Bankruptcy Ruling Limits Chapter 7 Conversions
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Bankruptcy Ruling Limits Chapter 7 Conversions

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December 27, 2011

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A recent decision from the Fourth U.S. Circuit Court of Appeals could limit the options of Chapter 13 bankruptcy cases looking to convert, Thompson-Reuters News & Insight reports.

The ruling comes in appeal from a Chapter 13 bankruptcy case originally filed in August 2008 by a couple in Virginia.

After initiating the case and beginning proceedings with the bankruptcy court, the couple reportedly requested permission to convert their Chapter 13 case into a Chapter 7 bankruptcy case. The court granted that permission and the couple converted its case.

However, the bankruptcy trustee overseeing the case challenged the conversion because the couple did not pass the Chapter 7 means test; in fact, they had a reported $2,000 in disposable income each month. The limit to file under Chapter 7 of the U.S. Bankruptcy Code is about $167 in disposable income per month.

The filers insisted that, because they had initially filed under Chapter 13, Section 707(b) of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, which outlines the statutory Chapter 7 income limits, did not apply to their case. The bankruptcy court agreed with the debtors.

The trustee opted to legally appeal that ruling, but the District Court that would have heard the case ruled that it could not because it did not have jurisdiction over the matter. Its argument was that, because of the unusual nature of bankruptcy cases, which involve multiple creditors and can change rapidly, the denial of the trustee’s request for dismissal was not yet a final order.

However, when the trustee turned to the Fourth Circuit Court, a panel of judges ruled that BAPCPA made Chapter 7 eligibility a mandatory threshold question. In other words, the panel concluded that BAPCPA is designed to prevent filers with too much disposable income from filing for Chapter 7 bankruptcy.

The Fourth Circuit Court then reportedly returned the case to the District Court to rule on the particular case at hand.

In the future, this ruling could impact other questionable Chapter 7 bankruptcy filings, especially those that involve passage of the qualifying means test.


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