Chapter 7 Bankruptcy Code offers extraordinary relief: a fast track away from all dischargeable debt. My clients are often surprised by the scope and speed of the Chapter 7 process, because the majority of cases are successfully closed, with the discharge entered, less than 120 days after filing.
However, there is an obstacle to this relief: the means test. If your income is above the median for your state and you do not meet the legal threshold even after completing the “long form,” the door to Chapter 7 will be closed for you.
One important exception to this rule is that borrowers who have primarily non-consumer debt do not have to complete the long form, even if their income is well above the median. The Bankruptcy Code tells us that if your debts are not primarily consumer debt, there will be no “presumption of abuse” that the debtor must overcome to enjoy Chapter 7 benefits. The definition of consumer debt is:
Debt incurred by an individual primarily for a personal, family, or household purpose.
Taxes, real estate investments gone bad, and business debt are all non-consumer debt. So, if you file bankruptcy to get out of delinquent home loans when the property is worth much less than what is owed on the mortgage, and you don’t owe as much on credit cards or on your home loan, then you won’t. You don’t have to fill out the long form.
But that’s not necessarily the end of the story. Every bankruptcy case requires the debtor to file in good faith. If the bankruptcy judge determines that a case was not filed in good faith, that case may be dismissed.
The phrases “good faith” and “bad faith” are not defined in the Bankruptcy Code, but courts have long rejected debtors who flaunt their wealth:
The ability to pay debts, live an expansive lifestyle beyond one’s means, and single out a major creditor for nonpayment are factors that warrant dismissal for bad faith.
Courts may find a lack of good faith when a debtor fails to make a full and honest disclosure.
Several courts have dismissed Chapter 7 cases when it appears that a debtor is living a lavish lifestyle without making legitimate efforts to pay their debts.
Evidence of a lavish lifestyle can be maintaining a vacation home, driving a luxury vehicle, making substantial withdrawals from retirement funds, or even sending children to expensive private schools. When debtors attempt to discharge millions of thousands or even millions of dollars in business debt, a bankruptcy court will, if asked, consider whether those debtors are making any legitimate effort to downsize.
If the court finds that the debtor has not made that effort, the result may be that the debtor is forced to file for Chapter 13 or, if their debt exceeds the legal limit, Chapter 11. Filing a Chapter 11 case may be a disaster for people. , because administrative costs (filing and attorneys’ fees) are much higher and creditors have a greater say in the treatment of their claims.
The trend in bankruptcy courts across the country is that if a debtor is going to ask creditors to suffer for nonpayment of their debts, the debtor will have to share that pain as well. Refusing to shoulder that burden may very well lead to a denial of Chapter 7 relief.