Today’s post picks up on the explanation started in part one and continues to explore the difference between consumer debt and tax debt. Keith
Once it is determined that a debtor has “primarily consumer debt,” then the “means test” will apply and a mathematical calculation will be completed to determine if the presumption of “abuse” arises. See 11 U.S.C. § 707(b). The calculation begins with the debtor’s current monthly income (CMI) from which allowable expenses are deducted. The result determines if the presumption applies. See 11 U.S.C. § 707(b)(2)(A). The Court presumes “abuse” if the debtor’s disposable monthly income, as adjusted for inflation, exceeds the lesser of (i) 25 percent of the debtor’s nonpriority unsecured claims, or $6,000, whichever is greater; or (2) $10,000. See Id. This presumption is rebuttable. See 11 U.S.C. § 707(b)(2)(B).
In situations where a debtor’s debts are “primarily consumer debts” but the “presumption of abuse” under 11 U.S.C. § 707(b)(1) does not arise because the results of the “means test” do not implicate the presumption, or in cases where the presumption is otherwise rebutted, the Court will determine if the granting of relief is an abuse of the Chapter 7 provisions by evaluating (A) whether the debtor filed their Bankruptcy petition in bad faith, or (B) will apply a “totality of the circumstances” test (including whether the debtor seeks to reject a personal services contract and the financial need for such rejection as sought by the debtor) to determine if the debtor’s financial situation demonstrates abuse. See 11 U.S.C. § 707(b)(3).
As outlined above, the “means test” applies to debts that are “primarily consumer debts” and the mathematical results of the test determine if the presumption of abuse arises, which may result in either dismissal of the Chapter 7 case, or, with the consent of the debtor, conversion to a Chapter 13 case. Tax debts, however, are not considered consumer debts either under 11 U.S.C. § 101(8) or, as discussed above, under case law. Therefore, the “means test” would not apply to determine if discharging debts that are “primarily tax debts” is an “abuse” of the Chapter 7 provisions.
Furthermore, 11 U.S.C. § 707(b)(3) would not apply either. Section 707(b)(3) states, in pertinent part, “[i]n considering under paragraph [(b)](1) whether the granting of relief would be an abuse of the provisions of [Chapter 7] in a case in which the presumption in paragraph [(b)](2)(A)(i) does not arise or is rebutted …” (emphasis added), and therefore only applies to the situation indicated therein. Specifically, paragraph (b)(1) only applies to situations where a debtor’s debts are “primarily consumer debts” which tax debts are not, and paragraph (b)(2)(A)(i) is the “means test” for determining if granting a Chapter 7 discharge to debtors with “primarily consumer debts” would constitute an abuse of the Chapter 7 provisions.
Section 707(b)(3) therefore only applies when the presumption of abuse under paragraph (b)(2)(A)(i) “does not arise or is rebutted” with regard to paragraph (b)(1), i.e.,debts that are “primarily consumer debts.” Since tax debts are not “primarily consumer debts” the alternative tests for determining whether a discharge of debts that are “primarily consumer debts” would constitute an abuse of the provisions under Chapter 7 are not applicable. As such, the Court shall not address whether the debtor filed in “bad faith,” or consider the totality of the debtor’s circumstances under 11 U.S.C. § 707(b)(3) in determining whether a debtor is entitled to a Chapter 7 discharge for debts that are “primarily tax debts”.
Therefore, in summary, section 707(b) of the Code, in its entirety, applies only to debts that are “primarily consumer debts.” The Courts have not applied section 707(b) to situations where the debtor’s debts consist of debts that are not “primarily consumer debts.” Thus, when a debtor files for Chapter 7 seeking to discharge debt consisting “primarily” of tax debt, the Courts will not apply section 707(b) to dismiss, or convert, the Chapter 7 case. This is true even if the debtor has disposable income that could be used to pay all or part of the debtor’s tax debt. Under the Code and corresponding case law, section 707(b) is only applicable to situations where a debtor seeks discharge of debts consisting “primarily [of] consumer debts.”
However, although a debtor who has debt that consists “primarily” of tax debt is not subject to section 707(b) of the Code, the debtor is still subject to dismissal under section 707(a). The statutory language of section 707(a) states that a Court may dismiss a Chapter 7 case only after providing notice and a hearing to the debtor and then only for “cause.” The phrase “for cause” is not defined in the Code but section 707(a) does lists three specific situations where “cause” may be found. “Cause” may be found when (1) there is unreasonable delay by the debtor that is prejudicial to creditors; (2) a debtor fails to pay any fees or charges required under Chapter 123 of title 28; and (3) upon motion by the United States Trustee, the debtor fails to file, within fifteen (15) days of filing the petition commencing their Chapter 7 proceeding, or within the time allowed if additional time is granted by the Court, the information required in section 521(a)(1).
The Court in Wilk Auslander LLP v. Murray (In re Murray), 900 F.3d 53, 58 (2d Cir. 2018) indicated that the three examples in section 707(a) are “illustrative, not exhaustive.” Accordingly, the Court in In re Dinova, 212 B.R. 437, 442 (B.A.P. 2nd Cir. 1997), stated that Courts are required to “engage in a case-by-case analysis in order to determine what constitutes ‘cause’ sufficient to warrant dismissal.” The Court in In re Smith, 507 F.3d 64, 71 (2d Cir. 2007) stated that the Court shall “determine[] whether cause exists by looking at whether dismissal would be in the best interest of all parties.” However, the Court in In re Aiello, 428 B.R. 296 (Bankr. E.D.N.Y. 2010), indicated that a dismissal under “section 707(a) should be limited to extreme misconduct falling outside the purview of more specific Bankruptcy Code provisions.” Therefore, although section 707(a) does not specifically state that the Court can dismiss a Chapter 7 case for either “bad faith” or based upon the “totality of the circumstances,” the Court has held that “bad faith” constitutes “cause” under section 707(a), and that certain circumstances, based upon the “totality of the circumstances,” may also constitute “cause” under section 707(a). As such, if a debtor files a Chapter 7 case in “bad faith” or if the “totality of the circumstances” determines that a dismissal is warranted, the Court may dismiss the debtor’s Chapter 7 case.
