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Eleventh Circuit Rules Ability to Pay Debts Should Be Part of Test for Bankruptcy Abuse - Witcher v. Early

December 18, 2012

No bankruptcy filer wants to be accused of abusing the bankruptcy system. In addition to the personal feelings it may bring up, an accusation of abuse can lead to involuntary dismissal of the case or conversion from Chapter 7 to Chapter 13. A serious case may even result in criminal charges. So Vincent Howard and our Corona consumer bankruptcy attorneys were interested to see a recent case in which the Eleventh U.S. Circuit Court of Appeals set a new standard for whether the Chapter 7 bankruptcy process has been abused. In Witcher v. Early, the trustee for the bankruptcy of Robert and Jennifer Witcher alleged that they abused the process because they had kept and were making payments on property considered luxury items. The bankruptcy court agreed, citing the "totality of the circumstances" rather than a statutory definition, and the Eleventh Circuit affirmed.

The Witchers, of Alabama, filed for Chapter 7 bankruptcy in early 2010. Their trustee, Early, moved to dismiss or convert the case to Chapter 13, arguing that their Chapter 7 petition was an abuse of the process. In support, she pointed to the fact that they were able to continue making payments on a camper, a boat, a tractor and a trailer, all of which were considered luxury items. The bankruptcy court found that they passed the means test for Chapter 7, giving rise to no presumption of abuse. But because they could still pay for the luxury items, the court said, their "ability to pay, as well as their reluctance to change their lifestyle," meant that permitting them to file under Chapter 7 would be an abuse. The court gave them 14 days to convert to Chapter 13 or face dismissal. On appeal, the district court affirmed that ability to pay debts is part of the "totality of the circumstances" test for bankruptcy abuse.

Their appeal to the Eleventh Circuit argued that the totality of the circumstances test should not consider ability to pay, because to do so would render the means test meaningless. They argued that this would essentially permit every bankruptcy court to design its own means test, undermining the intention of Congress when it passed BAPCPA. The Eleventh disagreed, finding that nothing prevents courts from considering the same factors for both tests. Congress could have expressly excluded means-test information from the totality of the circumstances test, the court said, but it did not. Furthermore, the Eleventh said, pre-BAPCPA courts took ability to pay into account when deciding cases under the totality of the circumstances standard. Thus, the Eleventh held that ability to pay may be considered under that standard, joining numerous lower courts--though it emphasized that this is a narrow holding and the issue may not be dispositive.

Vincent Howard and our Garden Grove personal bankruptcy lawyers hope that courts take that narrowness comment to heart. Working in bankruptcy helps us see that "luxury item" may be a subjective term. A boat is not a luxury item to a fisherman, and the decision to keep some inessential items may have emotional components for many filers. In fact, calling items "luxury items" has an element of judgment that may be inappropriate if the law permits the filer to keep them. However, we advise you to consult an experienced bankruptcy attorney like Vincent Howard anytime you're concerned that a trustee may object to your Chapter 7 filing, to avoid complications like this.

If you're overwhelmed by your debts and you'd like to discuss your legal options with an experienced Claremont individual bankruptcy attorney, contact Howard Law, P.C., today. You can send us a message online or call 1-800-872-5925.

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