Michigan Bankruptcy Blog Banner

Michigan Bankruptcy Blog

Eastern District: Business Debtors in Chapter 7 Must Tighten Their Belts, Too
Posted by:

In re Rahim, Bankr. E.D. Mich., Dec. 16, 2010 (Case No. 10-57577-R, Hon. Steven Rhodes).

When one thinks of Chapter 7 bankruptcy cases, the low-income consumer debtor who is overwhelmed by debt often comes to mind. But individuals whose debts are primarily "non-consumer" debts – usually business debts – may also qualify for Chapter 7 relief, even if they cannot pass the "means test" required for consumer debtors under BAPCPA. Because business debtors do not have to pass the means test, their incomes may be significantly higher than what one might expect to see in a Chapter 7 case. However, at least one Michigan bankruptcy court is requiring high-income business debtors to tighten their belts when they seek Chapter 7 relief.

In In re Rahim, the married debtors, both practicing physicians, earned a startlingly high income. Despite having filed Chapter 7, the debtors' annual income exceeded $500,000, and their expenses included sizeable mortgage payments on their home, vacation home, and rental home, plus payments on three luxury vehicles. Their debts included numerous mortgages and personal guaranty liability arising out of failed real estate ventures.

Two creditors moved to dismiss the bankruptcy case "for cause" under Section 707(a), asserting that the debtors could repay creditors if they reduced their living expenses. The debtors objected and argued that only a consumer case can be dismissed based on ability to pay debts. The debtors pointed out that Section 707(b), which allows dismissal of a consumer case if a debtor's income is too high, did not apply to their case. The debtors then argued that Section 707(a) – which lists unreasonable delay, failure to pay fees, and failure to file schedules and other information as grounds for dismissal – does not authorize dismissal based on ability to pay.

The Bankruptcy Court dismissed the case for cause under Section 707(a). Reasoning that Chapter 7 is not designed to protect the "dishonest or non-needy debtor," the court found that the debtors did not need Chapter 7 relief and that granting them relief would be "extraordinarily unfair to their creditors." Id. at *5. The court emphasized that the debtors had taken no steps to "tighten their belts" – an analogy typically used in Section 707(b) consumer cases.

The court specifically rejected the debtors' argument that Section 707(a) does not allow dismissal based on ability to pay. Instead, the court concluded that "[n]othing in the bankruptcy code suggests that a debtor who has primarily business debts but who can pay those debts is entitled to Chapter 7 relief." Id. at *10. The court held that the examples of "cause" listed in Section 707(a) are not exclusive and that under Sixth Circuit precedent, lack of good faith constitutes "cause" for dismissal. In this case, the court found that the debtors' "extravagant and lavish" lifestyle, on its own, showed a lack of good faith that warranted dismissal.

The debtors have claimed an appeal to the district court. Michigan debtors' attorneys should take note that even a business debtor's income and lifestyle may be subject to scrutiny if a Section 707(a) motion is filed.

Authors

Categories

Recent Posts

Jump to Page

Foster Swift Collins & Smith PC Cookie Preference Center

Your Privacy

When you visit our website, we use cookies on your browser to collect information. The information collected might relate to you, your preferences, or your device, and is mostly used to make the site work as you expect it to and to provide a more personalized web experience. For more information about how we use Cookies, please see our Privacy Policy.

Strictly Necessary Cookies

Always Active

Necessary cookies enable core functionality such as security, network management, and accessibility. These cookies may only be disabled by changing your browser settings, but this may affect how the website functions.

Functional Cookies

Always Active

Some functions of the site require remembering user choices, for example your cookie preference, or keyword search highlighting. These do not store any personal information.

Form Submissions

Always Active

When submitting your data, for example on a contact form or event registration, a cookie might be used to monitor the state of your submission across pages.

Performance Cookies

Performance cookies help us improve our website by collecting and reporting information on its usage. We access and process information from these cookies at an aggregate level.

Powered by Firmseek