Disaster

Chapter 7 bankruptcy and the presumption of abuse

Dubya Bush’s Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the first overhaul of US personal bankruptcy law in more than 25 years, actually made filing bankruptcy much less protective, more expensive, and more difficult for consumers. It provided for the dismissal or conversion of a Chapter 7 case upon a finding of “abuse” by debtors with primarily consumer debt. Abuse may be found when there is an unrebutted presumption of abuse via the means test, or through a finding of bad faith, determined by a totality of the circumstances.

Only debtors whose income is higher than the median income in their jurisdiction are subject to being found “abusive”. We certainly didn’t file in bad faith, but the presumption of abuse due to income was a definite hurdle to overcome. We pass the means test with flying colors, but because our income is over median in our jurisdiction, we knew there would be some scrutiny by the US Trustee. When we originally converted from Chapter 13 to Chapter 7 bankruptcy, we were relieved to see that the document we received from the court specified that “The presumption of abuse does not arise.”

On the way back from our 341 hearing, I called the attorney’s office to ask a question, and the paralegal mentioned that the US Trustee had requested some additional information. A week or so later, our attorney finally got around to sending me the request: We had to provide bank and pay statements for the past five months, 401(k) statements (which all showed losses), and a written statement of the circumstances surrounding our conversion from Chapter 13. We were expecting something like this, and actually I was kind of surprised we only had to go back five months. I’ve heard of cases where the UST requested years of statements and tax returns. I think it helps that our case is pretty straightforward and uncomplicated.

About the same time I submitted these documents to our attorney, I found the United States Trustee’s Statement of Presumed Abuse on PACER. This statement is very short:

You are hereby notified that:
The United States Trustee has reviewed all materials filed by the debtor and has determined that the debtor’s case is presumed to be an abuse under 11 U.S.C. § 707(b)(2).

First it was not presumed to be abuse, and now it is? I panicked at first, but then our attorney said there’s no way the US Trustee had received our documents before issuing this statement, so it was probably just a routine filing because we are over the median. We crossed our fingers and toes, and fervently hoped our case wouldn’t be routinely dismissed.

Last week, our attorney called to let us know that the US Trustee had filed a statement saying he did not consider dismissal appropriate in our case, and therefore would not seek dismissal. The UST cited a precedent in our jurisdiction (In re Hummel) where the court ruled that on the means test, a debtor may deduct the amount of payments to a secured creditor even when she intends to surrender the collateral. If we add in our mortgage payment (which we are still legally liable for), our disposable income after paying living expenses goes from just a little bit negative to completely fucking impossible — so there is clearly nothing to fund a Chapter 13 plan with. I do not know how much, if any, negotiation my attorney had to do to get this allowed. He simply attributed it to the flexibility of the UST’s discretion, and said we were out of the woods.

I’m still not 100% relieved; like all of our creditors, the Trustee has until October 25 to file an objection or dismissal request. I don’t think an about-face is likely, but I won’t be completely convinced until we see our status changed to DISCHARGED and then CLOSED. We have completed the second required financial management course, so at this point it’s all over except for the waiting.

 

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