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Section 707(b) Dismissal for Abuse

In re Croft (October 14, 2015)
Facing summary dismissal for failure to pay their delinquent post-petition taxes in accordance with a previously-entered agreed order, the Debtors converted their bankruptcy case from chapter 13 to chapter 7. After conversion, the U.S. Trustee sought dismissal of the case pursuant to section 707(b)(3)(B), which authorizes courts to dismiss – or, with the debtor’s consent, convert to chapter 13 – cases for abuse demonstrated by the totality of the circumstances of a debtor’s financial situation. The Debtors argued that section 707(b) does not apply to cases converted to chapter 7 from another chapter. Finding the language of 707(b)(1) ambiguous, the Court looked to the remedial purposes of the  statute. According to the Court, section 707(b) was intended to limit the chapter 7 remedy to those debtors who need such relief, so what matters is whether the relief is warranted, not how the case got to chapter 7. Further, the Court reasoned that a holding that section 707(b) did not apply to converted cases would allow some debtors to avoid the limitations Congress intended to place on chapter 7 relief by filing under chapter 13 and then converting to chapter 7, which would undermine the apparent goal of Congress. Therefore, the Court held that section 707(b) applies to converted cases. Applying section 707(b)(3)(B) to the facts, the Court concluded that the Debtor’s high income, expenses in excess of the IRS National and Local Standards, and repeated failure to pay their taxes, when considered together, demonstrated abuse of the provisions of chapter 7.
In re Croft, 539 B.R. 122 (Bankr. W.D. Tex. 2015).