Possible Chapter 7 Bankruptcy Abuse

The following case is a good example of what happens when a person files a chapter 7 case in bankruptcy and the Trustee believes it should have been filed as a chapter 13.  The Trustee may claim the Debtors have committed an “abuse” of the bankruptcy system.
You need to review this with your bankruptcy attorney to determine the chapter in which you should file.

The Tates filed for bankruptcy relief under Chapter 7 of the Bankruptcy Code on January 10, 2007.     They reported household income above the applicable state median income level. The Bankruptcy     Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) subjects debtors with above     median income to a means test to determine if they qualify for Chapter 7 bankruptcy. The purpose     of the means test is to determine if the debtors can repay a portion of their debt. Under the means     test, if a debtor has sufficient disposable income to pay his unsecured creditors at least $166.67     each month (at least $10,000 over five years), proceedings under Chapter 7, which allows for     complete discharge of debt, are considered presumptively abusive. 11 U.S.C. § 707(b)(2)(A)(ii)(I).     In that situation, the debtor is usually required to proceed under Chapter 13, which allows for     partial repayment of debt.
The means test takes the debtor’s current monthly income and reduces it by allowed deductions     set forth in 11 U.S.C. § 707(b)(2)(A)(ii)-(iv). At issue in this appeal is the transportation ownership     deduction allowed under § 707(b)(2)(A)(ii)(I), which allows the debtor to deduct-
the debtor’s applicable monthly expense amounts specified under the National Standards and Local     Standards, and the debtor’s actual monthly expenses for the categories specified as Other     Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor     resides, … Notwithstanding any other provision of this clause, the monthly expenses of the debtor     shall not include any payments for debts.
11 U.S.C. § 707(b)(2)(A)(ii)(I).
The National and Local Standards referenced in the statute are found in the IRS’s     Financial Analysis Handbook which is in turn found in the IRS’s Internal Revenue Manual (IRM).     Revenue agents use the IRM to assess the financial condition of delinquent taxpayers to determine     what they can afford to satisfy their tax debt to the government. Transportation expenses are part     of the Local Standards and are divided into ownership and operating expenses.
In re Tate, 571 F.3d 423, 425 (5th Cir. 2009)

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