The U.S. Court of Appeals, First Circuit, ruled recently that a chapter 7 bankruptcy debtor could not obtain dismissal of his case by citing his own failure to file payment advices, or other financial disclosure information required by section 521(a), in an effort to avoid losing an asset to the chapter 7 trustee.
In re Acosta-Rivera, 2009 WL 400394 (1st Cir. Feb. 19, 2009), held that the automatic dismissal provisions of section 521(i)(1) granted authority to the bankruptcy court to waive dismissal where the required financial disclosures had become irrelevant or extraneous to the proceedings.
The case involved a joint chapter 13 proceeding in which the debtors had failed to list in their schedules a valuable employment discrimination lawsuit owned by the husband. This lawsuit had been pending in the courts for years, and it had been the subject of two appeals to the Puerto Rico Supreme Court. Six months after the filing of the case, after converting their case to a chapter 7, and in their third set of amended schedules, the debtors finally revealed the existence of the lawsuit. The amended schedules noted only that the lawsuit’s value was “unknown.” After several more amendments to the schedules, the debtors valued the lawsuit at $2,700,000 and claimed an exemption of $350,000.
The chapter 7 trustee obtained approval from the bankruptcy court to settle the lawsuit for $600,000, a sum sufficient to pay all creditors’ claims in full, with the debtors to receive nearly $400,000 less mortgage arrearages. However, the debtors desired to fully litigate the lawsuit in an effort to obtain a larger recovery. To that end, they filed a motion seeking dismissal of their chapter 7 case, on the ground that they had failed to file the section 521 financial disclosures within 45 days of the commencement of the bankruptcy case. After dismissal, the debtors apparently hoped to reassert ownership of the lawsuit from the hands of the chapter 7 trustee; the debtors would then be free to seek a larger recovery than that sought by the trustee.
The appeals court rejected this strategy, ruling that the bankruptcy court had been correct in denying the debtors’ dismissal request. Allowing debtors to seek dismissal based upon failure to file the section 521(a) financial disclosures would give “debtors with something to hide” an “escape hatch to be opened as needed.” The appeals court observed that this could lead to abuse of the bankruptcy process. Bankruptcy courts possessed the discretion to waive section 521′s financial discosure requirements, where the information was no longer relevant to the proceedings, the appeals court held. Therefore, the debtors’ dismissal motion had been properly denied.
This decision, if followed in other appeals court districts, will foreclose a canny bankruptcy debtor from using section 521 to obtain dismissal of a chapter 7 case in which the debtor unexpectedly finds that an asset is to be lost to the chapter 7 trustee.
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Last modified: February 20, 2013