Does getting past the means test on Bankruptcy Form 22A get you into a chapter 7 bankruptcy without further consideration?  In most cases the answer is yes, but in some cases the bankruptcy trustee may challenge the chapter 7 petition (and then seek to have the case converted to chapter 13 or dismissed) if Schedule J still shows net income that may be sufficient to fund a chapter 13 plan.

Practice tip! Before you file your chapter 7 petition take a close look at the net income difference between schedule I and J and pay particular attention to the expenses on schedule J. If there is net income that could fund a chapter 13 payment, or the expenses could be challenged and reduced resulting in net income, you could end up with the trustee arguing for dismissal or conversion to chapter 13.

Passing the means test leads to the conclusion that there is no presumption of abuse under Bankruptcy Code Section 707(b)(2)(A).  The problem is that Form 22A allows you to (in fact tells you to) use standardized expenses.  It’s not unusual for expenses on Form 22A to differ from Schedule J (schedule J even says, right across the top, that they might be different).  Showing net income on Schedule J may lead a trustee to suggest that the chapter 7 petition is abusive.

Here’s the problem. The fact that you pass the means test may mean that there isn’t a presumption of abuse, but Bankruptcy Code Section 707(b) includes more than just the means test presumption. Section 707(b) says that dismissal or conversion can occur for any abuse, and Sec 707(b)(3)(A) and (B) says that abuse includes bad faith or that the totality of the circumstances of the debtor’s financial situation demonstrates abuse.

There are numerous bankruptcy court cases discussing this issue (see, for example, 2011 WL 5925527), but the “totality of the circumstances” analysis typically looks to the following:

1) whether a debtor had the likelihood of sufficient future income to fund a chapter 13 plan which would pay a substantial portion of unsecured claims;

2) whether a debtor’s petition was filed as a consequence of illness, disability, unemployment, or some calamity;

3) whether the schedules suggest the debtor obtained cash advances and consumer goods on credit exceeding his or her ability to repay them;

4) whether a debtor’s proposed family budget was excessive or extravagant;

5) whether a debtor’s statement of income and expenses misrepresented the debtor’s true financial condition; and

6) whether the debtor engaged in eve-of-bankruptcy purchases.

The trustee is likely to focus on the first point – that net income as shown on Schedule J could fund a chapter 13 plan payment and pay a substantial portion of unsecured claims.  That does not speak to any of the other factors, but the courts appear to put more emphasis on that factor than any other factor individually.

Note also that Section 707(b) used to look for “substantial abuse”, but under the BAPCPA amendments it was changed to just “abuse”.  Be careful of that distinction when looking at historical cases  – it is a much lower bar for the trustee to meet. A previous case finding that there was not “substantial abuse” could be decided much differently today.