If he lets the house go back to the bank this debtor has the financial ability to pay his credit cards and work his way out of credit card debt provided he keeps his job and salary level. In order to clear all his debts and prevent a deficiency judgment, this individual files Chapter 7 bankruptcy and indicates his intention to surrender his house after the filing. Including the current house mortgage payment on his schedules, the debtor passes the means test for Chapter 7. The Chapter 13 Trustee objects to the filing on the basis that without the house payment this debtor has enough disposable income to pay back his unsecured creditors in a Chapter 13 plan. The issue presented in this case is whether the debtor properly included in his means test expenses the monthly mortgage payment on a house he intends to let go to foreclosure.

A Tampa bankruptcy court said that this debtor passes the means test and can properly file Chapter 7 regardless of his intent to relieve himself of the mortgage. The Court found that the means test income/expense analysis is a snapshot of the debtor?s financial condition on the eve of bankruptcy. The Court held that when applying the means test to a Chapter 7 debtor, a deduction of monthly secured debt payment is allowed even if the collateral will be surrendered in the bankruptcy case because the payments are contractually due upon the filing. The Court pointed out that debtors who pass the "mechanical" means test are still subject to dismissal under other Code provisions designed to prevent "substantial abuse" of Chapter 7 bankruptcy. In re: Ralson, Case No. 8:07-9727

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

Full post as published by Florida Bankruptcy Law on April 26, 2009 (boomark / email).