Court Decision To Limit Chapter 13 Conversions

Many people are unaware of the rules that surround the bankruptcy filing process. For example, in order to qualify for Chapter 7 a filer must pass the means test, which essentially compares their income level to the median income level of the state. While many people are disqualified from a Chapter 7 case at this point, most have no clue that there is a loophole.

Beating The System?

Earlier this year, a married couple filing for bankruptcy discovered this loophole that allowed them to convert their Chapter 13 case into a Chapter 7 case. Having exceeded the income restrictions set forth by Chapter 7 laws, the couple originally filed for Chapter 13. They later requested for their case to be converted into a Chapter 7 case, which was approved by the court.

The court’s approval of the conversion sparked much controversy. The couple’s bankruptcy trustee challenged the court’s decision to convert the case citing the couple’s income exceeded the Chapter 7 means test requirement. It was reported that the couple has nearly $2,000 in disposable income each month, which exceeds the $167 limit set forth by the Chapter 7 Bankruptcy Code. However, the couple argued that they were not in violation since their original filing was under a Chapter 13 case. The case eventually made its way to the Fourth U.S. Circuit Court of Appeals, which handed down a decision to limit the options of Chapter 13 cases that are looking to covert.