§ 142.3     Application of § 707(b) Abuse Test at Conversion
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 142.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Interim Rule 1019 assumes that the abuse test in § 707(b) applies at conversion from Chapter 13 to Chapter 7.1 The statute may be contrary, and litigation of this issue is inevitable.

[2]

The outcome will turn on the phrasing of § 707(b)(1). After notice and a hearing, the bankruptcy court on its own motion or on motion of a 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.2
[3]

Read plainly, a Chapter 13 case converted to Chapter 7 was not “filed . . . under this chapter.” The two references to “this chapter” in § 707(b)(1) have to mean Chapter 7. Conversion of a case filed under Chapter 13 to a case under Chapter 7 does not pass through the abuse test in § 707(b)(1).

[4]

As persuasively argued in a recent article,3 “filed” in § 707(b)(1) does not mean the same thing as “converted”—as amply demonstrated by the use of both words in the sentence quoted above from § 707(b)(1) itself. Other provisions of the Bankruptcy Code—including many amended by BAPCPA—support this construction of § 707(b). For example, §§ 348 and 1307 respect the difference between the date of filing a case and the conversion to another chapter.4 There are obvious policy reasons why Congress would impose an abuse test on access to Chapter 7 in the first instance but not impose that test when an individual debtor attempts to pay creditors through a Chapter 13 case and then converts to Chapter 7.5

[5]

If the abuse test in § 707(b) does not apply at conversion from Chapter 13 to Chapter 7, there are incentives for individual debtors eligible for both chapters to first attempt a Chapter 13 case. This would be especially true for debtors with current monthly income (CMI) greater than applicable median family income who are likely to face the presumption of abuse in a Chapter 7 case under § 707(b)(2) or at least face expensive litigation whether the abuse presumption applies. An individual debtor with CMI greater than applicable median family income may find Chapter 13 to be hospitable to financial reorganization after BAPCPA.6

[6]

If the abuse test in § 707(b) does apply at conversion from Chapter 13 to Chapter 7, counsel should keep in mind that the calculations required by § 707(b) are time-bound to the original Chapter 13 petition. The definition of CMI in § 101(10A)7 is based on the debtor’s income during the six months before the month in which the original Chapter 13 petition was filed—without regard to the passage of time between the filing of the Chapter 13 petition and conversion to Chapter 7. The expenses deducted from CMI for purposes of the presumption calculation in § 707(b)(2)(A)(ii) are determined based on amounts specified in standards issued by the IRS “as in effect on the date of the order for relief.”8 Under § 348(a), conversion from Chapter 13 to Chapter 7 does not change the date of the order for relief except as specified elsewhere in § 348, and there is no reference to § 707 in § 348, as amended by BAPCPA.9

[7]

If § 707(b) does apply at conversion from Chapter 13 to Chapter 7, there will be no predictable relationship between the debtor’s financial circumstances at the filing of the original Chapter 13 case and the debtor’s financial circumstances at the time of conversion. The debtor’s plight may have improved or sunk further. But the abuse test under § 707(b) will be bound by the facts recorded at the original Chapter 13 petition. This could be trouble for a debtor whose financial circumstances have deteriorated while the case was in Chapter 13. For such a debtor, the test in § 707(b) may produce an undeserved presumption of abuse using the static historical data at the original Chapter 13 filing. Perhaps the passage of time and deterioration of the debtor’s financial condition are “special circumstances” for purposes of § 707(b)(2)(B).


 

1  See § 530.1 [ New Deadlines and Filing Requirements after Conversion ] § 142.2  Deadlines and Filing Requirements at Conversion after BAPCPA.

 

2  11 U.S.C. § 707(b)(1) (emphasis added).

 

3  See G. Eric Brunstad, Jr., The Inapplicability of “Means Testing” to Cases Converted to Chapter 7, 9 Am. Bankr. Inst. J. 1 (2005).

 

4  See Brunstad, supra note 3, at 58.

 

5  See Brunstad, supra note 3, at 60.

 

6  See discussion beginning at § 94.1  Big Picture: Too Many Issues§ 95.1  In General§ 99.1  In General, § 101.1  What Do Unsecured Creditors Get? and § 96.1  Average Monthly Payments on Account of Secured Debts§ 97.1  Total Priority Debts and Divide by 60, § 98.1  Additional Expenses or Adjustments to CMI and § 100.1  Applicable Commitment Period Calculation

 

7  See 11 U.S.C. § 101(10A), discussed in §§ 379.1 [ Form B22C: Statement of Current Monthly Income ] § 36.19  Form 122C-1: Statement of Current Monthly Income and 468.1 [ Current Monthly Income: The Baseline ] § 92.3  Current Monthly Income: The Baseline.

 

8  11 U.S.C. § 707(b)(2)(A)(ii)(I).

 

9  There are some specific Code references in 11 U.S.C. § 348 that do affect debtors at conversion from Chapter 13 to Chapter 7. See 11 U.S.C. § 342, referenced in 11 U.S.C. § 348(c) and discussed in § 532.1 [ Notice Issues under § 342 at Conversion ] § 142.4  Notice Issues under § 342 at Conversion.