Clients' Chapter 7 Bankruptcy Dismissed For "Abuse" and Extravagant Lifestyle

People who pass the means test, or are exempt from the means test, may still have their Chapter 7 bankruptcy dismissed if their filing is deemed "abusive." The United States Trustee (different from the Chapter 7 trustee) may file motions to dismiss a bankruptcy if the U.S. Trustee believes the bankruptcy abuses the bankruptcy law. The bankruptcy court evaluates U.S. Trustee abuse challenges under the totality of circumstances involved in the bankruptcy filing. In layman’s terms, if the court finds that the debtor can afford to pay a substantial portion of his debt and is abusing the system to wipe out these debts the court can dismiss the Chapter 7 bankruptcy.

Last week one of my own clients had their case dismissed because the judge found their joint filing to be an abuse of Chapter 7 bankruptcy. The judge wrote a 32 page opinion. The decision is a thorough explanation and detailed application of the abuse standard and should help future bankruptcy debtors understand what a Trustee and bankruptcy judge will find to be an abuse of Chapter 7 bankruptcy.

Abuse is determined on a case by case analysis. Here are some of the factors this judge found persuasive in dismissing my clients’ joint Chapter 7 filing:

1. The debtors’ family income is over $200,000 per year;

2. The debtors’ timed their filing just before an a significant raise which tripled their monthly income.

3. The debtors were living in a very expensive house with no equity.

4. The debtors acquired a luxury car pre-petition with a $933 monthly lease payment.

5. They are attempting to maintain a second $26,000 car which has a $65,000 car loan.

6. The debtors are subsidizing living expenses of relatives.

7. The debtors continue to spend a significant portion of income on investments, restaurants, and non-essential retail purchase.

8. And the debtors’ testimony was not credible.

The court stated that the debtors’ bankruptcy was caused by an extravagant lifestyle which they are attempting to maintain after filing to the detriment of their creditors. The case is 6:09-bk-00914-ABB, Middle District, Orlando Division.

I have explained to many clients that rich people do not do well in bankruptcy court. Trustees and judges are not sympathetic to those debtors whose lifestyle is better and more indulgent than the judge’s and Trustee’s own standards of living. The new bankruptcy law was intended to stop people from sustaining luxury at the expense of banks and other creditors. This case illustrates what bankruptcy courts can and will do to prevent well-off debtors from wiping out all their debts.

Many people with high incomes also have very high and unpayable debts in today’s recession. Well-intentioned high income debtors can find themselves insolvent and unable to service their debts. Bankruptcy is not a good solution for such debtors. The high income or high net worth debtor can use Florida’s homestead laws and other statutory exemptions to protect assets with equity and then negotiate a low settlement with their most aggressive creditors.

posted by Jonathan Alper, bankruptcy and asset protection lawyer, Orlando, Florida