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Consumer Bankruptcy Law and Practice: 13.1 Introduction

For most consumer debtors, the decision to file bankruptcy and the selection of which chapter to utilize comes after careful thought and consideration of the advantages and disadvantages of that choice. However, in certain emergency situations, such as a pending foreclosure, the decision may be made in haste. Due to a variety of factors, either unknown at the time of filing or arising after the filing, the debtor may wish to voluntarily dismiss the bankruptcy case or to convert it to another chapter.

Consumer Bankruptcy Law and Practice: 13.3.1 Reasons for Dismissal or Conversion

Involuntary dismissal or conversion, in either a chapter 7 or chapter 13 case, may occur for a number of reasons, some of which are listed in sections 707 and 1307(c).23 Probably the most common causes are failure to pay the filing fees24 or chapter 13 plan payments,25 failure to file appropriate papers, such as the bankruptcy schedules or chapter 13 plan, failure to obtain credit counseling prior to filing the petition,

Consumer Bankruptcy Law and Practice: 13.3.2 “Automatic” Dismissal Under Section 521(i)

The 2005 amendments added a new provision concerning dismissal of a case. Failure to provide documents required by section 521(a)(1) of the Code, but not other documents, may lead to dismissal. Under section 521(i)(1), a case is to be “automatically dismissed” if the debtor does not file the information required by section 521(a)(1) within forty-five days after filing the petition. However, section 521(i)(2) provides that in such circumstances the case is to be dismissed on request of a party of interest within seven days of the request.

Consumer Bankruptcy Law and Practice: 13.4.1 Overview

Section 707(b) permits a bankruptcy court to dismiss a chapter 7 case, after notice and a hearing, if the court finds that granting relief under chapter 7 would be an abuse of its provisions. Because the section applies only to cases “filed” under chapter 7, it is arguably inapplicable to a case originally filed under chapter 13 and later converted to chapter 7.65

Consumer Bankruptcy Law and Practice: 13.4.2 Section 707(b) Applicable Only to Debtors with Primarily Consumer Debts

Section 707(b) applies only to debtors whose debts are primarily consumer debts.67 The Bankruptcy Code defines “consumer debt” as “debt incurred by an individual primarily for a personal, family, or household purpose.”68 Thus, for debtors who have incurred most of their debts in business or through investment losses, section 707(b) should not be a problem.69 Courts generally use a profit motive test when analyzing whether a debt is a consumer debt.

Consumer Bankruptcy Law and Practice: 13.4.3.2.1 A six-month average normally used

“Current monthly income” is defined in section 101 of the Bankruptcy Code as the average of the last six months’ income received from all sources by the debtor (or, in a joint case, by the debtor and the debtor’s spouse), derived during the six-month period,87 with certain adjustments.88 As a result, the debtor’s actual income at the time the petition is filed may be significantly below or above current monthly income, which is a six-month average.

Consumer Bankruptcy Law and Practice: 13.4.3.2.2 Payments toward household expenses of debtor or dependents on a regular basis

Included in current monthly income is any amount paid by any entity toward the household expenses of the debtor or the debtor’s dependents on a regular basis.94 Amounts not used for such a purpose or not received on a regular basis are not included. For example, the definition would exclude child support received on a sporadic basis.95 Similarly, expenses paid for a dependent not in the household should not be considered a payment toward household expenses.

Consumer Bankruptcy Law and Practice: 13.4.3.2.4 Treatment of business income

The definition of current monthly income appears to include the debtor’s gross business income, rather than net income, especially because, in chapter 13, section 1325(b) explicitly provides for business expenses to be deducted from the debtor’s current monthly income.105 However, the forms adopted by the Judicial Conference count only net business income and net rental income toward current monthly income.106 The primary difference between the two methods in chapter 7 cases is that the deductio

Consumer Bankruptcy Law and Practice: 13.4.3.2.6 Distributions or withdrawals from an IRA or pension plan

There may also be questions about how to treat distributions or withdrawals from retirement accounts or pension plans. Although these withdrawals may well be taxable income, the definition of current monthly income specifically provides that tax treatment is not determinative.111 Courts are divided on the issue. Some courts have held that individual retirement account (IRA) contributions are properly treated as income at the time the contribution is made, rather than when a distribution is made.

