Ability to Repay Debts Not Grounds to Dismiss Ch. 7 Case

Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.

By Daniel Gill

The fact that Chapter 7 debtors had the ability to repay their debts was not a legitimate basis to dismiss their bankruptcy case, an Oklahoma federal judge ruled April 28 ( Crocker v. Bushyhead (In re Bushyhead) , 2017 BL 141812, N.D. Okla., No. 15-CV-90-JED-FHM, 4/28/17 ).

The debtors had exempt property worth nearly $790,000, income of more than $350,000 a year, a somewhat extravagant lifestyle and debts of only about $332,000, the court said. But that wasn’t cause to dismiss their bankruptcy case, Judge John E. Dowdell, of U.S. District Court for the Northern District of Oklahoma, held.

Bow and D. Lynn Bushyhead filed a Chapter 7 case in 2013. In Chapter 7, a debtor’s nonexempt assets, those he cannot keep, are liquidated by a trustee, and the proceeds are distributed to creditors. Subject to certain exceptions, the debtor is awarded a discharge, effectively wiping out his debts.

Eligibility rules for filing Chapter 7 are different when the debtors’ obligations are primarily consumer or if they arose in business. Here, about 80% of the debt was related to a failed spa that the Bushyheads owned. For that reason the court doesn’t have to look at whether the debtor is able to pay the debts over time.

Although no creditors objected to the bankruptcy or discharge, the U.S. Trustee, a branch of the U.S. Department of Justice charged with overseeing the bankruptcy process, objected to the case and sought to have it dismissed.

The debtors could pay off their debts over time, as in a Chapter 13 case, the Trustee argued. The Chapter 7 case was therefore filed in bad faith, which is grounds for dismissal.

But such a dismissal should happen where the debtor has taken advantage of the court’s jurisdiction in a manner abhorrent to the purposes of Chapter 7, the court said.

An extravagant lifestyle and apparent ability to repay debts over time was not among the enumerated grounds for dismissal in the statute, and wasn’t “egregious, unusual or abhorrent” to the purpose of the bankruptcy.

Timothy T. Trump, Conner & Winters, LLP, Tulsa, Okla., represented the Bushyheads. Samuel K. Crocker, the region’s U.S. Trustee, was represented by Paul R. Thomas, Tulsa, Okla.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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