December 17, 2017

Attorneys Who Don’t Understand Bankruptcy’s Means Test: A Case Study

Rick Mitchell is a board-certified bankruptcy lawyer and a Chapter 7 bankruptcy trustee

I was recently consulted by a highly-paid professional.  He was quite distraught over his financial plight that included debts of over $1,000,000.  He had consulted another attorney who had indicated to him that he was going to have difficulty filing a Chapter 7 bankruptcy case because of the amount of his income.

He was at his wits end.

I analyzed his situation.

Two ways the Bankruptcy Code was mis-interpreted by the other attorney

There could be only two reasons for the advice that the other attorney had given.  The first involved the means test set out in the Bankruptcy Code in §707(b).  This declares a Chapter 7 bankruptcy filing as “abusive” and causes the dismissal of a Chapter 7 case when the means test indicates that the debtor has the ability to repay at least a part of his debts.

The second reason is also contained in Bankruptcy Code §707(b).  This proscribes a Chapter 7 filing as “substantially abusive” when the debtor has substantially more income than expenses.  It can also lead to the dismissal of a Chapter 7 bankruptcy case.

An expert bankruptcy attorney knows how to apply the law to each bankruptcy case

Having dealt with Bankruptcy Code §707(b) on many occasions I knew that neither of these provisions applied to the case at hand.

§707(b) limits the applications of these provisions to cases in which the debt is “primarily consumer debt.”  This has been defined by case law as a majority of the debt being consumer debt.  This is a simple more than one-half test.  Interestingly, tax obligations are not deemed to be consumer debt.  In the case at hand, it was clear the majority of the debt came from a failed business.

It turned out that my potential client never had a problem with the law as far as filing a Chapter 7 bankruptcy case.  His problem was consulting an attorney who lacked the expertise to properly advise him on the law.