What is an abusive bankruptcy filing? When does a bankruptcy court consider a debtor’s Chapter 7 filing to be an abuse of the bankruptcy process?

A bankruptcy court will look at whether the person filing the bankruptcy acted in bad faith and at the entire circumstances surrounding the debtor’s financial situation.

A Florida court addressed this issue in a recent case. Not only were the debtors living what the court considered to be “an extravagant lifestyle” both before and after their filing, but they also failed to disclose all relevant information in their bankruptcy filing.

Among other factors, the court found the following to be especially significant – the debtors:
1) Initiated a lease on a luxury car – an Infiniti – the month before filing for bankruptcy;
2) Timed the filing to be right before a significant raise in income;
3) Had excessive withholding of their Federal taxes and increased 401(k) contributions;
4) Transferred property and/or money right before and after filing for bankruptcy;
5) Tried to hide cash from the bankruptcy court; and
6) Spent a lot of money on day trading, brokerage fees, restaurants, and non-essential purchases.

The court also examined whether the debtors were able to pay their unsecured debts. With disposable income of over $3000 per month left over after monthly expenses, the court found that yes, these debtors would be able to pay back about 54% of their unsecured debts over about 60 months.

Primarily because the debtors could repay a significant portion of their unsecured debt, the court found that it would be an abuse of Chapter 7 to give them relief under that chapter. But the court took other factors into account, such as:
1) One of the debtors was experienced in financial matters and they both had experience with Chapter 7;
2) The debtors timed their filing to take place just before a raise in income;
3) They transferred money and/or property before and after their bankruptcy filing;
4) They made no effort to reduce expenses and live “a luxurious lifestyle”;
5) They decided to keep and pay on 3 luxury vehicles that had no equity;
6) They make large mortgage payments on a house that has no equity;
7) The debtors increased their monthly vehicle obligations right before filing;
8) The debtors provide a rent-free home to two relatives, whose utilities they also pay; and
9) Their bankruptcy filing was not the result of an unexpected or catastrophic event.

The debtors’ Chapter 7 case was dismissed and they were given time to convert their case to an appropriate chapter of the Bankruptcy Code.

The factors listed above, taken together, are enough to probably make any bankruptcy court sit up and take notice – in a bad way. The existence of just one of these factors might not be enough to lead to dismissal of a Chapter 7 case, but it really depends on the individual facts of each case.

This post is based on In re Ricci, Case No. 6:09-bk-00914-ABB, (Bankr., Middle Dist. Fla., Orlando Div. 2009).

If you are looking for a New Jersey bankruptcy lawyer, please call (201) 676-0722.

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