Does the Means Test Apply on Conversion from Chapter 13 to Chapter 7

Does the Means Test Apply on Conversion from Chapter 13 to Chapter 7 in Arizona

The Chapter 7 means test (also referred to as Form B22A) creates a presumption of abuse for many higher income debtors who then elect a Chapter 13 repayment plan which can last 3-5 years. But a lot can change over 3-5 years in Chapter 13 proceedings and a debtor may want to subsequently convert to Chapter 7 proceedings. The question then becomes does the means test apply on conversion for Chapter 13 bankruptcy to Chapter 7 bankruptcy in Arizona.

The Majority Approach – Means Testing Required

The majority approach take the view that means testing is required upon conversion as Section 348(a) provides that the date of filing does not change upon conversion and a means test is required for data on the original filing date. Practically speaking, this means test upon conversion makes little sense as circumstances and financials often changes during the period of an unsuccessful or incomplete Chapter 13 plan.

The Minority Approach – Means Testing Not Required

The minority approach takes a literalist view and conclude that the means test does not apply to cases that are converted to Chapter 7 because the text of the statute only references cases that are filed as Chapter 7 and makes no reference to converted cases. They further reason that because the means test employs a computation based on monthly income of a debtor during the six-month period preceding the filing of the initial petition, conducting a means test upon conversion may require a court to review outdated financials of a debtor that would not provide a reasonable reflection of the debtor’s financial position as of the time of conversion. If this were the case, a good faith debtor would be unable to proceed under either chapter which serves little purpose in the majority of situations.

Bankruptcy courts within the Ninth Circuit have reached differing conclusions when asked does the means test apply on conversion from Chapter 13 bankruptcy to Chapter 7. For example, Oregon has also required a form B22A means test in converted cases. In re Kellett, 379 B.R. 332 (Bankr. Or. 2007). Washington also requires means testing upon conversion both by case law and by local rules. But other bankruptcy courts, including California, have concluded that the means test does not apply to converted cases. In re Ryder, No. 07-40192 EDJ (Bankr. N.D. Cal. Aug. 8, 2008). In addition to citing the statutory language as a basis for the ruling, these rulings also reason that the court always has authority to dismiss a Chapter 13 case not filed in good faith and the entire purpose of means testing is to preclude Chapter 7 relief to debtors who cannot fund a Chapter 13 plan. To put those debtors through a means test after failing in good faith in a Chapter 13 plan seems redundant.

The Arizona Approach – Means Testing Not Required

While there is no definitive answer from an Arizona bankruptcy judge, the bankruptcy clerk and the U.S. Trustee’s Office in Arizona do not require debtors to file a Form B22A (i.e., means test) upon conversion. Thus, debtors who ask does the means test apply on conversion from Chapter 13 to Chapter 7 bankruptcy will be pleased to know that the answer is likely no. This indicates that Arizona seemingly takes the minority or literalist view of means testing upon conversion. This is the more pragmatic approach since the means test based upon old financials is a misleading indicator of abuse. As a result, debtors often receive little or no scrutiny upon conversion. Some practitioners use this strategy to avoid the presumption of abuse. By putting an over-median debtor in a Chapter 13 temporarily and then converting, it gives the appearance of good faith and is an easier alternative to initially filing a Chapter 7 and seeking to rebut the presumption of abuse which may be more expensive if contested by the U.S. Trustee.

If you are an over-median income debtor but do not want a five year plan or do not think it is feasible, consider filing a Chapter 13 and then converting to avoid the presumption of abuse and having to rebut that presumption in a contested matter with the U.S. Trustee’s Office.  The U.S. Trustee’s Office will likely want to review updated income and expenses (Schedules I and J) from a debtor on conversion to review changed circumstances justifying conversion.

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