HIGH income alone is not a ground to deny debtors a bankruptcy discharge. But the maintenance of a lavish lifestyle may allow bankruptcy courts to dismiss a case for “cause.” A lavish lifestyle may be seen as a lack of good faith in a bankruptcy filing. When you have spouses who are both doctors, you can be sure that you are looking at high income for the household. But what is a ‘lavish’ lifestyle? In Re Rahim and Abudulhussain, the bankruptcy court defines a ‘lavish’ lifestyle.
According to Schedules I and J, the debtors, who were both doctors, had monthly income of $39, 400 and expenses of $39,380. The court found that the debtors understated their monthly income by failing to include the fact that their medical practice provided them with two Mercedes Benzes and a BMW. The monthly payment for these vehicles was $2,046. They also omitted $1,000 per month that they paid to support a niece. The court added $3,046 to the total on both Schedules I and J, leaving debtors only $20 in net income. The mortgages on the debtor’s three houses and the commercial property that housed their medical practice totaled $3,417. Debtors had unsecured debts of $6,671,939 mostly on account of personal guaranties of failed real estate investments in Florida. In other words, these doctors were not satisfied with their monthly gross of income of $40,000 so they moonlighted as real estate investors hoping they would make a killing on real estate. Two creditors looking for payment on their guaranties filed a motion to dismiss their bankruptcy case pursuant to Section 707(a) which states a court “may dismiss a case under this chapter only after notice and a hearing and only for cause…” What constitutes ‘cause’ for dismissal pretty much depends on the court’s discretion; in Re Zick.
In Zick, the court said that a lack of good faith can constitute cause for dismissal. In Re Krohn, the court said that a finding that a debtor is not “needy” can be a sufficient to warrant dismissal. Are debtors with gross income of $40,000 monthly and driving around in Mercedes Benzes and BMW “needy?” Debtors argued that they were “needy” because other doctors, plastic surgeons and radiologists, were making $400,000 a year each and were driving around in Masseraties and Ferraris. The judge, who was driving around in a Honda Civic did not buy the argument. Based on Zick and Krohn, Judge Rhodes concluded that the debtors’ maintenance of their lavish lifestyle supported a finding of bad faith sufficient to warrant dismissal under 707(a). “The debtors’ monthly expenses of at least $42,426 reflect a lifestyle that can only be described as extravagant and lavish. It is certainly unprecedented in this court’s experience in chapter 7 cases. By an objective measure, the debtors simply do not need chapter 7 relief. Moreover, granting chapter 7 relief to them would be extraordinarily unfair to their creditors. If they would take the steps necessary to reduce their yearly expenses, for example by half ($255,000 - still an extraordinary expense budget for a family of four in bankruptcy), they could commit the other half to a five year chapter 11 plan that would pay their creditors over $1,000,000. If they further reduced their yearly expenses to a more modest, but still comfortable $150,000, the dividend to creditors might be $1,800,000,” the court said.
“However, the record reflects that the debtors have made no effort whatsoever to reduce their expenses. Like the debtor in Krohn, these debtors have done nothing to tighten their belts… Indeed, the present case brings considerations of ability to pay and continuing lavish lifestyle to a new order of magnitude that simply cannot be condoned. It is truly an ‘egregious’ case.” The debtors did not argue that they could not fund a chapter 11 plan. Instead, they argued that because they had primarily business debts, their ability to repay creditors alone was insufficient to warrant dismissal. The court dismissed the case for ‘cause’.
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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.
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