Bankruptcy courts normally look at debtor’s income at the time of filing and two months before filing of the bankruptcy case to determine eligibility for a chapter 7 discharge of debts. Debtor’s future income usually does not factor into eligibility. However, in some instances, the totality of circumstances may be such that the court may dismiss a case under § 707 (b) (3). This section is the catchall provision that authorizes the court to dismiss a case if the circumstances of the case demonstrate abuse of the bankruptcy system by debtor. This is a general standard that gives the court broad authority to dismiss abusive filings.
The existence of post-petition income may be used to dismiss a case if other circumstances show that debtor’s conduct tends to show abuse. In re Vogeler is an example. Mr. Vogeler was unemployed when he filed for chapter 7 relief. He owed a car loan of $11,000 and $35,925 of unsecured debt. A month after he filed his chapter 7 case, he won $130,000 in the Kansas lottery and received net proceeds of $90,000. One week later, the Chapter 7 trustee and the US Trustee told Mr. Vogeler not to spend the lottery proceeds. But he did not heed this warning. Instead, he spent most of the lottery proceeds on new cars and various, non-emergency personal expenses. He did not provide an itemization of his expenditures to the court. The court ruled that it would be an abuse to grant a discharge to the debtor based on the totality of his circumstances. The court said that the US Trustee presented two compelling facts evidencing abuse. "First, debtor entered bankruptcy with approximately $47,000 of debt. Second, a month later, debtor received more than $90,000. Debtor, without explanation, opted to spend his lottery winnings on new items rather than attempt to address the debt with which he entered bankruptcy. Debtor enjoyed his lottery winnings at a time when the automatic stay kept his then-existing creditors from executing on his good fortune. Debtor failed to satisfactorily explain the dissipation of the lottery proceeds. Debtor has been shown to have had significant ability to pay his pre-petition debts," the court said.
The court also said that the UST has shown that Mr. Vogeler was not an unfortunate debtor entitled to a fresh start. On the contrary, debtor was fortunate and could have repaid all of his creditors.
The timing of his good fortune is relevant in this analysis. If Mr. Vogeler had won the lottery six months after his discharge, he would have been able to keep his lottery winnings despite discharging $47,000 of debt. But since his winnings came a month after his case was filed, and after the Chapter 7 trustee and the US Trustee had warned him not to spend his lottery winnings, it was obvious that debtor was trying to keep his cake and eat it too. He wanted to spend his winnings while discharging his debts. In other words, his winnings created an ability to repay all of his debts of $47,000 since his net winnings were $90,000. He could have given $47,000 of his winnings to the Chapter 7 trustee who would have used it to pay off all of his creditors in full in exchange for the discharge. He would have gotten the discharge and would have kept $43,000 less payment for the chapter 7 trustee fees for administering the estate, probably about $5,000.
Normal increases in debtor’s income after filing will not adversely affect Chapter 7 eligibility, unless a disposable income enough to fund a Chapter 13 plan is created. The creation of disposable income may entice the UST to file a motion to dismiss based on ability of debtor to pay a portion of his debt. This is also a 707 (b) (3) motion to dismiss because ability to pay a portion of debt is an abuse of bankruptcy law of a chapter 7 discharge is sought.
Bankruptcy under the new law is complicated. Consult with an experienced bankruptcy lawyer.
If you need debt relief, contact my office. I will analyze your case personally.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803. (Advertising Supplement)
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