If Creditors Will Get Nothing In A Chapter 13 Bankruptcy, Can I Still File Chapter 7 Even If I Don’t Qualify?

The means test imposed by § 707(b)(2) following adoption of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) has created a new universe of bankruptcy jurisprudence. The means test, and the Forms 22A, B and C that manifest the test, were created to provide a mechanical and formulaic guide to whether an individual debtor will qualify for the broad relief afforded under Chapter 7 or the more constrained relief available under Chapter 13 (presuming the client’s debt load is within the limits imposed by Section 109(e)). In that Chapter, under section 1325, the means test form 22C will determine the disposable income the debtor must pay the Chapter 13 trustee for the benefit of creditors.

The Form 22 system is designed to eliminate the angst of judicial discretion. Confusion has arisen however because BAPCPA’s meme that bankruptcy abuse should be curbed for the benefit of creditors does not always play out consistently amongst the different iterations of Form 22. This divergence of result occurs primarily when Chapter 13 authorizes specific deductions from disposable income that are not accepted in BAPCPAized Chapter 7.

The problem: Side by side comparisons of Forms 22A and 22C prepared by the same debtor[1] may display substantial monthly net income in Chapter 7 but no income, or monthly loss, in Chapter 13. By showing surplus income, the Chapter 7 debtor is now faced with a presumption of abuse, endangering the attempt to obtain a Chapter 7 discharge. Creditors, the Chapter 7 trustee or the Office of the United States Trustee may file a motion to dismiss the Chapter 7 case when the correctly completed Form 22A demonstrates this statutory presumption of abuse. Section 707(b)(1) provides the following procedure upon the finding of abuse:

After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, trustee (or bankruptcy administrator, if any), or any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor’s consent, convert such a case to a case under chapter 11 or 13 of this title, if it finds that the granting of relief would be an abuse of the provisions of this chapter.

The specific provisions allowing for Chapter 13 deductions that tend to cause the greatest difficulty are the 401(k) loan repayment exclusion and child support deductions.

The 401(k) loan repayment issue arises due to Section 1322(f), a mandate that

A plan may not materially alter the terms of a loan described in section 362(b)(19)[2] and any amounts required to repay such loan shall not constitute “disposable income” under section 1325.

The child support problem arises due to Section 1325(b)(2), providing the following exclusion from income:

For purposes of this subsection, the term “disposable income” means current monthly income received by the debtor (other than child support payments, foster care payments, or disability payments for a dependent child made in accordance with applicable nonbankruptcy law to the extent reasonably necessary to be expended for such child) …

Consistent with the requirements of Section 707(b), Form 22A provides no deduction for child support received or repayments due on 401(k) loans.

The Possible Solution: Judicial Discretion or Special Circumstances

When faced with a motion to dismiss the Chapter 7 case due to the presumption of abuse, a debtor may attempt to rebut the presumption, ask the court to exercise its discretion by not dismissing, or may seek to establish that special circumstances exist. Section 707(b)(2)(B) provides the framework for special circumstances:

(i) In any proceeding brought under this subsection, the presumption of abuse may only be rebutted by demonstrating special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.

(ii) In order to establish special circumstances, the debtor shall be required to itemize each additional expense or adjustment of income and to provide—

(I) documentation for such expense or adjustment to income; and

(II) a detailed explanation of the special circumstances that make such expenses or adjustment to income necessary and reasonable.

(iii) The debtor shall attest under oath to the accuracy of any information provided to demonstrate that additional expenses or adjustments to income are required.

(iv) The presumption of abuse may only be rebutted if the additional expenses or adjustments to income referred to in clause (i) cause the product of the debtor’s current monthly income reduced by the amounts determined under clauses (ii), (iii), and (iv) of subparagraph (A) when multiplied by 60 to be less than the lesser of—

(I) 25 percent of the debtor’s nonpriority unsecured claims, or $6,000, whichever is greater; or

(II) $10,000.

The Judicial Response

Many debtors faced with a motion to dismiss their Chapter 7 case have asked the court to find that the inconsistency between Forms 22A and 22C in respect of 401(k) loan repayments and child support received permit the court to exercise discretion to deny the motion, or constitute sufficient special circumstances to rebut the presumption of abuse. As may be expected, all courts do not agree on the appropriate result.

Cases denying the motion to dismiss

A leading case denying a motion to dismiss is In Re Skvorecz 369 B.R. 638 (Bankr. D. Colo. 2007), a case dealing with a 401(k) loan repayment case. Faced with the U.S. Trustee’s motion the court ruled:

If the Court were to dismiss the case pursuant to section 707(b), the Debtor could refile his case under Chapter 13 and unsecured creditors would be paid nothing based upon provisions of sections 1322(f) and 1325 and the deference accorded by Congress to 401(k) … loan repayments. Alternatively, if the Court were to convert the case to Chapter 13, “with the Debtor’s consent,” the same result would obtain. If part of the intent of Congress in tying Chapter 7 relief to a means test, was to require a debtor to repay his creditors if he is able to, then it would be nonsensical that the very payments or expenses which tip the calculation so as to create the presumption of abuse, an indication of an ability to repay, are the same payments or expenses that are excepted from “disposable income” in a Chapter 13.

