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Does the Means Test Apply to Cases That Are Converted From Chapter 13?

The short answer is probably yes.

The long answer is that the specific issue hasn’t been decided in a New York bankruptcy case or in a Second Circuit appellate case that I could find. Courts in other parts of the country have split on the issue. Their reasoning is interesting.

Against Taking the Means Test Upon Conversion:

In one 2007 New Jersey bankruptcy case, In re Fox, the debtor argued that the means test applied exclusively to cases filed originally in chapter 7. Specifically, the presumption of abuse that the means test calculates is authorized in section 707(b)(1) of the Bankruptcy Code, which applies to cases “filed by an individual debtor under this chapter.” The court described this language as unambiguous, and there was nothing else in the section to indicate it applied to debtors converting from another chapter. Moreover, the statute frequently refers to cases “filed” in chapter 7, not cases that happened to be “in” chapter 7.

Although the court noted that it’s possible debtors might file a chapter 13 case and convert it to chapter 7 to skirt the means test, it observed that one possible consequence of a presumptively abusive case is conversion to chapter 13, which would put debtors converting their cases to chapter 13 back where they started. The Bankruptcy Code has other means of catching bad faith conversions. Finally, the means test calculation applies to the debtor’s current monthly income six months before filing the case, which wouldn’t be relevant to chapter 13 debtors who are well into their repayment plans.

For Taking the Means Test Upon Conversion:

An Eighth Circuit bankruptcy appellate panel discussed the reasons in favor of requiring debtors to take the means test upon conversion to chapter 7 in 2011 (In re Chapman). Specifically, it contrasted the “limiting” interpretation of the phrase, “filed by an individual debtor under this chapter,” with an “identifying” one. Rather than limiting the means test to cases filed in chapter 7, the phrase identifies the kind of debtor to whom it applies. In other words, a corporation that converts its case from chapter 11 to chapter 7 would not need to take the means test because it isn’t an individual. Unlike the Fox court’s optimism, the Chapman court feared the prospect of bankruptcy courts using their equitable powers to stop wanton conversions by debtors hoping to avoid the means test. Somewhat anticlimactically, the court was forced to cite Eighth Circuit precedent that deemed cases converted to chapter 7 as having been filed in that chapter on their original chapter 13 filing date.

In a 2011 Virginia case, In re Lassiter, the court reasoned that in other parts of the Bankruptcy Code, the term “filed” incorporates conversion, favoring the “identifying” interpretation in Chapman. Secondly, section 707(b)(2)(D) creates the sole exception to the means test—disabled veterans—and does not do so for converted cases. Otherwise, the Lassiter court agreed with Chapman‘s reasoning.

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It’s unusual for a statute to lead to such compelling arguments for or against a certain interpretation, so it’s not surprising that bankruptcy courts have struggled with conversions and the means test. If you’re a debtor considering a chapter 13 case, and you’re unsure of your chances of converting to chapter 7 if necessary, the biggest hurdle is going to be determining what six-month period the means test will apply to. For complicated situations like these, it’s crucial to hire an experienced New York bankruptcy lawyer.

For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Chapter 13 bankruptcy attorney Brooklyn NY Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA
718-855-6840
http://nybankruptcy.net/

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