SECTION 707 (b) of the bankruptcy code is the provision that allows the dismissal of a Chapter 7 case if there is a “presumption of abuse” of bankruptcy law. This is applied to individuals with primarily consumer debts. So if the individual who seeks Chapter 7 relief has primarily business debts this provision would not be applicable. For instance, if Mr. X has $500K of credit card debt which he used to run his home health care business, or his restaurant, or his import distribution business, this provision would not be applicable because Mr. X, although and individual, has primarily business debt. Even if Mr. X were not a business person, he could still circumvent this provision and avoid the “presumption of abuse” if “the debtor’s current monthly income reduced by the amounts determined under clauses (ii), (iii), and (iv), and multiplied by 60 is no less than the less of (I) 25 percent of the debtor’s non-priority unsecured claims in the case, or $6,575, whichever is greater; or (II) $10,950.” Therefore, even if the individual debtor has a ton of consumer debt, as long as debtor meets his burden under the “means test,” there is no presumption of abuse. Indeed, an individual earning $1.0 M a year who owes $3M of credit card and other unsecured debt can still qualify for Chapter 7 relief and discharge the $3M of debt as long as the net disposable income under the means test shows that the person is running on negative disposable income.
That of course is an extreme example of what is theoretically and legally possible. Normally, debtors who seek Chapter 7 discharge of debts for a fresh start in life have gross incomes between zero and $275K a year. Although it may be hard to believe, I have clients who are in the $275K or more yearly bracket who are stuck with too much debt. Sometimes, they are hit with a collection of $200K for a 2nd trust deed on an investment property that was foreclosed. Or, they had a family emergency that required them to borrow large amounts, or invested in a business that was losing money and they relied on borrowed funds to finance the loss for an extended period of time.
What I would like to discuss here is a situation of a high-income earner who spends $54K a year for his four children to attend private school and wants Chapter 7 relief to discharge $80K of credit card debt. In Re Kornfield, debtors in this case were a gastroenterologist and his wife. A gastroenterologist is a medical doctor who specializes in stomach and intestinal problems. Yes, they ‘re the ones who like to do endoscopies. Hopefully, you and I will never have to see one in our lifetime. They listed current annual income of $276,000. Their statement of financial affairs showed that their income was $404,000 during the year previous to their bankruptcy filing, and $470,000 during the year before that. They scheduled $390,000 in an exempt pension plan, $508,000 in secured debt and $80,000 in unsecured debt. The trustee filed a motion to dismiss the Chapter 7 case on the ground that debtors had an ability to pay their debts and no factors mitigated against this ability. In other words, the trustee believed that debtors should be in a Chapter 13, not a Chapter 7.
The bankruptcy court found that the debtors’ extravagant lifestyle was a major cause of their financial problems and granted the trustee’s motion to dismiss the Chapter 7 case. Debtors appealed. The appellate court found that the bankruptcy court acted properly when it considered the propriety of the debtors spending $54,000 per year to send their four children to private school. Private school tuition has always been a disputable expense factor, because many courts consider private school as a matter of choice and not necessity. This is true. My own children all went to public school from kindergarten to high school, to public university. I don’t think they got shortchanged in any way in the quality of education. And they had to compete to get to the top. No spoon-feeding. I saw their final exam questions in the sciences in the university, and none of the questions were covered by the professor’s class lectures just because the professor was a Nobel peace price awardee for that subject matter. I mean, that is not just tough, that’s totally unfair. If you can ace that kind of exam, you really understand the subject matter. I know this person who went to a name brand private college, got high marks there, and could not get a good enough grade in the professional entrance exam to land him a seat in any professional college in the United States. I also have a friend who graduated from a private name brand US law school, who up to now, cannot pass the CA bar exam. He gave up after twenty attempts. And this guy went to private school all the way from grade school. So, its either our God gave you the talent, or He did not. If you don’t have the God-given talent, you just don’t have it. Find out what kind of talent God gave your child, and your child should excel in that area of human endeavor. Not everyone is cut out to be a brain surgeon, and no amount of private schooling will turn your child into a brain surgeon if God did not give your child that talent. Maybe your child is meant to be the next Steve Jobs who stopped college to set up Apple, now the largest company in the USA, perhaps the world. It’s nearing a trillion dollars. That’s not too bad, isn’t it?
In the United States, public education is really first class, and doesn’t cost that much. I don’t understand parents now who spend $3K a month just so their child can attend a private kindergarten, or a high school that “enhances” the chances of their children getting into name brand universities. Would you believe, my wife’s hairdresser sends his only daughter to a private grade school, and he spends $3K a month for her expenses. That’s more than the rent he pays for his shop. It’s absurd. If your child is intelligent enough and works hard enough, he or she is going to get into the university of his or her choice. If your child is not smart enough, you’re out of luck. Sorry, by and large, America is still a meritocracy, with some exceptions of course. Further, the appellate court found that the bankruptcy court properly considered the debtors’ exempt assets in reaching its conclusion.
But as an aside, here in CA, retirement accounts up to a $1.0M are exempt and are not used against the debtor. I had a client who had $980K in his IRA rollover, and another client who had $600K. Both were granted a Chapter 7 discharge. A totality of circumstances test is relevant in each case. Indeed, a debtor can have very high income but still obtain a Chapter 7 discharge depending on the circumstances affecting his or her case. Thus, there is a need for debtors to see an experienced bankruptcy attorney.
“No one will be able to stand up against you all the days of your life. As I was with Moses, so I will be with you; I will never leave you nor forsake you.” Joshua 1:5
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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, Mailstop 58, Building A-1 Suite 1125, Alhambra, CA 91803.