A Chapter 7 bankruptcy is designed to discharge–eliminate–most of your outstanding debts after certain non-exempt assets are liquidated by a court-appointed trustee. In some cases the court may dismiss or convert a Chapter 7 filing into Chapter 13 (or Chapter 11) case. Unlike Chapter 7, a Chapter 13 bankruptcy does not immediately eliminate debt. Instead, the debtor is required to file and follow a repayment plan that typically lasts 3 to 5 years.
Consumer vs. Business Debts in Chapter 7 Cases
A conversion usually takes place because the debtor has the ability to repay a significant portion of their “consumer debts” from their existing monthly income. Federal law establishes a mathematical formula or “means test” for the bankruptcy court to use in making this determination. If the debtor’s income exceeds a certain amount, the court must “presume” there has been an abuse of the Chapter 7 process.
This formula only applies to bankruptcy cases where the debts are “primarily consumer debts,” i.e. debts incurred for personal, family, or household purposes. For most debtors, credit cards are the primary source of consumer debts. But if you file for bankruptcy due to mostly non-consumer debts, such as debts incurred as part of your business or trade, the means test does not apply. A bankruptcy judge could still dismiss your Chapter 7 filing “for cause,” but your ability to pay the nonbusiness debt is not, in and of itself, cause for rejecting your petition.
Here is a recent Oklahoma bankruptcy case on that point. A couple filed for Chapter 7 bankruptcy, listing as their principal debt an unpaid loan of more than $250,000 incurred as part of their failed spa business. The trustee appointed to oversee the bankruptcy estate moved to dismiss the case, alleging the couple acted in “bad faith.”
The trustee said the couple had sufficient “excess monthly income” to repay the business loan over a 60-month period, i.e. under a Chapter 13 payment plan. The trustee also cited the couple’s “lavish” spending and lifestyle in the months leading up to their bankruptcy filing.
The bankruptcy court denied the trustee’s motion to dismiss and ultimately granted the couple their Chapter 7 discharge. On appeal, a U.S. district judge said the bankruptcy court applied the law correctly. A “for cause” dismissal of a Chapter 7 petition involving “mostly business debt” requires proof of conduct that is “egregious, extreme, or an abuse of the provisions of the Bankruptcy Code,” the district judge noted. A debtor’s “ability to repay pre-petition debt, standing alone,” does not constitute “cause” under these circumstances.
Do You Need Help Filing for Chapter 7?
A bankruptcy case can get quite complicated, especially when there are business debts mixed with consumer debts. An experienced Oklahoma City bankruptcy attorney can guide you through the process and do everything possible to help you get a Chapter 7 discharge in a timely manner. Contact Deborah Brooks & Associates, P.C., if you need help with a bankruptcy matter today.