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Court Denies Debtor’s Motion to Dismiss Chapter 7 Bankruptcy Case, Finding Dismissal Would Harm Creditors

By Jennifer Pahlka from Oakland, CA, sfo (LOL Just divorced. And no, that's not my car.) [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia CommonsA debtor moved to dismiss her Chapter 7 bankruptcy case after the trustee sought to use half of a $5,000 monthly payment she received from her ex-spouse to pay creditors. The trustee claimed that half of the monthly payment, which was the debtor’s only reported source of income, was actually an asset under the terms of the divorce decree and was therefore part of the bankruptcy estate. The bankruptcy court granted the motion and dismissed the case. The Bankruptcy Appellate Panel (BAP) reversed, finding that dismissal of the case would prejudice the creditors. In re Grossman, No. NV-13-1325, memorandum (BAP 9th Cir., Feb. 4, 2014) (PDF file).

The central issue for the debtor was whether $2,500 of the $5,000 payment she received every month from her former spouse was spousal maintenance, which is an exempt form of income under bankruptcy law, or part of her share of the marital estate, which is a non-exempt asset. The settlement agreement between the debtor and her former spouse stated that she was entitled to $390,000 from the former spouse. He paid her $30,000 upon signing the agreement and began making monthly payments of $2,500 on February 1, 2005. This is known as an “equalization payment.” The full amount should be paid by 2017. He sends her an additional $2,500 per month, which all parties in the bankruptcy agree is spousal maintenance.

The debtor filed a Chapter 7 petition in April 2013. She did not include the equalization payment in the Schedule B list of personal property, nor did she include a copy of her divorce decree. She reported $5,000 per month in spousal maintenance income in the Statement of Financial Affairs. After receiving a copy of the divorce decree, the trustee claimed that the equalization payment was an asset of the bankruptcy estate that could be sold to pay creditors.

In June 2013, the debtor moved to dismiss the case under 11 U.S.C. § 707(a), which states that the court may dismiss a case for cause. She argued that she had severe chronic health problems, that she expected to continue to incur debts for health care, and that the loss of the income from the equalization payment would cause her to go further into debt. The bankruptcy court granted the motion over the trustee’s opposition, citing the debtor’s health condition as the reason for its ruling. The trustee appealed.

The BAP reversed the order of dismissal. It noted that the lower court only considered the debtor’s medical expenses without making any mention of prejudice to the creditors. Under Ninth Circuit BAP precedent, a court cannot dismiss a Chapter 7 case on a debtor’s motion if it would prejudice a creditor. In re Leach, 130 B.R. 855 (BAP 9th Cir. 1991). The debtor has the burden of proving that creditors would not be prejudiced. In re Bartee, 317 B.R. 362 (BAP 9th Cir. 2004).

The court held that the debtor did not meet her burden of proof, and that dismissal would be inequitable to the creditors. It agreed with the trustee’s arguments that the debtor should have reported the equalization payment as an asset, and that she failed to investigate “her true financial picture” before filing for bankruptcy. Grossman, memo. at 4.

Devin Sawdayi has represented people in the Los Angeles area in personal bankruptcy cases under Chapter 7 and Chapter 13 since 1997, helping them rebuild their finances with dignity and respect. To schedule a free and confidential consultation to discuss your case, please contact us today online or at (310) 475-939.

More Blog Posts:

Supreme Court Rules Bankruptcy Trustee Cannot Use Exempt Assets to Pay Expenses, Even If Caused by Debtor Misconduct, Los Angeles Bankruptcy Lawyer Blawg, May 31, 2014

Court Converts Bankruptcy Case from Chapter 13 to Chapter 7 Based on Finding that Debtor Withheld Information, Los Angeles Bankruptcy Lawyer Blawg, January 27, 2014

Debtor’s Retirement Annuity is Not Excludable from Disposable Income in Chapter 13, Los Angeles Bankruptcy Lawyer Blawg, June 24, 2013

Photo credit: By Jennifer Pahlka from Oakland, CA, sfo (LOL Just divorced. And no, that’s not my car.) [CC-BY-SA-2.0], via Wikimedia Commons.