The Court in Piazza v. Nueterra Healthcare Physical Therapy, LLC, 719 F.3d 1253, 1266 (11th Cir. 2013), addressed the issue of whether prepetition “bad faith” constitutes “cause” based upon the “totality of the [debtor’s] circumstances.” The debtor, Piazza, had non-consumer debt that arose from a state court judgment that was entered against him for failure to pay a business guarantee. The creditor, Nueterra, had attempted to collect the debt unsuccessfully for more than two years. The state court became frustrated with Piazza’s obstinately uncooperative attitude and demanded that Piazza produce documents by October 9, 2010, explaining why he had failed to pay this debt. The court indicated that failure to produce the documents would subject Piazza to adverse presumptions and subsequent hearings. Piazza thereafter filed his Bankruptcy petition on October 8, 2010, the eve before he was to produce the required documentation. The Bankruptcy Court determined that Piazza acted in bad faith, based upon the totality of the circumstances, and dismissed his Chapter 7 bankruptcy case.
In determining whether a debtor acted in “bad faith,” therefore permitting dismissal of the Chapter 7 case under section 707(a) of the Code, the Piazza Court performed a “totality of the circumstances test” and determined that the finding of “‘bad faith’ should be guided by a list of fifteen non-dispositive factors.” “Bad faith” can be found when: (i) the debtor reduced his creditors to a single creditor shortly before the petition date; (ii) the debtor made no life-style adjustments or continued living a lavish life-style; (iii) the debtor filed the case in response to a judgment, pending litigation, or collection action; (iv) there is an intent to avoid a large, single debt; (v) the debtor made no effort to repay his debts; (vi) the unfairness of the use of Chapter 7; (vii) the debtor has sufficient resources to pay his debts; (viii) the debtor is paying debts of insiders; (ix) the schedules inflate expenses to disguise financial well-being; (x) the debtor transferred assets; (xi) the debtor is over-utilizing the protections of the Bankruptcy Code to the unconscionable detriment of creditors; (xii) the debtor employed a deliberate and persistent pattern of evading a single major creditor; (xiii) the debtor failed to make candid and full disclosure; (xiv) the debtor’s debts are modest in relation to his assets and income; and (xv) there are multiple bankruptcy filings or other procedural “gymnastics.”
When the Court finds that “cause” is present under section 707(a), the statue permits dismissal of the Chapter 7 bankruptcy case. Unlike section 707(b), which allows a debtor to consent to convert the Chapter 7 bankruptcy case to a Chapter 11 or Chapter 13 bankruptcy case, section 707(a) does not provide such an option. Section 707(a) only provides for dismissal of the Chapter 7 case, at the discretion of the Court (“[t]he court may dismiss a case under [Chapter 7] only after notice and a hearing and only for cause”).
Thus, in addressing the situation where a debtor files a Chapter 7 bankruptcy case seeking to discharge debt consisting “primarily of tax debt,” and the debtor has the means to pay some or all of the tax debt, a Court may consider whether, based on the “totality of the circumstances test,” the debtor was acting in “bad faith” at the time the debtor filed his Chapter 7 petition. If the Court determines that the debtor was acting in “bad faith,” based upon the factors outlined in Piazza, the Court may find that the “bad faith” constitutes “cause” under section 707(a) and may dismiss the debtor’s Chapter 7 case.
Once a Chapter 7 case is dismissed for “cause” the question arises as to whether the debtor can file another bankruptcy case under another bankruptcy chapter such as under Chapter 13. Section 349 indicates that a debtor is not prejudiced from filing a subsequent petition except for under section 109(g). Section 109(g) provides, in pertinent part, that an individual may not file a subsequent case for 180 days after dismissal if the case was dismissed because the debtor failed to comply with court orders or make a required appearance to prosecute the case, or if the debtor voluntarily dismissed the case after the creditor filed a motion to lift the automatic stay. When a Chapter 7 case is dismissed the automatic stay terminates, and creditors are free to move forward with any collection proceedings.
Another consequence for a debtor who files a subsequent bankruptcy within one year after having a Chapter 7 case dismissed, other than under section 707(b), is the automatic stay under section 362(a) terminates on the 30th day with respect to any action taken with respect to a debt or property securing such debt or with respect to any lease. If a debtor has filed two or more bankruptcy cases within the previous year that were dismissed, other than under section 707(b), the automatic stay under section 362(a) does not go into effect when the later case is filed. If a debtor is limited to a 30-day automatic stay or does not get one at all, the debtor may be able to request one from the court but will have to explain why there is a good reason for filing bankruptcy again and using the automatic stay.
Lastly, ordinarily dischargeable debts that were not discharged in the dismissed case can be discharged in a later case. However, in cases of egregious bad faith, the court may dismiss a case with prejudice, preventing the debtor from discharging debts in the dismissed case in a later bankruptcy.