03 Oct Bankruptcy And The Future Of The Economic Unit
When the bankruptcy laws were changed in 2005, Congress added several new sections to the Bankruptcy Code, 11 U.S.C. 707(b)(3) is one such section. This section refers to the totality of the circumstances when a Bankruptcy Court is considering a motion to dismiss pursuant to 11 U.S.C. 707(b)(1). This blog is not intended to be an exhaustive analysis of these bankruptcy code sections, but is intended to promote questions about how far a Court will go in analyzing the totality of the circumstances and where is the future of this section heading.
Recently, the dismissal of Debtor, Susan Kulakowski’s Chapter 7 bankruptcy was affirmed by the United States District Court, Middle District of Florida. 8:11-cv-02323-MSS. In this case, the Court went to a higher level of analysis to determine that the filing spouse and non-filing spouse created an economic unit, and therefore, the entire amount of the non-filing spouse’s income should be included in means test. While I believe that the case was correctly decided, it did get me thinking about other ways the economic unit theory could be applied.
The economic unit theory is not in the bankruptcy code. However, it’s applicability to bankruptcy cases is clear. If you think about it for a few minutes, each marriage creates an economic unit if the spouses share a home, cars, and expenses. A married individual can file bankruptcy alone or jointly with their spouse. This has always been the case, and should always be. In a case where only one spouse files for bankruptcy protection, the Debtor’s attorney, trustee and Court must look at the dynamics of each and every case to determine who pays for what.
As crazy as this may sound, I have seen clients who share everything, somethings and nothing. In one case several years ago, I had a client whose non-filing spouse threatened divorce before they would turnover financial information. So, it is relatively safe to say that each economic unit in each bankruptcy case is different. Logically, even though the case above was a Chapter 7, this theory could also extend to Chapter 13 cases as well.
What if we extend this analysis to the married couple who has to contribute to their children’ s college education because of the regulations imposed by FAFSA. In other words, let’s say that the couple have children in college and according to FAFSA the family must contribute $500 per month toward the child’s education. Is this contribution an allowable deduction on the means test or a newly created special circumstance? Good Question. I’m sure there are other marital situations where a contribution could be seen as an abuse as well.
Next, I fear that the logic surrounding this case may lead to higher divorce rates. In the case above, the Husband’s income was substantially greater than the wife’s, yet she held the majority of the debt. They were still married when she filed for bankruptcy protection. What if they were to get divorced? Would a divorce kill the economic unit theory analysis? This question remains unanswered.
I’m sure that the bankruptcy laws and the 2005 amendment to the bankruptcy code were never intended to increase the divorce rate. I think it is well known that a percentage of the divorce rate or a certain number of divorces can be directly related to money issues. Now, I cannot help but think that we are adding one more straw to the camel’s back.
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