Business Bankruptcy Debtor Denied a Discharge Under Section 707(a) for Ability to Pay

21 Jan Business Bankruptcy Debtor Denied a Discharge Under Section 707(a) for Ability to Pay

A Michigan bankruptcy court recently took the unusual step of denying a discharge under bankruptcy code section 707(a) to a debtor whose debts were primarly business debts, based upon the court’s determination that the debtor could repay a portion of his debts in a chapter 11 reorganization case. In re Rahim, 2010 WL 5128944 (Bky.E.D.Mich. Dec. 16, 2010),

Section 707(b) is the usual provision relied upon by bankruptcy courts to deny a chapter 7 discharge for ability to repay all or part ofone’s debts in a chapter 13 case. Because section 707(b) expressly does not apply to debtors whose debts are primarly business debts, most lawyers have assumed that business chapter 7 debtors are immune from motions to dismiss based upon ability to repay a portion of the debts. What makes this case unusual is that the court relied upon section 707(a) to bring about the dismissal of the business debtor’s chapter 7 case.

In re Rahim involved married chapter 7 debtors who earned in excess of $509,000 annually from a medical practice. Their unsecured debts consisted mainly of $6 million in guarantees arising from failed Florida real estate investments. The debtors’ budget showed monthly expenses of $15,714 for their home mortgage, nearly $5,000 for a second home in Florida, over $2,000 for luxury motor vehicle payments, $4,575 for private school tuition, and $540 for care for the debtors’ elderly mother. The court characterized these expenses as “extraordinary.”

The chapter 7 trustee’s lawyer testified that over $200,000 in assets would be administered for creditors if the case were allowed to proceed under chapter 7 rather than being dismissed. However, the court noted that much more would be paid to creditors if the debtors converted the case to achapter 11 reorganization.

The court held that given the debtors’ income level and extravagant lifestyle, they simply were not in need of a chapter 7 discharge. Therefore, section 707(a) applied, and the fact that the debts were primarly business debts was of no consequence. The case was therefore dismissed for “cause” under section 707(a).

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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