369 B.R. at 644. Refusing to give credence to this “absurd result” the court denied the U.S. Trustee’s motion. Citing the use of the discretionary “may dismiss” language of Section 707(b)(1), the court did not reach the question of whether the divergence between Forms 22A and 22C constituted “special circumstances.”[3] See also In Re Siler 426 B.R. 167 (Bankr.W.D.N.C. 2010) (401(k) loan repayment case):

To use the Means Test to deny Chapter 7 relief to an individual, who could not pay unsecured creditors in Chapter 13 and who, as a matter of clear congressional election would not be required to do so, is absurd and contrary to the purpose of the Means Test.

426 B.R. at 177

Cases supporting denial of motion to dismiss due to “absurd” Chapter 13 result include:

In Re Phillips 417 B.R. 30 (Bankr. S.D. Ohio 2009); In re Latone, 2008 WL 5049460 (Bankr. D.Ariz. 2008); In Re Mravik 399 B.R. 202 (Bankr. E.D. Wis. 2008)

Cases granting the motion to dismiss

A leading case granting a motion to dismiss is In re Castle, 362 B.R. 846 (Bankr. N.D. Ohio 2006). In In re Castle, the debtors argued that the conflicting provisions of § 707(b), where child support payments are not excluded from the disposable income calculation, and § 1325(b), where they are, cancel each other out, and “they should be given the benefit of the doubt, and hence be permitted to proceed with their Chapter 7 case.” 362 B.R. at 850. The court, in rejecting this argument, noted that Congress explicitly allowed the exclusion of child support payments from the disposable income calculation only in Chapter 13:

The Debtors in this matter seek to use the general phrase “special circumstances” in § 707(b)(2)(B)(i) to modify what Congress made explicit; that only in a Chapter 13 case, not a Chapter 7 case, could the term “current monthly income” exclude child support. And where “Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.

Id. at 851.[4]

Cases disregarding potential Chapter 13 result in dismissing Chapter 7 cases include:

In Re Smith, 388 B.R. 885 (Bankr. C.D.Ill. 6-20-2008) (401(k) loan repayment case); In re Johns, 342 B.R. 626, 629 (Bankr. E.D.Okla. 2006)

As of the date of these materials (April 11, 2013) the author could identify no Maryland court and no court above the bankruptcy court level that has addressed the specific issue whether a court should consider a Chapter 13 result in determining a motion to dismiss for abuse under Section 707(b)(2). However, the 9th Circuit has ruled that the repayment of 401(k) loans is not a special circumstance allowing a debtor to overcome the presumption of abuse. See In Re Egebjerg, 574 F.3d 1045 (9th Cir. 2009).


[1] This is a debtor whose income is above the median income for his applicable state, and is therefore required to fill out the “long form” of 22A in Chapter 7. See Section 707(b)(6) for provisions affecting below median income debtors.

[2] The text of Section 362(b)(19):

(19) under subsection (a), of withholding of income from a debtor’s wages and collection of amounts withheld, under the debtor’s agreement authorizing that withholding and collection for the benefit of a pension, profit-sharing, stock bonus, or other plan established under section 401, 403, 408, 408A, 414, 457, or 501(c) of the Internal Revenue Code of 1986, that is sponsored by the employer of the debtor, or an affiliate, successor, or predecessor of such employer—

(A) to the extent that the amounts withheld and collected are used solely for payments relating to a loan from a plan under section 408(b)(1) of the Employee Retirement Income Security Act of 1974 or is subject to section 72(p) of the Internal Revenue Code of 1986; or

(B) a loan from a thrift savings plan permitted under subchapter III of chapter 84 of title 5, that satisfies the requirements of section 8433(g) of such title;

but nothing in this paragraph may be construed to provide that any loan made under a governmental plan under section 414(d), or a contract or account under section 403(b), of the Internal Revenue Code of 1986 constitutes a claim or a debt under this title;

[3] In Re Delbecq, 368 B.R. 754 (Bankr. S.D. Ind. 2007) is the leading authority in a case not covered by this outline but still applicable in concept. In that case, the debtor tried to deduct a student loan repayment on the Form 22A. Finding that separate classification (and preferred treatment) of student loans was permitted in Chapter 13 plans in that jurisdiction, the Court found that general unsecured creditors would have received nothing upon a conversion of the case to Chapter 13:

In applying § 707(b)(2)’s presumption of abuse, there is simply no logic to essentially forcing a debtor into a Chapter 13 case if the distribution in that case will yield nothing to unsecured creditors. In this Court’s opinion, the administrative cost of Chapter 13 to the entire bankruptcy system alone makes such a result ill-advised.

368 B.R. at 760. In finding that special circumstances existed, the court stated “the standard for special circumstances should not be set so high that it transforms § 707(b)(2)’s rebuttable presumption into an irrebuttable one.” 368 B.R. at 768.


[4] The court in Castle also reasoned that public policy considerations may support a debtor receiving child support to be forced into a zero payment Chapter 13 case:

Advantages, in terms of the family unit, potentially exist with proceeding under a Chapter 13. To name just one, while in a Chapter 13 bankruptcy, debtors are not permitted to incur debt or dispose of assets outside the ordinary course. 11 U.S.C. §§ 363(b)(1), 364(b), 1303. Hence, the behavior which originally lead to the debtor’s financial problems may be partially alleviated…

362 B.R. at 852.

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