What Happens if you Fail the Means Test for Bankruptcy
How can the consumer defend himself/herself against a motion to dismiss or convert?
A consumer facing case dismissal or conversion on the basis of presumed abuse will receive a notice from the court 20 days in advance. The word “presumed” means to suppose that something is true even without evidence, that the consumer has the burden of proof, meaning he/she would have to provide the court with evidence that he/she did not commit the abuse.
1.) The consumer did not fail the means test defense. This means that the consumer is to prove to the court that he/she actually passed the means test, meaning, his/her income is not really above the state median standard.
To do this the consumer can state that the trustee and/or creditors misinterpreted the information in Form 22A or that the consumer did not know that he/she included his/her Social Security benefits in the calculation of his/her current monthly income (this happens mostly with individual filers without legal representation)
2.) The consumer passed the means test due to special circumstances. Serious medical condition or a call to active duty constitutes special circumstances in the new bankruptcy law. Any changes to the amount of the current monthly income must be justified by documentations for the expense or adjustment and the consumer must be able to explain in details that the expense or adjustment was necessary, reasonable, and that there was not an alternative to it.
*One example to demonstrate the meaning of “necessary, reasonable, and no alternative” to the situation is when consumers (a married couple) have a special mental condition that requires for him/her to attend a special school that offers the lowest rate in the area. Under the means test, the couple is entitled to deduct 15% of the tuition from the income. If the couple was entitled to deduct 100%, because of the special circumstance that they have, they would then pass the means test. If the couple documents and narrates the situation clearly to the court, it may grant them the full 100% deduction, and successfully rebut the motion to dismiss or convert.
Motion to Dismiss for Abuse under All Circumstances. Fortunately for consumers, the court has not yet come up with a clear formula on what constitutes Motion to Dismiss for Abuse under All Circumstances, it is just in the discretion of the judges whether or not to dismiss the bankruptcy petition, have the chapter converted, or let it push through. In cases such as this, the burden of proof lies with the trustees and not the consumers. The trustees can challenge the consumer’s income any time before the discharge, so the consumer would have a tough battle ahead, as he/she would have to justify his/her passing the means test with that much money at hand.
*An example of this case is after filing Chapter 7, the consumer who was previously unemployed got a job or won the lottery, and in the eyes of the trustees, that qualifies the consumer to file Chapter 13 instead of Chapter 7. The case would not be dismissed on the grounds of abuse, just converted to Chapter 13. Fortunately for the consumer, as mentioned earlier, the burden of proof lies with the trustee.
More resources about the means test: