Why Motivation Matters...
Bankruptcy jurisprudence is prejudiced in favor of the entrepreneur. And while the particular terminology of “consumer” or “non-consumer” debt is relatively recent, the idea that business owners should receive an extra dose of judicial mercy stretches back to the colonial days – something I learned in this summer’s red-hot beach read, Republic of Debtors: Bankruptcy in the Age of American Independence. Since the bankruptcy code changes in 2005, this prejudice is felt most often in chapter 7 liquidation cases. In chapter 7 cases where the debts are primarily consumer in nature, a debtor must show that his household income falls within a certain range. Understandably, congress has no stomach for well-healed profligates walking away from their American Express cards. In chapter 7 cases where the debts are primarily non-consumer in nature, however, there is no such means test. Loosely defined, a non-consumer debt is a debt incurred with a profit motive. A mortgage on your home, a credit card, and medical bills don’t fit this definition, while a bank loan to capitalize a business or a mortgage on rental property clearly does. Tax liability is considered non-consumer, even though there isn’t really a profit motive behind it. What remains to be seen is whether a student loan debt can be categorized as a non-consumer debt. Even without the mechanical means test requirement in non-consumer cases, though, there are limits. The bankruptcy court is given the power in 11 USC §707(a) to dismiss a case if it finds evidence of some combination of the following: – The debtor reduces creditors to a single creditor in the months prior to the filing of the petition; – The debtor failed to make lifestyle adjustments or continued living an expansive or lavish lifestyle – The debtor filed the case in response to a judgment in pending litigation; – The debtor made no efforts to repay his debts; – The unfairness of the use of chapter 7; – The debtor has sufficient resources to repay his debt; – The debtor is paying debts to insiders; – The schedules inflate expenses to disguise financial well-being; – The debtor transferred assets; – The debtor overly utilized the protections of the Code to the unconscionable detriment of creditors; – The debtor employed a deliberate and persistent plan of evading a single major creditor; – The debtor failed to make a candid and full disclosure; – The debts are modest in relation to assets and income; and – There are multiple bankruptcies or other procedural gymnastics. It can be easy to pick apart laws and point out their inequities and failings. But in this one, I think congress gets it right. There should be some reward for the entrepreneurial risk takers out there. There should be some distinction between the debtor with a credit card debt and the debtor with an equity-line used to purchase machinery for a shop. But neither should the basic rules of fair play be laid aside. It’s right that the judge have the ultimate discretion to distinguish between cases that, from the ten-thousand foot distance at which congress writes laws, all look the same.
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For more than 20 years, the Sasser Law Firm has been helping individuals and business owners sort through financial hardships to see the light at the end of the tunnel. Our North Carolina bankruptcy attorneys are all board-certified specialists, which means we have passed a complex exam, undergone a thorough peer review, and continue to earn legal education credits in this ever-evolving area of law.
