Chapter 7 of the Bankruptcy Code offers great relief: a fast track away from all debt that is payable. My clients are often surprised by the scope and speed of the Chapter 7 process, as the vast majority of cases are successfully closed, with admission releases, less than 120 days after filing.
But there is a limit to this help: test the means. If your income is above the median for your state and you don’t meet statutory thresholds even after completing a “long form,” the door to Chapter 7 will be closed to you.
A notable exception to this rule is that debtors who owe mostly non-consumer debt do not have to fill out lengthy forms, even if their income is well above average. The Bankruptcy Code tells us that if your debt is not primarily consumer debt, there will be no “presumption of abuse” that the debtor needs to overcome in order to enjoy the benefits of Chapter 7. The definition of consumer debt is:
Debt incurred by individuals primarily for personal, family, or household needs.
Taxes, real estate investing gone bad, and business debt are all non-consumer debt. So if you file for bankruptcy to get out of a defaulted real estate loan when the property is significantly less than what it owes on the mortgage, and you don’t owe much on your credit card or home loan, then you win. no need to fill out long forms.
But that’s not necessarily the end of the story. Every bankruptcy case requires the debtor to file in good faith. If the bankruptcy judge finds that a case was not brought in good faith, the case can be dismissed.
The terms “good faith” and “bad faith” are not defined in the Bankruptcy Code but courts have long disapproved of debtors flaunting their wealth:
The ability to pay debts, lead an expansive lifestyle beyond his means, and choose a major creditor not to pay are all factors that lead to bad faith dismissal.
Courts may find a lack of good faith when debtors fail to make truthful and complete disclosures.
A number of courts have dismissed Chapter 7 cases where a debtor appears to be living in luxury while making no legitimate effort to pay his debts.
Evidence of an extravagant lifestyle might be keeping a vacation home, driving a luxury vehicle, withdrawing from a sizable pension, or even sending your child to expensive private schools. When a debtor tries to get rid of hundreds of thousands or even millions of dollars in business debt, bankruptcy courts will, if asked, consider whether the debtor made a legitimate effort to reduce their lifestyle.
If the court finds that the debtor has failed to do so, the debtor may consequently be forced into Chapter 13 or, if the debt exceeds the statutory limit, Chapter 11. Bringing a Chapter 11 case can be disastrous for the individual, due to administrative costs (filing and attorney fees) ) is much higher and creditors have a greater voice in dealing with their claims.
The trend in bankruptcy courts across the country is that if a debtor is going to ask a creditor to suffer for not paying his debts, the debtor will also need to bear the pain. Refusal to shoulder that burden very likely leads to a denial of Chapter 7 assistance.
