Michigan Bankruptcy Blog

Eastern District: Business Debtors in Chapter 7 Must Tighten Their Belts, Too

In re Rahim, Bankr. E.D. Mich., Dec. 16, 2010 (Case No. 10-57577-R, Hon. Steven Rhodes).

When one thinks of Chapter 7 bankruptcy cases, the low-income consumer debtor who is overwhelmed by debt often comes to mind. But individuals whose debts are primarily "non-consumer" debts – usually business debts – may also qualify for Chapter 7 relief, even if they cannot pass the "means test" required for consumer debtors under BAPCPA. Because business debtors do not have to pass the means test, their incomes may be significantly higher than what one might expect to see in a Chapter 7 case. However, at least one Michigan bankruptcy court is requiring high-income business debtors to tighten their belts when they seek Chapter 7 relief.

In In re Rahim, the married debtors, both practicing physicians, earned a startlingly high income. Despite having filed Chapter 7, the debtors' annual income exceeded $500,000, and their expenses included sizeable mortgage payments on their home, vacation home, and rental home, plus payments on three luxury vehicles. Their debts included numerous mortgages and personal guaranty liability arising out of failed real estate ventures.

Two creditors moved to dismiss the bankruptcy case "for cause" under Section 707(a), asserting that the debtors could repay creditors if they reduced their living expenses. The debtors objected and argued that only a consumer case can be dismissed based on ability to pay debts. The debtors pointed out that Section 707(b), which allows dismissal of a consumer case if a debtor's income is too high, did not apply to their case. The debtors then argued that Section 707(a) – which lists unreasonable delay, failure to pay fees, and failure to file schedules and other information as grounds for dismissal – does not authorize dismissal based on ability to pay.

The Bankruptcy Court dismissed the case for cause under Section 707(a). Reasoning that Chapter 7 is not designed to protect the "dishonest or non-needy debtor," the court found that the debtors did not need Chapter 7 relief and that granting them relief would be "extraordinarily unfair to their creditors." Id. at *5. The court emphasized that the debtors had taken no steps to "tighten their belts" – an analogy typically used in Section 707(b) consumer cases.

The court specifically rejected the debtors' argument that Section 707(a) does not allow dismissal based on ability to pay. Instead, the court concluded that "[n]othing in the bankruptcy code suggests that a debtor who has primarily business debts but who can pay those debts is entitled to Chapter 7 relief." Id. at *10. The court held that the examples of "cause" listed in Section 707(a) are not exclusive and that under Sixth Circuit precedent, lack of good faith constitutes "cause" for dismissal. In this case, the court found that the debtors' "extravagant and lavish" lifestyle, on its own, showed a lack of good faith that warranted dismissal.

The debtors have claimed an appeal to the district court. Michigan debtors' attorneys should take note that even a business debtor's income and lifestyle may be subject to scrutiny if a Section 707(a) motion is filed.

Categories: Chapter 7, Eastern District of Michigan