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Means Test & Retirement: Case Study
Case Study: Filing for a Chapter 7 with an upcoming Retirement
In 2023, a client came to the Law Office of Christopher Hewitt with a unique bankruptcy situation presenting notable results. The firm has filed thousands of bankruptcy cases in Orange and Riverside Counties and may use the law to our client's advantage. The means test generally considers the debtor's last six months of income to determine whether The debtor is eligible for a Chapter 7 or should be required to file a Chapter 13. The debtor had an assured upcoming retirement.
Retirement: The Means Test
The upcoming retirement would inevitably change the debtor's monthly income from full salary to just a fraction of the debtor's salary from part-time consulting work. The debtor intended to end their career permanently, proving an easy mathematical certainty that their income would be far less than previously earned. The income decline would also put them under the median income, therefore passing the means test going forward.
What Income is Used for the Means Test?
The means test generally considers the debtor's last six months of pay stubs and other forms of income. If they are under the median income and pass the other requirements, they can file a Chapter 7 Bankruptcy. Otherwise, if they are over the median income, they will be implored to file a Chapter 13 bankruptcy, a repayment plan.
In 2023, a client came to the Law Office of Christopher Hewitt with a unique bankruptcy situation presenting notable results. The firm has filed thousands of bankruptcy cases in Orange and Riverside Counties and may use the law to our client's advantage. The means test generally considers the debtor's last six months of income to determine whether The debtor is eligible for a Chapter 7 or should be required to file a Chapter 13. The debtor had an assured upcoming retirement.
Retirement: The Means Test
The upcoming retirement would inevitably change the debtor's monthly income from full salary to just a fraction of the debtor's salary from part-time consulting work. The debtor intended to end their career permanently, proving an easy mathematical certainty that their income would be far less than previously earned. The income decline would also put them under the median income, therefore passing the means test going forward.
What Income is Used for the Means Test?
The means test generally considers the debtor's last six months of pay stubs and other forms of income. If they are under the median income and pass the other requirements, they can file a Chapter 7 Bankruptcy. Otherwise, if they are over the median income, they will be implored to file a Chapter 13 bankruptcy, a repayment plan.
Why We Filed a Chapter 7
The debtor imminently faced a significant loss of disposable income, so Chapter 13 did not make sense. The changing situation inevitably made Chapter 7 more appropriate, and the debtor would soon qualify for Chapter 7 regardless. Another solution would be for the debtor to wait until the average income over the previous six months was under the median. The U.S. trustee was likely to scrutinize the selection of Chapter 7, given that the debtor's income was too high, potentially making Chapter 13 a more suitable option.
The debtor imminently faced a significant loss of disposable income, so Chapter 13 did not make sense. The changing situation inevitably made Chapter 7 more appropriate, and the debtor would soon qualify for Chapter 7 regardless. Another solution would be for the debtor to wait until the average income over the previous six months was under the median. The U.S. trustee was likely to scrutinize the selection of Chapter 7, given that the debtor's income was too high, potentially making Chapter 13 a more suitable option.
The U.S. Trustee Response
The United States Trustee previously filed a statement under Section 11 U.S.C. 704(b)(1)(A) indicating that this case is presumed to be an abuse of the provisions of chapter 7.
*U.S.C. 704(b)(1)(A) dictates that the trustee has the right to view all the materials related to the bankruptcy within 10 days of the 341A Meeting of Creditors.
The U.S. Trustee initially rejected the petition on the presumption of an abuse of the provision of Chapter 7. The U.S. requested the following documents from the debtor and their spouse.
The United States Trustee previously filed a statement under Section 11 U.S.C. 704(b)(1)(A) indicating that this case is presumed to be an abuse of the provisions of chapter 7.
*U.S.C. 704(b)(1)(A) dictates that the trustee has the right to view all the materials related to the bankruptcy within 10 days of the 341A Meeting of Creditors.
The U.S. Trustee initially rejected the petition on the presumption of an abuse of the provision of Chapter 7. The U.S. requested the following documents from the debtor and their spouse.
- Tax Returns
- Pay Advice
- Vehicle Billing Statements
- Schedule J (Mortgage statement, H.O.A. fees, Health Insurance)
- Means test Explanatory/Supporting documents
Our Response
Because of the peculiar situation, we received a request from the U.S. trustee's office for documentation showing the debtor's and their spouse's final situation in great detail. The Law Office of Christopher Hewitt explained that the debtor has a significant upcoming wage decrease due to retirement. We supplied the U.S. trustee with all the other requested documents from the debtor.
U.S. Trustee Decided a Motion to Dismiss is not Warranted
“The United States Trustee previously filed a statement pursuant to Section 11 U.S.C. 704(b)(1)(A) indicating that this case is presumed to be an abuse of the provisions of chapter 7 of Title 11 of the United States Code. Notice is hereby provided that the United States Trustee, based on currently available information, does not consider a motion under Section 11 U.S.C. 707(b) to be appropriate for the following reasons: The U.S. Trustee reviewed the debtor's financial records and does not believe that a motion to dismiss is warranted. Based on the specific facts of this case, the U.S. Trustee declines to proceed. Filed by United States Trustee.”
Conclusion
In the end, the U.S. Trustee agreed that the motion to dismiss the case was not warranted as the debtor could prove the drastic income change over a short period. When the documents were requested and provided to the U.S. Trustee, the debtor's income had already decreased and fit into Chapter 7.
U.S. Trustee Decided a Motion to Dismiss is not Warranted
“The United States Trustee previously filed a statement pursuant to Section 11 U.S.C. 704(b)(1)(A) indicating that this case is presumed to be an abuse of the provisions of chapter 7 of Title 11 of the United States Code. Notice is hereby provided that the United States Trustee, based on currently available information, does not consider a motion under Section 11 U.S.C. 707(b) to be appropriate for the following reasons: The U.S. Trustee reviewed the debtor's financial records and does not believe that a motion to dismiss is warranted. Based on the specific facts of this case, the U.S. Trustee declines to proceed. Filed by United States Trustee.”
Conclusion
In the end, the U.S. Trustee agreed that the motion to dismiss the case was not warranted as the debtor could prove the drastic income change over a short period. When the documents were requested and provided to the U.S. Trustee, the debtor's income had already decreased and fit into Chapter 7.
