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Why Motivation Matters...

Published July 23, 2011 by Sasser Law Firm

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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