MEANS TEST MISSTATEMENTS MAY BE PROOF OF FRAUDULENT INTENT

The means test is the IRS based form of calculating disposable income in bankruptcy to determine if the case should be a Chapter 7 or Chapter 13; and if a Chapter 13, how long the commitment period should be. In addition to the means test, there is the schedule I which is now in the new very detailed format which came out last month that calculates debtor’s gross and net monthly income, and schedule J which is also in the new very detailed format that calculates debtor’s total monthly expense. Although the means test and the combined I and J calculate debtor’s disposable monthly income, the end result is not always the same amount. For instance, the means test may yield a negative disposable income, while I and J may be positive $500 a month for the same debtor! In this situation, debtor is well-advised to file a Chapter 13, instead of a Chapter 7, because the fact that there is disposable income in I and J may lead to a US Trustee motion to dismiss your Chapter 7 case, or convert to Chapter 13 based on bad faith if the disposable income is enough to pay at least say, 10% of your unsecured debt.

Be careful in calculating your means test because misstatements in the means test may be deemed a false oath by the court. And a false oath can lead to a denial of discharge!

In Re Gandy, when the debtor filed for Chapter 13 relief, he said he was single, had two dependents, a 48-year-old “Live-in Wife/Girlfriend,” a disabled 27-year-old son, and worked as a car salesman with a monthly income of $2,801. According to the means test he had a current monthly income of $4,333, which was below the applicable median income. The debtor subsequently filed an amended Schedule I in which he changed his marital status from single to married but made no other revisions. Two years after he filed for bankruptcy, the debtor converted his case to Chapter 7 in response to the trustee’s motion to dismiss. With the conversion to Chapter 7, debtor said he was unmarried, and had a monthly income of $4,333. The plaintiff filed a complaint against the debtor asserting that his discharge should be denied because he knowingly and fraudulently filed a false Chapter 13 statement of current monthly income, a false Chapter 7 statement of current monthly income and a false schedule I. The debtor responded by filing amended Chapter 13 schedules, which showed a current monthly income of $4,689, which resulted in annualized figure greater than the applicable median income. This doesn’t pass the smell test at this point.

Debtor then filed an answer denying the allegations in the complaint. After filing his answer, the debtor filed amended Chapter 7 schedules showing a current monthly income of $4,689, and total deductions of $5,058.02. The bankruptcy court said the plaintiff’s contention with respect to Section 727(a)(4) was on the statements made in the means test forms under Chapter 13 and Chapter 7. Both of these documents, executed under penalty of perjury, showed an annual income less than the applicable median income when the debtor’s income was actually in excess of the applicable median. When questioned about these discrepancies, debtor blamed them on climate change and Obamacare and on the fact that his attorney intended to file the debtor’s case on January 31, 2012, but it was not filed until February 3, 2012. “This explanation, however, does not adequately negate the clear misstatement in the defendant’s Chapter 13 means test understating his monthly income,” the court said. “Clearly, based upon the defendant’s own pay advices, the $4,333 reflected in the chapter 13 means test and again in the chapter 7 means test is not an accurate figure, and the defendant’s testimony that the 3 days delay in filing his bankruptcy  schedules cause a mathematical error is not plausible and is clearly incorrect.” The court said there were other discrepancies in the means test forms, the combined effect of which was to lead the court to conclude that the debtor made false oaths with fraudulent intent.

“I give my followers eternal life, and they shall never perish; neither shall anyone snatch them out of my hand.” – John 10:28.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years.  He specializes in bankruptcy, business and civil litigation and has handled more than five thousand successful bankruptcy cases in California.  He speaks Mandarin and Fujien and looks forward to discussing your case with you personally.  Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave, Mailstop 58, Bldg A-1 Suite 1125, Alhambra, CA 91803.