Last updated May 14, 2018.
Under Chapter 7 bankruptcy law, the court may dismiss your case if it believes that relief is unwarranted based on your financial circumstances. 11 USC § 707(b)(1) reads:
After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, trustee (or bankruptcy administrator, if any), or any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor’s consent, convert such a case to a case under Chapter 11 or 13 of this title, if it finds that the granting of relief would be an abuse of the provisions of this chapter.
If the trustee or the judge moves for dismissal of your case, the court will inquire into your financial situation and choose one of three remedies:
1) you are entitled to Chapter 7 relief;
2) your case does not warrant Chapter 7 relief, but may be converted to a Chapter 13 case; or
3) you are not entitled to any bankruptcy relief.
Chapter 7 Dismissal and In re West
The case of In re West, 324 BR 45 (S.D. Ohio 2005) provides a nice example of what can happen when a trustee moves to dismiss a case. Here are the facts:
Mr. and Mrs. West earned almost $93,000 per year, or about $5700 monthly. The Wests were having difficulty keeping up with multiple mortgages and car payments and a luxurious lifestyle, so they filed for Chapter 7 bankruptcy. According to the Wests’ bankruptcy schedules, they had only $14 left over from their monthly income after expenses.
Because their debts were mostly consumer debts and because they maintained a relatively high income, their bankruptcy trustee moved to dismiss the Wests’ case under § 707(b)(1), claiming that relief would be an abuse of the bankruptcy system.
The ‘Substantial Abuse’ Test
The court noted that dismissal of a case under §707(b)(1) requires evidence that allowing Chapter 7 relief would be a substantial abuse of the bankruptcy laws. To make that determination, courts examine the totality of the circumstances surrounding the debtors’ case.
Generally, a court can dismiss a Chapter 7 case for either of two reasons: 1) The debtors are guilty of fraud or misrepresentations relating to their bankruptcy schedules; or 2) Even if there has been no fraud, the debtors have been irresponsible with their spending, and thus bankruptcy can be avoided by changes in lifestyle.
The court decided to allow the Wests to convert their case to a Chapter 13 bankruptcy. The court found that the Wests had been honest in creating their bankruptcy schedules but had been too careless with their spending. They spent far more than necessary on telephone service, food, and other expenses. The Wests could easily reduce their monthly spending by as much as $500 monthly and contribute those savings toward a Chapter 13 payment plan.
The Wests had a much higher income than most Chapter 7 filers. While a high income does not automatically constitute grounds for dismissal of the case, it does indicate that a more cautious use of financial resources could solve a financial dilemma, making bankruptcy unnecessary. Allowing Chapter 7 relief would amount to a substantial abuse of the bankruptcy laws in Wests’ case.
Practical Considerations if Your Bankruptcy Case is Dismissed
Both the bankruptcy trustee and the court have the power to move to dismiss a bankruptcy case for abusing the system. In order to qualify for bankruptcy, you must be both honest and sensible. Consult an experienced attorney to determine what type of bankruptcy, if any, is right for you.