Failure to schedule rental income may be bad faith in bankruptcy

Failure to schedule rental income may be bad faith in bankruptcy

SECTION 707 of the bankruptcy code provides for the court’s authority to dismiss a bankruptcy case for abuse. What kind of conduct amounts to abuse of bankruptcy law by the debtor depends on the totality of circumstances surrounding the case. For instance, if the debtor files a bankruptcy despite the fact that his means test shows that he has substantial disposable income; the US Trustee will file a motion to dismiss the case for abuse, unless the debtor converts his Chapter 7 case to Chapter 13, and uses his disposable income to pay his creditors through a Chapter 13 plan. But what if the debtor claims mortgage payments for rental property but does not schedule rental income? This kind of situation may be construed as abuse of bankruptcy law because debtor is deducting an expense but is hiding income. Indeed, this could be seen as bad faith on the part of debtor any may trigger a 707 motion to dismiss.

In Re Bianco, the debtor’s Schedule I income schedule said she received $850 per month in unemployment compensation while her husband, who did not file for bankruptcy, earned $8,649.33 per month in gross wages. After payroll deductions, the couple had monthly income of $7,187.96. According to Schedule J expense schedule, the debtor and her husband had monthly expenses of $8,030, which included $3,580.85 for mortgage payments on two rental properties owned by debtor’s husband. While Schedule J included payments on the rental property mortgages, Schedule I did not include income from the rental properties. Is debtor trying to pull a fast one here? I mean, why hide the rental income if there is rental income? Without declaring the rental income but deducting the mortgage of $3,580.85 for the rental properties, the means test would show zero disposable income, and make debtor eligible for Chapter 7. This can only be a really retarded decision on the part of debtor unless there really is no rental income.

But there was indeed rental income. So what’s going on? The US Trustee noted that the couple’s 2009 joint federal income tax return included $49,350 as rental income. The debtor said she and her husband kept separate accounts, that he contributed very little money to the household expenses, and she did not receive an allowance from him. He was Mr. Deadbeat, in other words. She said the rental properties were bought by her husband, and she had nothing to do with them. She said she filed for bankruptcy because she lost her job and could not afford to pay her bills. The US Trustee asked the bankruptcy court to dismiss the case pursuant to Section 707(b)(1) and (b)(3). The bankruptcy court said it did not need to decide whether the debtor’s husband’s income needed to be included for purposes of determining whether the debtor had the ability to repay her debts under the totality of the circumstances test of Section 707(b)(3)(B) because the bankruptcy was filed in bad faith under Section 707(b)(3)(A). The debtor failed to identify her husband’s rental property income in Schedule I even though she deducted the rental property mortgage expenses in Schedule J, and then she failed to amend her schedules to include the rental income. Hence the court considered debtor’s failure to disclose the rental income while deducting the rental property mortgage expense as bad faith.

Section 707(b)(1) states that the court, after notice and a hearing, … may dismiss a case filed by an individual debtor under chapter 7 whose debts are primarily consumer debts, or with the debtor’s consent, convert the case to a case under Chapter 11 or 13, if it finds that the granting of relief would be an abuse of bankruptcy law. Section 707(b)(3)(A) states that in considering whether granting relief would be abuse of bankruptcy law, the court shall consider whether the debtor filed the petition in bad faith. In (3)(B) the court refers to the totality of circumstances to determine if there was abuse.

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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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