Atlas Law Firm

Michael Sheridan Defeats U.S. Trustee’s Motion To Dismiss His Clients’ Chapter 7 Bankruptcy Case.


When you file for chapter 7 bankruptcy, you must meet 2 income qualifications. First, you must pass the means test. The means test mechanically calculates whether you have the “means” to pay back a portion of your debts. One of the benchmarks of the means test, is whether your projected annual income exceeds the median income for a household of your size. If your projected annual income is greater than the median income for a comparable household, and you are unable net out enough allowed expenses on the second half of the means test, then there is a presumption that your chapter 7 filing is an abuse of the bankruptcy code. Because the means test is so mechanical and requires that all forms of income in the previous 6 months be included in the calculation of projected annual income, Congress also included a “special circumstances” exception to the presumption of abuse. Among other factors, if you can show that income you received in calculating your projected annual income is no longer income you will be receiving in the future such that you pass the means test and qualify for chapter 7, you can rebut the presumption of abuse.

The second income qualification is the monthly budget. The monthly budget is your projection of your monthly net income and monthly expenses. If, after accounting for the debts you will no longer be paying after bankruptcy, you do not have excessive disposable income remaining after paying your monthly expenses, then you meet the budget qualification. However, objections can be made to your budget if the U.S. Trustee or a creditor believes you are misreporting income or expenses. To make the determination of whether your chapter 7 is appropriate regarding your monthly budget, the court reviews the “totality of the circumstances.”

Recently, Atlas Law Firm assisted a young family in filing for chapter 7 bankruptcy relief. The young family had discovered structural damage to their home and liquidated their savings to make the $8,000 of required repairs. The young couple was advised that the safest course of action would be to wait until the $8,000 withdrawal was outside of their 6 month window, but that they could file sooner using the “special circumstances” procedure. Wanting to move forward with a fresh start and get relief from the stress of over-burdensome debts that the couple could not pay because of even more burdensome student loan debt, the couple chose to file using the special circumstances process.

While the special circumstances procedure was followed precisely and previous Atlas Law Firm clients had succeeded under similar “special circumstances,” the U.S. Trustee filed a motion to dismiss the young couple’s chapter 7 bankruptcy filing on the grounds of an un-rebuttable presumption of abuse and the totality of the circumstances. The U.S. Trustee failed to offer an argument or legal foundation as to its position that the one-time $8,000 stock cashout, which would not be available to the young couple in the future, was not a special circumstance, sufficient to rebut the presumption of abuse. The thrust of the U.S. Trustee’s argument was that because the young couple’s monthly budget included payments on student loans (which are not discharged in their bankruptcy), the totality of the circumstances shows the couple could afford to pay their other unsecured creditors some amount in a chapter 13 bankruptcy. The U.S. Trustee was attempting to stretch the holding of an opinion in the District of Minnesota, that in the context of a chapter 13, a debtor must make payments on their student loans through the chapter 13 plan, rather than directly to the student loan lenders, unless the debtor can elaborate a rational basis for “unfair discrimination” against the other unsecured creditors.

Essentially, the U.S. Trustee was arguing, because the couple was paying $800-900 per month to their student loan lenders, that the court should put the couple into a chapter 13 so that $800-900 would go at least partially to the other unsecured creditors that otherwise would be discharged in chapter 7.

Michael Sheridan of Atlas Law Firm argued for the young couple that the effect of the U.S. Trustee arguing that it is abuse for the couple only to pay their non-dischargeable student loan debt is to boot strap the unfair discrimination prohibition of § 1322(b)(1) into chapter 7 via § 707(b)(3). Such a holding would create a rule that above-median debtors who file chapter 7 and have student loan debt must convert their case to chapter 13. Otherwise, the above-median debtor’s post-chapter 7 discharge payments will unfairly discriminate against that debtor’s non-priority, unsecured creditors. Mr. Sheridan pointed out that there is no support for this contention in the bankruptcy code. In fact, such a rule would undermine the second part of the means test set forth by Congress. Mr. Sheridan argued that the U.S. Trustee was trying to use the totality of the circumstances – which commonly are used to object to so-called “lifestyle cases” in which debtors are claiming luxurious and unnecessary expenses as justification for chapter 7 qualification – to argue that student loans are not a reasonable and necessary expense.

The judge agreed with Mr. Sheridan that the U.S. Trustee had failed to establish sufficient grounds for its argument, stating “she had never seen a motion to dismiss like this” and empathizing with the young couple’s difficult circumstances of using chapter 7 just to be able to pay a burdensome student loan debt without fear of garnishment from other creditors. Another fresh start secured by Minneapolis Bankruptcy Lawyer, Michael Sheridan for his clients.

Share this Article