IF YOU look at a boat, a camper, a trailer and a tractor separately and as individual items they may not be considered as badges of a luxurious lifestyle. But if the debtor who has filed for Chapter 7 relief intends to keep all of them, even if all of them are used as collateral for loans, the trustee might argue that the debtor’s case is abusive because debtor intends to keep luxury items and to live a luxurious lifestyle, at the expense of creditors. This argument may not be as outrageous as it may sound. A debtor who continues paying for a boat, a camper, a trailer and a tractor could be seen in bad faith because if debtor stopped paying for all 4 assets, he could actually pay a significant amount to his unsecured creditors. If for instance, his monthly payment was $500 for the boat, $1,500 for the camper and trailer, and $1,000 for the tractor, if he stopped making these payments, he would actually $3,000 a monthly to pay unsecured creditors. On the other hand, debtor can argue that the means test allows him to deduct all monthly payments on secured debt, and all 4 assets are collateral for the purchase money loans. Since debtor qualifies for a Chapter 7 under the means test, why should the court listen to the argument of the trustee? Who is correct?
In Re Witcher, according to the means test, debtors did not have an ability to repay their unsecured debts. The trustee nevertheless asked the bankruptcy court to dismiss their case as an abuse pursuant to Section 707(b)(3), which allows the court to find abuse based on the totality of the debtor’s financial circumstances. The bankruptcy court agreed with the trustee that the debtors’ case was abusive because they intended to keep luxury items, a camper, a boat, a trailer, and a tractor, that were collateral for loans. While these secured debt payments were allowed deductions on the means test, the court found that debtors would have an ability to repay their unsecured creditors if they surrendered these items. The court concluded that “the debtors’ ability to pay, as well as their reluctance to change their lifestyle in order to provide a distribution to creditors together indicate that granting relief in this Chapter 7 case would be an abuse.”
The district court affirmed, as did the 11th Circuit. The debtors argued that their ability to pay should not be considered under the totality of the circumstances test because such a consideration would render the means test meaningless. A meaningless means test is the same as a square circle. Nobody in this world, not even our beloved President Obama, can make a square circle, perhaps a triangular circle, but a square circle? No way. Aside from logic, debtors relied on In re Walker, where the court found that “inclusion of the income and expenses calculation in Section 704(b)(2) precludes reconsideration of income and expenses in Section 707(b)(3) pursuant to the canon of negative implications.” The canon of negative implications, you might wonder, is the same canon that dictates that Cardinal Mahoney should recluse himself from voting for the new Pope.
The 11th Circuit said this reading of Section 707(b)(3) was too narrow. “Moreover, although the Witchers are correct that allowing each bankruptcy court to devise its own subjective means test under Section 707(b)(3) would defeat the purpose of the congressionally enacted means test in Section 707(b)(2), the same logic does not dictate that any factors that are considered under Section 707(b)(2) are by implication precluded from consideration under Section 707(b)(3). If you understood this, you are smarter than I am. I read this ten times and I am still getting a headache trying to understand what it really means. To make a long story short, the 11th Circuit agreed with the trustee that the totality of the circumstances in the case of Witcher made them look like the bad guys from head to foot.
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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.