Good summary of when you can file Chapter 7 Bankruptcy even if you fail the means test – the key is “special circumstances”

Read the whole article by Lori Patton here. It’s a good overview of how bankruptcy lawyers think through the means test.

How does the means test work? Can I still file if I fail?

Here is a small excerpt:

After all necessary income and expenses are plugged in, my software gives me either a green smiley face or a yellow frowny face at the bottom indicating whether going through the long form got us under median. Green is good. Yellow is not good. When I still have yellow after going through long form I still need to ask a few questions before giving up and telling a client they are ineligible for filing a Chapter 7 Bankruptcy. This is because we still have a couple escape hatches in 11 USC 707(b) “special circumstances” and “totality of the circumstances”.

Examples of “Special Circumstances” are given in the Code: “such as a serious medical condition or a call or order to active duty in the Armed Forces… I will tell you now that a child needing braces or getting ready to go to college is not going to fly. A car on its last leg and the need to replace it has worked for me in the past.

“Totality of the Circumstances” is defined in the Code as “whether the totality of the circumstances of the debtor’s financial situation demonstrates abuse.” This is nice and vague, which gives us more options. Obvious situations that fit would be lost employment, reduction in income that is not expected to recover soon, divorce, recently ordered domestic support (child support or alimony) that was not factored into the means test, as well as the fact that the income calculation might include 401K or retirement draws, or other “nonrecurring income” that is not reasonably expected in the foreseeable future.

It is all so individually specific to each particular client that I hesitate to tell you that something will or will not work in your case.

If I see either a special circumstance or a “totality of the circumstances” event, and there is no other good reason to do a Chapter 13 (hey! Another good article topic!), then I will file the case as a Chapter 7, despite the yellow frowny face on my screen. What will happen then is I will get a phone call or email from a paralegal at the United States Trustee’s office about the filing and requesting support for the filing. I will then quickly email to them all the documentation and support I have. The paralegal for the UST will likely come to the creditor’s meeting (about a month after filing) and ask the clients some or a lot of questions about the special circumstances or change in circumstances. They are not being mean, but they have to get those answers recorded so they can justify to their bosses in Washington D.C. why they didn’t throw the book at us.
Filing a Chapter 7 when the presumption of abuse arises because of not passing the means test makes getting through it tougher, but not necessarily impossible. Another option to seriously consider, and is sometimes necessary, is waiting until the six month average is diluted.