A Back Door to Chapter 7 for Means-Challenged Debtors?

There is now a difference of opinion in the published cases about whether means testing applies to determine chapter 7 eligibility in a case converted from chapter 13. Last month, Bankruptcy Judge Burns of the District of New Jersey decided In re Fox, 2007 WL 1576140 (Bankr. D. N.J. June 1, 2007).

In Fox, the debtor was a processing supervisor making $57,000 per year. Her chapter 13 plan was confirmed, but she lost her job a month later, and she successfully obtained a suspension of chapter 13 payments. After several months, her unemployment benefits and her payment suspension ran out at the same time. She finally got a job as a medical biller at $13.00 per hour, $30,000 per year less than previously. The debtor converted her case to chapter 7 a few days before starting her new job. She refused to file Official Form B22A, the Statement of Monthly Income and Means test, and the US Trustee filed a motion to dismiss the bankruptcy case. The Court denied the motion, ruling that means testing does not apply to the debtor in a chapter 7 case which was converted from chapter 13.

The rationale of Fox is simple and based on the “plain language” of BAPCPA. 11 U.S.C. § 707(b)(1) which provides authority for courts to dismiss a case, “filed by an individual debtor under this chapter . . . if it finds that the granting of relief would be an abuse of the provisions of this chapter.” Since the case wasn’t “filed under” chapter 7, the Court reasoned that it wasn’t subject to dismissal under section 707(b).

However much satisfaction may lie in literally interpreting the words of the poorly drafted, mean-spirited BAPCPA, the ruling of Fox may not wind up the majority rule. For one thing, Interim Bankruptcy Rule 1007(b)(4) requires that the statement be filed “in a chapter 7 case,” not just in a “case filed under” chapter 7. Also, there is already one published decision to the contrary, In re Perfetto, 361 B.R. 27 (Bankr. D.R.I. 2007). Perfetto was a case where the debtor converted her chapter 13 case within 2 weeks after the petition, and did not allege any change in circumstances. The Court required the debtor to file FormB22A, reasoning that it was the intent of Congress to apply the means test in all chapter 7 cases.

Neither of these decisions discusses the impact of the Supreme Court’s decision in Marrama v. Citizens Bank of Massachusetts, 127 S.Ct. 1105 (2007), which I blogged in February. Marrama holds that despite the “plain language” of 11 U.S.C. §706(a), there is no absolute right to convert a case from chapter 7 to chapter 13, and conversion could be denied based on bad faith. Perhaps a bad faith conversion standard could have been employed to achieve the same result in both cases?