A bankruptcy judge in Florida has sided with a minority of federal courts that take the view that the presumption of abuse that arises when a Chapter 7 debtor fails the “means test” does not apply when the debtor originally filed the case under Chapter 13 petition but later converted to Chapter 7.
In re Layton, No. 10-02014, 2012 WL 5193242 (Bankr. M.D. Fla. Oct. 19, 2012).
The means test does not apply to Chapter 13 cases, but a majority of courts have adopted a so-called “commonsense” view that Congress intended it to apply to all Chapter 7 cases, no matter how they were commenced.
The test is triggered when the debtor’s current monthly income exceeds the median income for the state in which he or she resides.
A Chapter 7 filing is presumed to be abusive under the test if the debtor’s aggregate current monthly income over the past five years, or the amount of unsecured debt, exceeds statutory levels.
A Chapter 7 proceeding results in the sale of the debtor's non-exempt property, with the proceeds being distributed to creditors.
The debtor may rebut the presumption of abuse by showing special circumstances exist but, failing that, the case generally will be either dismissed or converted to Chapter 13.
A Chapter 13 plan, also known as a “wage earner” plan, allows the debtor to keep property and use his or her disposable income to pay debts over time, usually between three and five years.
The decision by Judge Michael G. Williamson of the U.S. Bankruptcy Court for the Middle District of Florida comes in the Chapter 7 case of Ronda L. Layton.
She initially filed a Chapter 13 petition in the Bankruptcy Court in January 2010 and obtained confirmation of a plan that called for the abandonment of her undersecured homestead and a 100 percent payout to her unsecured creditors.
Layton subsequently lost her job and was unable to make timely payments to the Chapter 13 trustee. She later converted her case to Chapter 7 and reported her unemployment.
But when she then found a new job, her disposable monthly income of $1,200 caused her to fail the means test.
The trustee responded by seeking dismissal of the case, but Judge Williamson rejection the motion.
He said a “plain and rational interpretation” of the phrase in 11 U.S.C. § 707(b)(1) that “the court … may dismiss a case filed by an individual debtor under this chapter” leads to the conclusion that an individual debtor must have filed the original petition under Chapter 7 in order for Section 707(b) to apply.
The provision authorizes the dismissal of a Chapter 7 case where the debtor fails the means test.
“Despite this, several courts have framed sophisticated arguments against the plain-language application of the statute in order to comply with purported legislative intent,” the judge said.
He noted that courts that have adopted this majority view have expressed concern about debtors’ gaming the system. The judge found, though, that there are other avenues available to courts to deal with bad-faith filings, including the power under 11 U.S.C. § 105 to take any action necessary to prevent an abuse of process.
Judge Williamson concluded, therefore, that “the statute says what it says and should be applied accordingly.”