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The most recent bankruptcy reform laws mandated a reinstatement of the means test for Chapter 7 bankruptcies. Formerly a staple condition of the law, the prior major overhaul of bankruptcy regulations, in the 1970s, eliminated this component. Chapter 13 bankruptcy does not require a means test, since the petitioner negotiates repayment terms with creditors.

The Florida judge’s decision may affect people in Miami and around the state, although it sides with the minority of federal courts. Those courts typically view a petitioner’s failing the means test as a “presumption of abuse.” This decision, however, relates specifically to Chapter 13 cases that are subsequently converted to Chapter 7 petitions.

The means test comes into play when the debtor has current monthly income that exceeds the median income for his/her state. Filing for Chapter 7 bankruptcy, liquidation, is presumed to be abusive if the petitioner’s aggregate monthly income over the past five years–or the amount of unsecured debt–is greater than statutory levels.

Most federal courts adopt the view that the intent of Congress was to apply the means test to all Chapter 7 petitions, regardless of whether they are conversions from Chapter 13 bankruptcies, so-called “wage earner” plans. The case in question involves a debtor who originally filed for Chapter 13 protection, intending to repay her creditors over a three to five year period.

She then lost her job and, unable to make the agreed upon creditor payments, sought to convert her Chapter 13 bankruptcy to a Chapter 7. However, before the court’s decision on the conversion request, she found another job. Her new disposable income level caused her to fail the means test. However, the judge refused to dismiss her case, stating that the debtor must have filed the case as a Chapter 7 bankruptcy to be subject to the means test.

Do you agree that a debtor with sufficient income to repay creditors should be barred from asking the court to wipe away their debts in Chapter 7 bankruptcy? Do you agree with this Florida judge, that a person, originally filing Chapter 13 bankruptcy, with good faith intentions to repay creditors, converting to Chapter 7 should not be subject to the means test?

Source: Reuters, “No means test for converted Chapter 13 cases, Florida bankruptcy judge says” Nov. 5, 2012