Chapter 7

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Would a person whose annual income falls way below the median income for families in their geographical area automatically qualify for Chapter 7 and have their debts discharged?

For example, a single person with yearly income of $30,000 who lives in Arizona where the median income is $43,397. Person has $20,000 in credit card debt and needs a fresh start.

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No. It just means that there is no presumption of abuse if you fail the means test (ie you have some disposable income remaining after paying your bills). The presumption is found in 11 USC 707(B)(2): http://doney.net/bkcode/11usc0707.htm

You still have to contend with 11 USC 707(B)(3):

(3) In considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter in a case in which the presumption in subparagraph (A)(i) of such paragraph does not arise or is rebutted, the court shall consider--

(A) whether the debtor filed the petition in bad faith; or

the totality of the circumstances (including whether the debtor seeks to reject a personal services contract and the financial need for such rejection as sought by the debtor) of the debtor's financial situation demonstrates abuse.

In other words, the court will still apply the subjective sniff test. If the court thinks you are being shady, then they may take a closer look and/or dismiss your case. If the case is downright fraud, you could have to pay sanctions for the time that the trustee puts in to file a motion to dismiss. This is highly unusual today but there is plenty of case law.

Edited by jq26
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In my scenario above, the information would be accurately portrayed and no abuse being contemplated. Even so, I understand that there should be the subjective sniff test throughout the bankruptcy process.

Using the scenario in my initial email aboveā€¦ When preparing Form 22A the person would complete Parts II and III at which point Item 15 tells them to stop, and they are not to complete Parts IV, V, VI or VII.

The means test map also says to stop if they are below median income. The map shows the disposable income piece applies to those above median income. And on Form 22A, folks whose income exceeds the median criteria must complete Parts IV, V, VI and VII.

Where in the Chapter 7 process do folks whose income is well below the median criteria have to calculate or factor in potential monthly disposable income that is $100 or greater? Would they also use the National/Local Standards for that piece of the process, or would they use their own calculated expenses?

At what point, for these folks falling below the mean income test, would they know they must pursue Chapter 13?

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What you are describing is the mechanical means test. Your case may not be dismissed based on a quantitative failure. It would be wholly subjective based on the trustee and ultimately the judge.

If your income is $3000/month and your bills are $2700/month on your schedules I & J, then my guess is that it would catch the eye of the trustee even though you are below the state median income. There is the "additional" mechanical test applied to higher earners (which is a joke really) and then there is the customary "does this filer require Chapter 7 relief" that is applied to all cases by all trustees and judges. Abuse in this case means filing when you really can pay back creditors.

Last summer I filed a ton of pro bono petitions. These people were all below 125% poverty levels. We would not file any case where there was more than $100 in disposable. A good attorney may feel a bit more brazen with localized knowledge of trustee tolerance levels.

Just my 2 cents.

Edited by jq26
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