Bankruptcy Means Test,
Part 4:
Bad Faith or the
Totality of Circumstances as Abuse of Chapter 7
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This article was last revised June 2008
Merely defeating the presumption of abuse under
§707 (b)(2) is not enough. Passing the means test is not a “safe harbor” against
scrutiny of debtors’ schedules; the court is also to consider “bad faith” or the
“totality of circumstances” in the determination of whether there has been an
abuse of Chapter 7.
Therefore, debtors who “pass” the means test but
have substantial net income on their Income and Expense Schedules (Schedules I
and J) remain at risk of being forced into Chapter 13 or having their case
dismissed. This is true for both above-median income debtors and below-median
income debtors.
The following cases have particularly caught my
attention.
Consideration of Post-Petition Changes in Income
In re Quintana, 4-05-BK-08497, May 3, 2006:
Judge Marlar granted the U.S. Trustee’s Motion to Dismiss under 707(b)(3) a
ruling that, under its “totality of circumstances provision,” the debtor was
abusing the provisions of Chapter 7. Debtor’s means test reflects no
“presumption of abuse.” However, six days after he filed, he resumed work
following a lay-off due to a four-month lockout; once back to work, the
difference between his income and his expenses was a net $1,500, and he would be
able to fund in excess of $94,000 through a five-year Chapter 13 plan and pay in
full his $55,000 in scheduled unsecured debt.
Judge Marlar’s decision is very similar to that in
In re Pak, 343 B.R. 239 (Bankr. N.D. Cal. 2006) decided 15 days later.
See also In re Henebury, 361 B.R. 595 (Bankr.S.D.Fla.) [Wife’s employment
as teacher four days after petition for relief filed.]
Other Cases
In re Ashraf, 367 B.R. 151 (Bankr.D.Ariz.
2007): The Court found that the debtors’ failure to list significant information
in their schedules, including undisclosed debts and income, “combined with the
debtors’ timing to file a bankruptcy petition shortly after a judgment has been
obtained by one of their creditors, reflect that, based on the ‘totality of the
circumstances,’ the debtors’ petition must be dismissed as an abuse of Chapter
7.”
In re Mitchell, 357 B.R. 142
(Bkrtcy.C.D.Cal. 2006) involves a debtor who had been unemployed for nearly two
years pre-petition but had spent over $29,000 on “dining out,” “women’s fashions
and accessories,” “electronics and personal property,” and “beauty treatments
and related products” during the same period. Debtor was found to have made her
filing in bad faith and, additionally, was barred from filing another Chapter 7
petition for 180 days.
In re James, 345 BR 664 (Bankr. N.D. Iowa
2006): The Court granted a 707(b)(3) Motion to Dismiss filed by the U.S. Trustee
for “abuse” where the debtor spent $13,000 of salary bonuses on luxury purchases
within the six months prior to filing, rather than paying any debts.
In re Richie, 353 BR 569 ( B.E.D.Wis. 2006):
The judge found abuse because a below-median-income out-of-work debtor was not
treating her creditors fairly by filing for bankruptcy. Debtor had just received
a master’s degree in outdoor therapeutic recreation administration. With the
degree, she was qualified to work with at-risk youth or disabled individuals in
a camp or clinical setting. The Court found that she pursued employment
opportunities only in her chosen field and only in geographic area in which she
lived. In granting the U.S. Trustee’s Motion to Dismiss, the Court viewed the
“undue hardship” analysis in student loan cases as instructive.
“The Court finds that a debtor’s failure to seek
any but very limited – possibly non-existent – employment, and thus her failure
to make a real attempt to pay something to her creditors before seeking
discharge of her debts, is not behavior that treats her creditors fairly. It is
not behavior that indicates that the debtor has tried her best to repay her
debts before throwing in the towel and seeking Chapter 7 discharge as a last
resort.” 353 BR at p. 580. |
