Unusual Means Test Ruling Allows Chapter 7 Debtor to Receive a Discharge, Despite Failing the Means Test

16 Jan Unusual Means Test Ruling Allows Chapter 7 Debtor to Receive a Discharge, Despite Failing the Means Test

A recent Wisconsin case allowed a chapter 7 bankruptcy debtor to receive a discharge, even though she “failed” the means test, and even though she presented no special circumstances to rebut the presumption of abuse under section 707(b). Instead, the court made the unusual ruling that section 707(b) states only that the court “may” dismiss a case where abuse is presumed, and therefore the court can exercise its discretion to grant the debtor a discharge, even though the presumption of abuse is not rebutted. The court held that section 707(b)’s use of the word “may” indicated that dismissal was permissive, and not mandatory.

This case, In re Mravik, 2008 WL 5423108 (Bky.E.D.Wis. Dec. 31, 2008), involved a chapter 7 debtor who had been employed as a county clerk for over twenty years. Her $48,300 annual income was above the median income for a one person Wisconsin household; she therefore was required to take the means test contained in Form B22A. This showed $382.13 in monthly disposable income, thus triggering the presumption of abuse under section 707(b)(2). The U.S. Trustee therefore sought dismissal of her case.

The court observed that for the past fifteen years, the debtor had contributed to a “457 plan,” a tax deferred retirement account for public employees. Because retirement account contributions are excluded from chapter 13’s defintion of monthly disposable income, the debtor would not be required to include her retirement account contributions in the amount to be paid into a chapter 13 plan. For this debtor, that meant that she would be required to pay nothing into her chapter 13 plan, if she were to covert her to case a chapter 13.

First, the court held that retirement account contributions were not a special circumstance rebutting the presumption of abuse.

Next, the court held that notwithstanding the fact that the debtor’s chapter 7 case was presumed to be an abuse, the court nevertheless was not required to dismiss the case. Section 707(b) simply stated that the court “may” dismiss a case where the presumption arose; it did not mandate dismissal. The court held that because a conversion to chapter 13 would result in no payment to creditors, by reason of chapter 13’s allowance of a deduction for retirement account contributions, it would exercise its discretion to refrain from dismissing the chapter 7 case.

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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.
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