March 1, 2007
Do You Have an Absolute Right to File Chapter 7 If You Pass the Means Test?
Mr. Ginsberg - I am a regular reader of your bankruptcy blog, and appreciate your time and efforts. A recent post on another bankruptcy blog raised an interesting issue on which I am wondering if there is a consensus of legal opinion.
Essentially, the question is whether the revision of 707(b) under the BAPCPA effectively precludes a “double jeopardy” type situation in which a Chapter 7 debtor could be exempt from the “means test” but subsequently face a challenge on the basis of excess disposable income. In the interest of brevity, I’ve copied the posting below:
Attorney Kevin Chern writes…
707(b)(2) May Help Debtors Under the Median Income
Tuesday, September 06, 2005
Under the old bankruptcy law, the trustee could bring a 707(b) motion alleging abuse based on a debtor's ability to repay debt with expendable income. Under BARF 707(b)(2), the judge, trustee or creditor can all bring a 707(b) motion to dismiss if the debtor's household has more than the median income for a household of that size. Logic dictates that, under the same provision, neither a creditor, nor the judge, nor the trustee has a right to bring a motion to dismiss no matter how much expendable income the debtor has so long as the debtor's household has less than the median income for a household of that size.
So, in some situations under BARF, this bright line median income test will help debtors escape 707(b) objections. Of course, the judge or trustee can still bring a motion based on 707(b)(3) alleging that the case was not filed in good faith, but, certainly, no presumption of abuse exists.
What are your thoughts on the issue? Any feedback you could provide would be appreciated.
–Chuck
Jonathan Ginsberg responds: Chuck, I would respectfully disagree with Kevin's analysis. The median income/means test is a qualification test. It is based on a 6 month look back, not on reality. The Schedule I and J budget that you file with your actual Chapter 7 case reflects actual numbers as of the date of filing.
For example, a debtor physician may satisfy the median income/means test because he was unemployed July-December. If he gets a new job in January earning $200,000 a year, his Form B22 would show zero earnings and he would not trigger the presumption. However, his schedule I & J would likely show significant disposable income. I am not aware of any cases that support Kevin's logic. Further, whether a case is successfully challenged as an abuse vs. one challenged under the good faith provision ends up at the same place - a dismissed case.
It would be interesting to see if any Court has considered the double jeopardy argument.
Technorati Tags: 707(b), substantial abuse, good faith, Chapter 7, dismissal of Chapter 7, Kevin Churn, means test, median income test
Filed under Bankruptcy budgets, Means Test issues, Median income test issues by Jonathan
Comments on Do You Have an Absolute Right to File Chapter 7 If You Pass the Means Test? »
I also disagree with the analysis and conclusion. Section 707(b)(1) stands alone and allows the Court and interested parties to seek a dismissal if it is determined that the filing constitutes "abuse." That section is relatively unambigious, and nothing in the rest of the statute limits it. The other subsections, generally, discuss what MAY be considered and what SHOULD be considered. This "abuse" analysis includes all relavant factors, including the debtor's financial condition (707(b)(3)). It also includes an analysis of the means test factors and the fictional median income number, and what may be deemed PRESUMPTIONS. There is no "double jeopardy," as there is nothing in the Code to indicate that passing the means test is a final determination of eligibility for Chapter 7 relief or discharge. It is merely one element, albeit a very important one.
Under Jonathan's example, if the Debtor had significant disposable income going forward (whatever that may be), he could be subject to dismissal or consensual conversion to 13 or 11 based on the abuse provision, even if he easily "passed" the means test. This MAY be true even if the new job (or winning lottery ticket) was obtained after the filing of the petition.
"[The Means Test] is based on a 6 month look back, not on reality."
That's the whole conceptual problem. The means test is perverse because Congress has effectively made it the definition of income for determining bankruptcy eligibility. So the Trustee's argument is that although the debtor may be only 50% of medium income based on income received six months prior to filing, because he's currently making more money at the time of filing, he has the ability to repay and must convert or face dismissal. Conversely, a debtor who may have recently lost a high paying job making him over median on the means test, but who is making much less money at the time of filing the Chapter 7, faces the presumption that his case is abusive. Maybe his ability to provide circumstances to overcome the presumption prevents a dismissal, but the Trustee still enjoys the presumption of abuse and the debtor is placed at extreme risk. For example, what would prevent the Trustee or other objecting party in this situation from raising the argument that the debtor is underemployed given his previous higher salary and still has an ability to repay?
So, to say we go by current ability to pay in determining whether a debtor may proceed with a Chapter 7, or whether the debtor over median in a Chapter 13 must devote his disposable income shown on Schedule J to the Plan if greater than the Plan payment set forth in the means test, we are effectively going back to the old law where only Schedules I and J were relevant for ability to pay. If this is true, what legal significance does the means test have? If Congress had created a means test providing that if the debtor were over a certain annualized income amount based on the income shown on Schedule I, then a presumption would arise that he couldn't file Chapter 7, this would make sense.
I suppose lack of good faith is always a fall back position in a 707(b) objection, but you might ask if the means test and the rest of the schedules and statements are accurate, where's the bad faith?
As lawyers, we believe in a rational interpretation of the law, but I am not sure this is possible with the Reform Act. Courts can't re-write the law just because Congress has created a scheme which produces irrational results, even it might allow the unwanted result of debtors with an actual ability to repay filing for Chapter 7 bankruptcy.
Attorney Roberts raises several very cogent points about the practical problems with the means test. I don't necessarily agree that Bankruptcy Judges are powerless to "do the right thing" in specific cases.
I think we will find that in some districts, judges will apply a very strict reading of the Code and deny debtors relief because of phantom income, while other judges in other districts will find exceptions in the Code and look to reality.
I have an interesting case that coming up - I have a Chapter 13 debtor whose means test calculation suggests a trustee payment that will yield a 60% dividend to unsecured creditors. Such a plan might be possible if the debtors live on bread and crackers, but because of numerous resets and other complications, my attorney fee claim will jump from $2,500 to around $6,000 - I am going to decrease the percentage to make my fee claim fit.
It will be interesting to see what the judge does.