By John Hilla, a Michigan Bankruptcy Attorney
When you file either a Chapter 13 Bankruptcy or a Chapter 7 Bankruptcy, you must file also a “means test,” which is the income-based eligility test which determines, in a Chapter 7, whether you are eligible for the Chapter 7 or, in a Chapter 13, whether you are eligible for a Chapter 13 payment plan that is shorter than 60 months long. The “means test” is actually form which calculates your average household income over the six months prior to the month in which you filed your bankruptcy. The result of that calculation—a high or low result relative to the median income of a household of your size for the state in which you live—makes the above determinations.
When you file a Chapter 13 Bankruptcy, you file a means test based on the six months prior to that filing, and that means test very likely indicates that your household earns too much money for Chapter 7 eligibility, although there are many good reasons to file a Chapter 13 beyond basic Chapter 7 ineligibility. However, what happens if your household loses a source of income, such that remaining in the Chapter 13 payment plan is no longer feasible for you?
It is a simple matter to convert a Chapter 13 to a Chapter 7 under such circumstances. The US Bankrutpcy Code gives consumers a virtually absolute right to convert a Chapter 13 to a Chapter 7 bankruptcy (the opposite is not necessarily true!). But what do you do, then, with a means test dating back to the six months prior to the original filing that says you are not eligbile for a Chapter 7, despite the fact that that means test may have been filed years prior to the event causing the loss of income and the infeasibility of the Chapter 13?
The case-law is somewhat divided on the subject on the various details, but it is fairly well-accepted that the means test look-back income period that applies to the converted Chapter 7 is the six-month period of time prior to the filing of the original Chapter 13. From there, different Federal jurisdictions (bankruptcy is a Federal legal process) have different requirements for handling this and explaining the difference between the income then and the income NOW and the current need for a Chapter 7 bankruptcy where only a Chapter 13 was possible before.
In the Eastern District of Michigan where I practice, for example, we are required to file a new Chapter 7 means test upon conversion, however with the same period of time in the calculation. Along with that Chapter 7 means test (which varies in form, content, and intent a bit from the Chapter 13 version), we file a sworn affidavit from the debtor explaining the loss in income necessitating the conversion—and then email a whole lot of supporting documentation (letter of termination from debtor’s former employer, etc.) to the US Trustee. The court clerk will often file a “Presumption of Abuse” upon the filing of the new Chapter 7 means test (because the little box that says “presumption of abuse” on the actual form will still be checked, given that it is still calculating that old six-month period of income), but it is the job of the US Trustee, which is a division of the US Department of Justice, to decide whether there really is an any abuse. If they think that there is, they will file a motion to dismiss the case—which could, if filed with good reason, result in the case being converted back to a Chapter 13 (or just being dismissed).
However, short of that, the US Trustee and the Chapter 7 bankruptcy Trustee will usually agree, if the conversion is premised on a bona fide change of circumstances, that there is no abuse and allow the case to proceed to discharge.
Again, the variations on this process will be potentially extreme depending upon where you reside and have filed your case.
The take-away from all of this for you, the consumer, is that it is important to keep in mind that a Chapter 13 bankruptcy is not a prison-sentence. If it ceases to function for you on a practical level because you do suffer a change of circumstances, there is a path out to earlier discharge through Chapter 7 conversion. It is important to have, however, an experienced bankruptcy attorney working with you as none of these steps will be apparent to the pro se debtor filing a case on his or her own.