Chapter 7’s Section 707(b) Applies Even When Converting from Chapter 13, Appeals Court Says

05 Apr Chapter 7’s Section 707(b) Applies Even When Converting from Chapter 13, Appeals Court Says

A federal appeals court has added its voice to the growing number of cases which hold that a debtor who converts a chapter 13 case to chapter 7 is still subject tosection 707(b)’sincome eligibilty standards for filing chapter 7. Left unanswered, however, is the question of what time period must used for the means test’s six month look-back period for calculating income: is it the six months prior to filing the chapter 13 case, or the six months prior to converting to chapter 7?

In this consolidated appeal oftwo Iowa and Minnesota cases, In re Chapman and In re Cruse, Nos. 10-6046 and 10-6047 (8th Cir. BAP Mar. 11, 2011), the debtors had filed chapter 13 after the 2005 Bankruptcy Reform Act. After changes in circumstances, they converted their chapter 13 cases to chapter 7, asking for a discharge of their debts prior to completion of their chapter 13 plans. The U.S. Trustee objected to their chapter 7 cases under bankruptcy code section 707(b). This section requires that debtors file chapter 13 rather chapter 7 if their income, as calculated under the byzantine “means test” formula, shows they can afford a payment toward their debts in chapter 13, or if their actual income and expenses show that as well.

The debtors argued that under the actuallanguage of 707(b), that section only applied to a debtor who filed her case under chapter 7, and not to a debtor who converted her case to chapter 7. They also argued that Congress did not intend to subject a debtor, who had made a good faith effort to repay her debts in a chapter 13 case only to have her plans derailed by changes in circumstances, to either the strictures of the means test, or the actual income and expenses test, of section 707(b).

The bankruptcy courts agreed with the debtors, ruling that section 707(b) only applied to cases originally filed under chapter 7, not to conversions to chapter 7. The U.S. Trustee appealed, and the bankruptcy appellate panel ordered the two cases consolidated for the appeal.

The appeals court noted there was a split of authority on this question, withsix reported cases allowing conversion to chapter 7 without consideration of section 707(b), and five reported cases applying section 707(b) even to cases that were converted to, rather than filed under, chapter 7.

In ruling against the debtors, the appeals court held thatunder long-standing Eighth Circuit federal appeals court precedent, the term “conversion to chapter 7” means the same thing as “filed under chapter 7.” The court was not swayed by the debtors’ argument that such precedent was pre-Bankruptcy Reform Act and thus was no longer valid. However, the appeals court did not address the time periods to be applied in the means test for debtors converting to chapter 7, making further litigation on this question likely.

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Craig Andresen is a Minnesota bankruptcy attorney who represents both consumers and small business owners in chapter 7 and chapter 13 cases. With thirty years experience, Mr. Andresen is a frequent speaker on the topics of stopping mortgage foreclosures, and stripping off second mortgages in chapter 13. His office is located in Bloomington just across the street from the Mall of America. Call his office at (952) 831-1995 for a free consultation about protecting your rights using bankruptcy.
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