Below Median Income – Chapter 7 Bankruptcy

Posted by Kevin on July 20, 2011 under Bankruptcy Blog | Be the First to Comment

Under the 2005 Code know as BAPCPA, a consumer debtor must pass the means test to qualify for Chapter 7 bankruptcy.  Chapter 7 allows a debtor to make no payments to unsecured creditors while keeping all exempt property.

What most consumers believe is that if you are under the median income for your area , you pass the means test, and you get to file under Chapter 7.   Yes and no.

The means test is under Section 707 of the Code.  In a recent case in Pennsylvania (which is in the 3d Circuit like NJ), a family of 4 was below the median income and filed under a Chapter 7.  Debtor owned a home in Fla which was underwater and  debtor was not living there.  Mortgage $1173 per month.  Debtor also had a timeshare- $255 per month.  Debtor was also paying $1100 per month for education expenses for 21 year old daughter.  Debtor wanted to abandon both properties and was living in a parsonage in PA and not paying any rent.  The Trustee objected to Chapter 7 claiming abusive filing.

Debtor said that he was under median and under 707(b)(2), it was only an abusive filing if he were above median.   Trustee said you are right under (b)(2), but (b)(3) looks at the totality of the circumstances and applies whether you are above or below median income.  Trustee said practically speaking the debtor is paying no rent, and wants to give up the home and timeshare.  So, the debtor cannot deduct the home and timeshare from  his income.  In addition, the debtor cannot put his 21 year old daughter through school at the expense of his creditors.  For trustee, 21 means adult and not child.  So, Daughter is SOL.

Court agreed.  Court said to debtor you could either convert to the case to Chapter 13 and make 36 months of payments or the Chapter 7 is dismissed.

Now, if this debtor’s attorney was astute, the debtor probably went into the bankruptcy knowing pretty much that the case could be challenged.  However, a debtor who uses a preparer or his brother-in-law’s real estate attorney as opposed to experienced bankruptcy attorney may have been in for the surprise of his life.  Make sure that you get an experienced bankruptcy attorney when you decide to file in Bergen County.