March 25, 2011
A federal bankruptcy panel has recently overturned previous court judgments by establishing that Chapter 7 bankruptcy filings can still be deemed abusive even if they started out as Chapter 13 bankruptcy filings, and were then converted.
The matter was first brought up when two debtors in Minnesota and Iowa filed for Chapter 13 bankruptcy, then converted their filings to Chapter 7, Reuters reports. Chapter 13 bankruptcy has some advantages over Chapter 7, but it requires the debtor to have a steady income while Chapter 7 does not, according to the Administrative Office of the U.S. Courts.
The trustee then reportedly claimed abuse in their filings, as it was suspected that their monthly incomes exceeded the established threshold. The trustee's petitions to dismiss the bankruptcy cases due to this alleged abuse were rejected by bankruptcy courts on the grounds that the cases had not started out under Chapter 7 bankruptcy.
The 8th U.S. Circuit Bankruptcy Appellate Panel rejected the courts' reasoning, however, ruling that Chapter 7 bankruptcy can be dismissed if abuse is detected - regardless of what chapter of the bankruptcy code the case started under.