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

by Craig Andresen, Minneapolis, MN, Bankruptcy Attorney

April 5, 2011

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 to section 707(b)’s income 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 of two 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 actual language 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, with six 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 that under 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 W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.

Last modified: April 5, 2011