In re: Cannon, No. 10-63263-A-7F (Bankr. E.D. Calif., May 24, 2011).
Since the bankruptcy code was amended in 2005, a debtor who files for Chapter 7 bankruptcy must pass a Means Test. Under the test, debtors must report their income on legal forms. If his income less expenses allowed by bankruptcy law is over a certain set amount for a family in their geographical region, the debtor will be presumed to be abusing the bankruptcy system by filing a Chapter 7 petition. Instead, their case will be presumed best suited for a Chapter 13 plan, whereby the debtors will have to pay at least some of their unsecured debts.
In a recent California bankruptcy decision, a bankruptcy court converted the Chapter 7 petition of the debtors to a Chapter 13 plan for this reason. The debtors were perfectly situation for relief under Chapter 7 of most of their debts: they had very little in the way of assets, no real property, and their only secured asset was a 2004 Toyota Camry. Yet, the debtors had accumulated over $150,000 in unsecured debt, mostly in the form of credit card debt.
Under a traditional Chapter 7 bankruptcy, the debtors would be permitted to discharge all of this debt and lose very little personally, as their assets were minimal. However, with the change in the 2005 law, the debtors were presumed abusers according to the court. Their Current Monthly Income and Means Test Calculation showed that they were above median income, and therefore presumed to be able to pay more of their unsecured debts under a Chapter 13 plan.
This new provision in the law is important for every debtor considering filing for Chapter 7 bankruptcy to consider and discuss with a qualified bankruptcy attorney.
