No money – Big Problem

Having No Money at the End of the Month Does Not Guarantee Chapter 7 is Available to You.


This comes from a recent case out of the Northern District of Ohio, In Re Hodge – it is relatively right off the presses, having been decided on April 11, 2014.  In this case, the Debtor filed for Chapter 7 relief.  He made a decent salary, his wife made a more modest one.  He was over the median income, so the Means Test applied, but he could pass it with the expenses he bore.  The Court and the Trustee had no problem with the fact that he passed the Means Test, meaning that he could get into Chapter 7 under 707(b)(2).  That was not the problem.

The Trustee in Hodge had a problem with the Debtor’s overall pattern of expenses under the analysis required under 11 U.S.C. 707(b)(3), which looks to see if there is abuse of the system under the “totality of the circumstances”.  This is a catch all term that looks at the debtor’s available income after reasonable ACTUAL expenses, and determines if there is money to repay unsecured creditors. This is where the debtor in Hodge got nailed.  The first problem was that he made $134,000 in 2012 and looked to be on track to make $120,000 a year at the very least going forward.  His alimony obligations had ceased. The Court examined the Debtor’s expenses and started looking for what could be cut out to free up money for unsecured creditors.  The court cut out 401-K deposits and loan repayments, as well as inclusion of an IRS repayment plan.  The reasoning was that, during the life of a Chapter 13 Plan, these funds might come available when the repayment obligation ended.  The court then directed the debtor to convert his case to chapter 13 or have it dismissed.

What does this teach the potential client and his lawyer? Several things – first know your trustees.  There may be several in your area, but get a general idea.  Are they hungry, obnoxious, power mad, easy going, debtor or creditor friendly?  Know your judges.  Same questions apply.  When you discuss your finances with your lawyer make sure that you pay close attention to what is going to be available for the next five years and what’s not.   Remember bankruptcy means testing looks at a five-year range to determine your ability to repay your creditors.  Thirdly when looking at expenses, be realistic. You don’t get to have money for a lot of luxuries if you’re looking for Chapter 7 relief.  In Chapter 13 you are allowed reasonable expenses even for recreation, but again they have to be reasonable. College tuition for your child who is over 18, unfortunately, is not going to be well looked upon by most trustees. I have successfully argued that time share expenses can be allowed, but it has always cost my client some extra money to the trustee.

Bankruptcy is a fresh start. There’s a lot of relief available but it comes at a price.  If you’re looking at doing a bankruptcy, speak with an attorney and carefully review your situation to determine if it is an appropriate solution for you. There maybe other relief available outside of the bankruptcy system, but mostly people need  professional advice to figure out what is out there and what is the best solution.  Choose carefully however or you may have a situation like that in Hodge case.