Bankruptcy Dismissal, Conversion, and the Means Test
In this next post we will be discussing the issue surrounding dismissal or conversion of bankruptcy and the role and mechanism of the means test and presumption of abuse.
You may find that after you file your bankruptcy, there is a need to voluntarily dismiss your case. If you have filed a chapter 13 bankruptcy that has not been converted from another chapter, you have the right to dismiss the case. If you originally filed a chapter 7 bankruptcy, which was then converted to chapter 13, the case can only be dismissed if it is in the best interests of your creditors and the bankruptcy estate. When you’ve filed chapter 7 bankruptcy, the court has the discretion to decide whether or not dismiss your case. Dismissal requires notice to your creditors, who have the opportunity to object to the dismissal.
If you do not file required information within 45 days of submitting your original filing for bankruptcy, your case may be automatically dismissed. If you are having difficulty finding the required information you may request additional time. If you have mostly consumer debt, it is also possible to have a chapter 7 bankruptcy involuntarily dismissed if the court believes there is abuse of the bankruptcy code. When your income falls below the median state income, your case cannot be involuntarily dismissed for abuse of the bankruptcy code.
The Means Test
Your monthly income is determined by an average of your income over the last 6 months prior to filing bankruptcy. It is quite possible for your real current monthly income to be much lower that the “current monthly income” as defined by the bankruptcy code. As we discussed in planning the strategy of timing your bankruptcy filing, it may be advantageous to file more quickly or wait depending on whether your income will be higher or lower in the coming months.
Median family income for purposes of bankruptcy is taken from the income statistics provided by the Census Bureau. We will use your household size (not just dependents) to determine the median family income level that will apply to your case. We will take your current monthly income multiplied by 12 and compare it to the Census Bureau numbers for a family of the same size. Because the term “household” is used in the bankruptcy code, we will use all the individuals living in your household to figure out what number to use as a comparison to the median family income.
If you are a disabled veteran and you or your family incurred the majority of your debt while you were on active duty, you are not required to use the means test. This also includes members of the National Guard or reserves.
As part of the means test, we will deduct allowed expenses based on the IRS allowances for such expenses. The five categories of expenses under the IRS are food, clothing and services, housekeeping supplies, personal care products and services, and miscellaneous items. Payments on secured and priority debts are also deducted from monthly income. Unsecured debt payments are not allowed to be deducted unless those debts are priority debts.
Other expenses that will be deducted as part of the means test include: out-of-pocket health care expenses, costs of owning a car, operating a car, and public transportation expenses. Even if you do not make car payments because you have a car that is paid in full you are allowed to take the deduction for ownership expenses. This allows someone who owns an older car to be able to replace that car during the bankruptcy period should the car need to be replaced. Housing and utility expenses are included as a deduction and are based on the county you live in and family size.
Other necessary expenses that are deducted from your monthly income includes things such as child care, any court ordered payments, medical and dental expenses, elder care, care for someone with a disability, health insurance costs, life insurance premiums (term life), taxes, and internet and telephone services. You are also allowed to deduct administrative expenses associated with your chapter 13 bankruptcy. Education expenses for children under 18 years of age are also an allowed deduction from current monthly income.
Abuse of Bankruptcy Laws
The purpose of the means test is to determine if there is abuse of the bankruptcy laws. To determine abuse, your current monthly income after all the expenses are deducted and we will then multiply it by 60. The amount you are multiplying by 60 is your disposable income. Your disposable income must be within a certain amount or the presumption of abuse comes up.
However, even if your disposable income is above the amount allowed, we can refute this presumption of abuse by demonstrating special circumstances. Some examples of special given are serious medical conditions or being called to active duty. Because the law requires us to base your monthly income on what you received over the last 6 months, special circumstances might also include the fact that you are no longer receiving that same amount of income.
There are many kinds of special circumstances that we can look at when rebutting the presumption of abuse. Gas prices often continue to rise or there may be extra automobile costs associated with your job. Perhaps your child has a medical condition or special needs that require special equipment or housing expenses. We would provide to the court documents for the lowering of income or additional expenses to rebut the presumption of abuse.
Dismissal or Conversion
If the means test shows the presumption of abuse, the bankruptcy clerk must send a written notice to your creditors within 10 days. Once this is done, the court must provide a copy of the statement within seven days to all of your creditors. The trustee then has 30 days to file a motion to dismiss or convert your case. If your case is dismissed and your circumstances change, you can file again or you can choose to convert your case.
