Dismissal of Chapter 7 Bankruptcies Based Upon Totality of Circumstances

Palm Beach County Bar Association Bulletin, February 2009

Section §707 of the bankruptcy code authorizes dismissal or conversion of a chapter 7 case under certain circumstances. Under section 707(a), dismissal is authorized only for cause, such as unreasonable delay by the debtor that is prejudicial to creditors or nonpayment of any fees or charges required under chapter 123 of title 28. Under section 707(b), the bankruptcy court is authorized to dismiss or convert a case filed by individual consumer debtors if the court finds that granting a discharge would be an abuse of chapter 7 of the bankruptcy code. Section 707(b) sets forth a complex formula to determine whether a chapter 7 case is presumed to be an abuse of the bankruptcy system and, therefore, subject to dismissal. However, even if there is no presumption of abuse, cases may still be subject to dismissal based upon one of two criteria set forth in Section 707(b)(3) ;. This subsection allows a bankruptcy court to dismiss an individual consumer chapter 7 bankruptcy if the debtor filed the bankruptcy in bad faith or if the totality of the circumstances of the debtor’s financial situation demonstrates abuse of chapter 7. This article focuses on two recent cases out of the Northern District of Ohio bankruptcy court which address dismissal of a chapter 7 bankruptcy based upon a totality of the circumstances analysis.

In In re Violanti, 2008WL5211006 (Bankr. N.D. Ohio), the court found the debtor’s conduct abusive and dismissed her chapter 7 case based on the totality of circumstances of her financial condition. In Violanti, the debtor had an annual income in excess of $100,000. Her financial difficulties were precipitated in large part by the purchase of an expensive home, less than one year prior to her bankruptcy filing, that required the commitment of more than 40% of her available net monthly income. The debtor also purchased a $32,000 new vehicle in the months immediately preceding the petition date. The court found that if the debtor tightened her belt, she would have had the ability to pay a significant amount of her unsecured debt out of her future income.

In In re Brennaman, 2008WL 5211019 (Bankr. N.D. Ohio), the court dismissed a chapter 7 bankruptcy based on the totality of circumstances of the debtors’ financial condition. In Brennaman, the debtors’ annual household income was in excess of $125,000. The debtors’ prepetition conduct included purchasing a new motor vehicle and entering into a lease for a second vehicle, at a monthly cost of $654 and $624.03 respectively. The court found that the debtors enjoyed significant disposable income to make payments on their debts after eliminating or reducing unnecessary or excessive expenditures.

In addition to considering a debtor’s pre-bankruptcy circumstances, as the court did in In re Violanti and In re Brennaman, bankruptcy practitioners should be aware that a debtor’s post petition circumstances are relevant as well. In In re Henebury, 361 B.R. 595(Bankr. S.D. Fla. 2007) and In re Asdrubal Jose and Lourdes Josefa Parada, 07-15938-BKC-LMI, Chief Bankruptcy Judge Hyman and Bankruptcy Judge Isicoff held that a court may consider relevant post-petition events in analyzing the totality of the circumstances.

There is no bright line rule for bankruptcy practitioners to look to in determining if a potential consumer debtor’s bankruptcy may be dismissed based upon the totality of the circumstances of their financial condition. However, areas of concern should include whether the consumer debtor has the ability to repay their debts out of future income and the impact of a debtor’s voluntary increase in expenses when the debtor knows or should know that they are insolvent and/or are in need of bankruptcy protection.