Thursday, May 5, 2011

Bankruptcy and the above/below median debtor in Chapter 7

When you are contemplating a Chapter 7 bankruptcy filing, you look first to your income to determine if you are above or below your state's median income average.  If you are below the median, it qualifies you to file a Chapter 7 case.  If you are above the median, you must complete a series of complicated forms to determine if after applying a legal "means test" you still qualify for Chapter 7.

In a Chapter 7 case, a below median income bankruptcy filer is not "home free" to stay in Chapter 7. Although the Bankruptcy Court may not dismiss a Chapter 7 case filed by a below median income debtor because he or she is simply below the state's median income average, the Bankruptcy Court may also look at the totality of the circumstances to determine if the case still belongs in Chapter 7.

The Court of Appeals for the Fourth Circuit, in Calhoun v. United States Trustee (4th Cir. May 3, 2011) affirmed the decision of the District Court (which District Court affirmed the Bankruptcy Court's decision) to dismiss a Chapter 7 case filed by below-median income debtors under the "totality of the circumstances."  In that case, the debtors were a retired couple whose retirement income was below median but certainly capable of a repayment plan in a Chapter 13 case. Pre-bankruptcy, they had been paying creditors with their excess income, but became discouraged when they had no money left over at the end of the month and so explored bankruptcy in Chapter 7 as an option.  The debtors in that case had extravagant amounts deducted for food and cable bills for only two people -  and even including the payment of such extravagant amounts of expenses, these two people had more than $2000 left over at the end of every month with which to pay creditors.  

Thus, the court of Appeals for the Fourth Circuit affirmed that it was an abuse for them to file Chapter 7.

They probably should have filed a Chapter 13 bankruptcy repayment plan. So, rather than face dismissal, these two debtors could have converted their Chapter 7 case to a Chapter 13 bankruptcy case for a three-year repayment plan.   In Chapter 13, they would dedicate their disposable income left over at the end of the month after payment of expenses, to repay creditors, and then at the end of three years they would be done, meaning, at the end of three years whatever unsecured debt had not been repaid would be discharged through the bankruptcy case.

A below median income debtor in Chapter 13 is subject to a 36-month repayment plan (three years).  An above median income debtor in Chapter 13 is subject to a 60-month repayment plan (five years).

Lessons Learned:  The Fourth Circuit left unanswered whether or not they should consider inclusion of social security income in their analysis of "totality of the circumstances".  In New Hampshire, where I practice, the cases are governed by decisions from the First Circuit, not the Fourth Circuit Court of appeals.  However, other appellate cases are instructive and may be used for support in a legal argument, so it is good to know where courts outside of this jurisdiction are trending.

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