Once the dismissal has occurred, all the parties to the bankruptcy are returned to whatever status was in place when the bankruptcy petition was filed. Dismissal may be a viable alternative for you if you can’t complete your chapter 13 bankruptcy payments. It is important to remember that if your chapter 13 case is converted to a chapter 7 case, you lose the right to dismiss your chapter 13 case. Or if your case is dismissed over your objections (involuntarily) you do not have the right to convert. We can re-file your bankruptcy petition, but that would entail new fees being paid, which can put additional strain during an already difficult financial time. We will pay close attention to the both the right to seek a voluntary dismissal or conversion so that we don’t compromise your case or lose nonexempt property.
In 2007, in the Marrama v. Citizens Bank of Massachusetts, the Supreme Court decided that the right to convert from chapter 7 to chapter 13 could be denied for bad faith. Bad faith is determined by looking at the totality of the circumstances in your filing, including things such as whether you incurred debt for luxury items just prior to filing bankruptcy, or intentionally hiding assets under a different name to avoid loss of those assets.
You also have the right to convert a chapter 7 case to chapter 13 if you started that case originally as a chapter 7 case. If you originally started the case as a chapter 13 case, converted to chapter 7, and want to convert back, we must get the court’s permission. Some courts ban reconversion outright.
When you begin your bankruptcy as a chapter 13 bankruptcy, you have the right to convert to chapter 7. We may not need to file a new set of schedules. However, we will need to file a statement of intent for your secured property. This statement indicates to the court how you will handle property that is secured by a loan in the chapter 7 bankruptcy. It is also possible that we will need to submit a means test calculation when converting from chapter 13 to chapter 7.
If you have already started making payments for nonexempt property under chapter 13 when you decide to convert to chapter 7, that property will be sold or liquidated. If you are trying to keep the nonexempt property it might be in your best interests to request a hardship discharge rather than convert to chapter 7 and lose the nonexempt property.
For the most part, any property you acquired after you filed chapter 13 will not be included in your chapter 7 bankruptcy estate. The exceptions include “bad faith.” So it is possible that if the court finds you never intended to complete your chapter 13 bankruptcy, you might have that property become a part of the estate in the converted chapter 7 bankruptcy, for example.
It might also be more advantageous to convert from chapter 13 to chapter 7 if you took on additional debt after you petitioned for chapter 13 bankruptcy. These debts might be dischargeable under the chapter 7 conversion. There are many other reasons for possibly converting from chapter 13 to chapter 7. For example, it may be that when you filed chapter 13 your intention was to protect your car from being repossessed. If the car was then totaled in an accident, there may be no other incentive to continue to your chapter 13 bankruptcy and you might choose then to convert to chapter 7.
Sometimes clients underestimate the strain of continuing to make bankruptcy payments for 3 to 5 years. They might decide to convert from chapter 13 to chapter 7 to be done with the bankruptcy process more quickly. Other times a client might have tried to strip a second mortgage, but the bank was able to provide information challenging the valuation. In that case, the client might decide to convert to chapter 7.
As mentioned earlier, it is also possible that conversion from chapter 13 to chapter 7 is involuntary. A creditor can request conversion when the debtor has failed to begin payments, or there is some delay that will harm the creditors. Involuntary conversion requires notice and a hearing.
When converting from chapter 13 to chapter 7, there is an important point to remember. If you have secured property, such as a car and you owed $15,000 on the loan prior to filing chapter 13, but your car is only worth $10,000 you will not be allowed to carry over that lower value into your converted chapter 7 case. If clients find themselves in this situation a hardship discharge might be a better choice than a chapter 7 conversion. We might also consider voluntarily dismissal of chapter 13 case and filing a new chapter 7 case while taking into account any possible limits on the automatic stay should we file a new chapter 7 case.
When administering a case that originally started as a chapter 13 case and was converted to chapter 7, trustees face a multitude of issues when trying to administer the bankruptcy estate. Trustees must figure out the proper amount of a claim when payments have been made as well as determine what property is part of the estate under the conversion. Sometimes there are differences in what was promised to be paid to creditors under a chapter 13 plan versus what was actually paid.
As you progress through you chapter 13 case, if you find that you have difficulty making payments, we should spend time thoroughly discussing the details of your case. For example, if you are concerned about when the bankruptcy will be removed from your credit report we can discuss the implication that chapter 13 is removed 7 years after you file, while chapter 7 can remain on your credit report for up to 10 years. Anticipating the possible unintended consequences of conversion, hardship discharge, or involuntary dismissal/conversion will allow us to make the best decision possible in your case. Although the actual process for conversion is not difficult, sometimes making the decision can be difficult without good counsel from an experienced bankruptcy attorney.