Michigan Bankruptcy Blog

Chapter 7 Debtor’s Case Dismissed After Court Finds that She is Judicially Estopped from Arguing that Student Loan Debts are Non-Consumer in Nature

While bankruptcy relief is available as a tool for individuals to discharge debts, it is not available to everyone, under all circumstances. Before a debtor can, for example, discharge debts in a Chapter 7 bankruptcy, he or she must prove that debts and income are within certain statutory thresholds. When determining whether an individual is eligible for relief, the nature of the debts at issue is also relevant.

In a recent case in the United States Bankruptcy Court for the Eastern District of Michigan (the “Court”), the Court considered whether a debtor’s student loan debts were consumer or non-consumer debts, which was critical to determining whether a motion to dismiss the debtor’s Chapter 7 case should be granted.[1]

Background

The debtor is a registered nurse who owes unsecured debts of approximately $150,000, $131,400 of which are for student loans. According to her Chapter 7 petition and schedules, she has monthly expenses0. (including $500 per month to repay the student loans) of $3,210 and monthly income of $3,212.

The United States Trustee (the “Trustee”) filed a motion to dismiss the debtor’s case. The Trustee argued that the $500 budgeted for repayment of student loans would result in a 20 percent dividend to all unsecured creditors if that amount was paid in a Chapter 13 plan. There wouldn't be a dividend paid in the Chapter 7 case. The Trustee argued that the student loans should not be given preference over other unsecured creditors and, therefore, the Chapter 7 case should be dismissed or the debtor should be granted an opportunity to convert her proceeding to Chapter 13.

Analysis

The debtor’s argument against dismissal was based (1) on her fears that converting the case to Chapter 13 would prevent her from later applying to certain programs that could provide relief for her student loans, and (2) that after a five year Chapter 13 plan she would still owe approximately $37,000 in interest in addition to the $27,000 in student loan payments.

The Trustee’s motion was brought under Section 707(b) of the Bankruptcy Code. At issue in the case was whether student loan debts are consumer debts, which would make 707(b) applicable, or non-consumer debts, which would make it inapplicable.

The Court began its legal analysis by considering whether student loan debt constitutes consumer debt. Under the Bankruptcy Code, “consumer debt” is defined as “debt incurred by an individual primarily for a personal, family, or household purpose.” The Court explained that other courts that have examined this issue “focus on the purpose for which the debt was incurred, and when a debt is incurred for more than one purpose, the primary purpose of the debt will determine whether or not the debt is a consumer debt.” Once it has been determined that debts are primarily consumer in nature, a court must then look to the “totality of circumstances” to determine whether to dismiss a case under Section 707(b).

In this case, while the Court stated that “it may very well be that Debtor’s debts are not primarily consumer debts, thus making Section 707(b) inapplicable,” it did not conduct this analysis because it concluded that the debtor should be judicially estopped from arguing that her debts are not primarily consumer in nature.

The Court explained that “[j]udicial estoppel is an equitable doctrine that preserves the integrity of the courts by preventing a party from abusing the judicial process through cynical gamesmanship, achieving success on one position, then arguing the opposite to suit an exigency of the moment.” When filing her original petition, the debtor declared under penalty of perjury that her debts were primarily consumer debts. Only later, when the Trustee filed its motion to dismiss, did the debtor amend its filing and assert the contrary position that her debts were not consumer debts.

The Court found that there was no “mistake or inadvertence” for this change in position, and the timing of the amendment exhibited prohibited “gamesmanship.” The Court held, therefore, that it could not “condone what clearly appears to be a deliberate change in positions taken by the Debtor in direct response to the United States Trustee’s Motion to Dismiss, with what the Court concludes was done with the obvious motive of attempting to make Section 707(b) inapplicable.”

After finding that the debts were primarily consumer in nature, the Court turned to the issue of whether dismissal was appropriate under Section 707(b). A bankruptcy court may dismiss a Chapter 7 case involving primarily consumer debts if it finds that granting a discharge would be a “substantial abuse” of the Bankruptcy Code. This requires that a court look to the “totality of circumstances,” including situations where either the debtor has acted dishonestly or the debtor is not needy in that his or her “financial situation does not warrant a discharge in exchange for the liquidation of his assets.”

The Court found while the debtor did not act dishonestly, the totality of circumstances dictated that her Chapter 7 case should be dismissed. It concluded that, because (1) the debtor enjoyed stable income, (2) creditors could receive a 20 percent dividend in a Chapter 13 case, (3) there was no evidence that the debtor had attempted to renegotiate her student debt outside of bankruptcy, and (4) that there was no evidence that the debtor’s expenses could be reduced significantly, “it is premature for the Debtor to seek either Chapter 7 or Chapter 13 relief at this time.”

If you have any questions about this case, or about bankruptcy issues in general, please contact Patricia Scott at pscott@fosterswift.com.

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[1] In re Vicky Sue Jones, Case No. 15-32931-dof (Bankr. E.D. Mich. Aug. 24, 2016).

Categories: Chapter 13, Chapter 7, Eastern District of Michigan