Conversion To Chapter 7 Bankruptcy Free From Means Test

A debtor files a Chapter 13 bankruptcy and makes plan payments for several months. Then, the debtor loses his job and is unable to make the Plan payments. The debtor files a notice of conversion to Chapter 7.

Soon after the conversion the debtor found a new job that pays him even more money, and with his new earning level his family income far exceeds the means test. The U.S. Trustee moves to dismiss the case because the debtor failed the means test and because discharging all of his unsecured debt would be an abuse of the bankruptcy system.

The bankruptcy court did not dismiss the case. The judge said that the means test and abuse standard applies only to debtors who initially file Chapter 7 bankruptcy. Because this debtor’s entry into bankruptcy was through Chapter 13, the court said that the debtor is not subject to the means test standard.

Now, many readers are thinking that anyone with relatively high income, who would not pass the means test, can circumvent the means test by filing a Chapter 13 bankruptcy and then convert to Chapter 7. This will not work because any bankruptcy is subject to a “good faith” test, and dismissal of abusive bankruptcy considers the “totality of circumstances.” In the facts of this case, there is no indication of bad faith on the debtor’s part, and his circumstance started with his involuntary job loss.