Consumer Bankruptcy Law and Practice: 13.4.3.2.7 Explicit statutory exemptions from current monthly income

Excluded from current monthly income are benefits received under the Social Security Act, and payments made to victims of war crimes, crimes against humanity, and international terrorism on account of such status.116 This provision will bring many elderly and disabled debtors below the median income thresholds. It would exclude from a debtor’s current monthly income benefits paid to a child. On the other hand, private disability benefits are not excluded by this provision.

Consumer Bankruptcy Law and Practice: 13.4.4 Safe Harbor for Disabled Veterans, Reservists, and National Guard Members

The 2005 amendments create a separate safe harbor from the means test for debtors who are disabled veterans (as defined in 38 U.S.C. § 3741(1), which requires at least a thirty percent disability), if their “indebtedness occurred primarily” during a period when they were on active duty or “performing a homeland defense activity.”146 In most cases, if the debtor bought a home or refinanced a mortgage while on active duty, this test will be met because the mortgage will be over fifty percent of the debtor’s debts.

Consumer Bankruptcy Law and Practice: 13.4.5.1 Generally

If the debtor is not protected by the disabled veteran, reservists, National Guard, or median income safe harbor and has primarily consumer debts, a means test formula is then applied to determine whether a presumption of abuse exists. In general terms, the means test formula begins with the debtor’s current monthly income, and deducts from that income certain allowed expenses to come up with a monthly amount presumed to be available to general unsecured creditors.

Consumer Bankruptcy Law and Practice: 13.4.5.2.1 Introduction

The debtor is allowed to deduct from current monthly income expenses allowed by the Internal Revenue Service (IRS) in its financial standards used in collecting taxes. These expenses are allowed for the debtor and the debtor’s dependents, and for the debtor’s spouse in a joint case. Expenses for a dependent are allowed even if the dependent is not in the same household. As discussed above, the term “dependent” should be defined broadly.

Consumer Bankruptcy Law and Practice: 13.4.5.2.2 IRS national standards for food, clothing, housekeeping supplies, personal care, and miscellaneous expenses

The IRS national standards provide for the debtor’s allowed living expenses in five categories: food, clothing and services, housekeeping supplies, personal care products and services, and miscellaneous items.161 The amounts listed in the national standards for these categories apply to debtors in every state. Some of the national standards depend on the size of the debtor’s household.

Consumer Bankruptcy Law and Practice: 13.4.5.2.4 IRS local standards for transportation expenses

The debtor may also claim transportation expenses under the regional IRS local standards for transportation, which differentiate between ownership costs, operating costs, and public transportation costs.170 The ownership costs expense is provided as a national standard that is the same no matter where the debtor resides. The debtor is permitted an ownership expense of $588 for one car and $1176 for two cars (based on 2022 figures).

Consumer Bankruptcy Law and Practice: 13.4.5.2.5 IRS local standards for housing and utilities

The debtor may take as an expense deduction a housing allowance under the IRS local standards.182 Debtors should not be penalized for spending less than the housing allowance permits, and most courts have so held.183 Housing allowances are specified for each county, dependent on family size, and on the Official Form are broken into separate housing and utilities allowances for “non-mortgage expenses” and for mortgage or rent payments.

Consumer Bankruptcy Law and Practice: 13.4.5.3.1 Introduction

In addition to expenses covered under the IRS guidelines, section 707(b) provides a list of expense items that may be deducted from the debtor’s current monthly income in a range of categories, such as health insurance costs, expenses to maintain safety from domestic violence, certain expenses to care for others, costs necessary in a chapter 13 case, certain educational expenses, and charitable contributions.200 Some of these items are deductible under the IRS standards and presumably should not be double counted.