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Business Bankruptcy Debtor Denied a Discharge Under Section 707(a) for Ability to Pay

By Craig Andresen, Minnesota Bankruptcy Attorney

A Michigan bankruptcy court recently took the unusual step of denying a discharge under bankruptcy code section 707(a) to a debtor whose debts were primarly business debts, based upon the court’s determination that the debtor could repay a portion of his debts in a chapter 11 reorganization case.  In re Rahim, 2010 WL 5128944 (Bky.E.D.Mich. Dec. 16, 2010),

Section 707(b) is the usual provision relied upon by bankruptcy courts to deny a chapter 7 discharge for ability to repay all or part of one’s debts in a chapter 13 case.  Because section 707(b) expressly does not apply to debtors whose debts are primarly business debts, most lawyers have assumed that business chapter 7 debtors are immune from motions to dismiss based upon ability to repay a portion of the debts.  What makes this case unusual is that the court relied upon section 707(a) to bring about the dismissal of the business debtor’s chapter 7 case.

In re Rahim involved married chapter 7 debtors who earned in excess of $509,000 annually from a medical practice.  Their unsecured debts consisted mainly of $6 million in guarantees arising from failed Florida real estate investments.  The debtors’ budget showed monthly expenses of $15,714 for their home mortgage, nearly $5,000 for a second home in Florida, over $2,000 for luxury motor vehicle payments, $4,575 for private school tuition, and $540 for care for the debtors’ elderly mother.  The court characterized these expenses as “extraordinary.”

The chapter 7 trustee’s lawyer testified that over $200,000 in assets would be administered for creditors if the case were allowed to proceed under chapter 7 rather than being dismissed.  However, the court noted that much more would be paid to creditors if the debtors converted the case to a chapter 11 reorganization.

The court held that given the debtors’ income level and extravagant lifestyle, they simply were not in need of a chapter 7 discharge.  Therefore, section 707(a) applied, and the fact that the debts were primarly business debts was of no consequence.  The case was therefore dismissed for “cause” under section 707(a).

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Full post as published by Bankruptcy Law Network on January 21, 2011 (boomark / email).