Confusion reigns on whether a means test is needed when converting a bankruptcy case to Chapter 7

If you file a Chapter 7 bankruptcy case, debtors with mainly consumer debts have to also file a “means test,” which proves they qualify for Chapter 7 relief based on their recent income.

If you file Chapter 13 case, there is no pure means test (although there are qualifications), but you file a very similar form that determines your minimum monthly plan payment.

So what happens if you file a Chapter 13 case and then convert it to Chapter 7 at a later date? is the means test required, or is it excused?

Well, there is no one answer; this is a question that has vexed the bankruptcy judges since the bankruptcy code was modified in 2005, and court have issued conflicting opinions using a variety of reasoning tactics.

There is at least one Massachusetts bankruptcy court opinion (which I wrote about in 2010) that suggests the answer is “no,” that no means test is required for converted cases. But next door in neighboring Rhode Island, a judge concluded just the opposite.

Out in the Midwest, there has been a mini-trend toward “no” for an answer, with judges in both Minnesota and Iowa coming to that conclusion.

But that changed last month when those cases went up on appeal, and a panel of judges from the Eighth Circuit appeals court reversed the decisions. In the Chapman and Cruse cases, the Eighth Circuit, based in Chicago and covering parts of the upper Midwest, imposed a means test on converted cases after all.

The Eighth Circuit’s opinion is not binding on bankruptcy debtors in either Massachusetts or New Hampshire, but it may represent a counter-trend away from the free pass that converted cases sometimes got, as this appears to be the first time an appellate court has dealt with the issue. In any event, it is an issue that bears watching, and one that may someday have to be decided by the United States Supreme Court.

 

By Doug Beaton

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