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Fourth Circuit Declines to Punish “Frugal Debtors” in Bankruptcy Appeal

The United States Court of Appeals for the Fourth Circuit recently published a decision that affirmed a bankruptcy court’s ruling to deny a US Trustee’s motion to dismiss a Chapter 7 bankruptcy case as an abuse of the bankruptcy code. The trustee questioned the propriety of the standardized instructions for preparing a Chapter 7 bankruptcy as applied to debtors who incurred less than the “National and Local Standard Amount” for exemptible expenses but were specifically instructed by the form to use the standard amounts rather than their actual expenses.

FormsBy ruling that the plain language of the statute resulted in a fair and reasonable policy, the court found no merit to the bankruptcy administrator’s arguments in the motion. As a result of the most recent ruling, the debtor’s bankruptcy will not be reversed.

Bankruptcy Debtors Face an Objection After Following Clear Instructions on a Mandatory Form

The debtors in the case of Lynch v. Jackson are a married couple from North Carolina who filed a petition under Chapter 7 of the bankruptcy code in 2015 to seek relief from their debts. Since their family had an above-average income for the region, the debtors were required to submit a “means test” to the court to determine their eligibility for Chapter 7 bankruptcy relief.

The means test requires the submission of a form outlining expenses that are applicable to the debtor for purposes of determining disposable income. The debtors followed the instructions on the form, using numbers from a national and local standards table for certain expenses in lieu of their actual expenses. Their actual expenses were lower than those in the table. Since the debtors followed the instructions on the form, the amount of expenses they submitted to the court was higher than their actual expenses, leading the bankruptcy administrator to file an objection to the discharge.

The Bankruptcy Court Assumes the Instructions Are Valid

The bankruptcy court denied the trustee’s motion, viewing the plain reading of the statute and the form it created to allow debtors who spend less than the local/national standard amounts on certain expenses to be entitled to claim the standard amounts for the purposes of determining disposable income and their ability to repay financial obligations. Not satisfied with the result, the trustee brought a direct appeal to the Fourth Circuit, with the debtors agreeing to expedite the appeal.

The Fourth Circuit Ruling Avoids an “Absurd Result” and Maintains the Clear Intention of the Legislature

The Fourth Circuit agreed to take the direct appeal, declining the court’s right to refuse the case on procedural grounds. The court first noted that statutes and laws should be taken at face value, and the plain meaning of a statute should be given deference. In ruling that Congress intended to allow debtors to claim applicable expenses greater than their actual expenses, the court explained that the alternative interpretation of the law would punish frugal debtors by offering the most protection and relief to those debtors with the highest expenses. The court instead found that debtors who are frugal and spend less than the average on a particular expense should not be prevented from seeking bankruptcy relief because they are thrifty and spend less than others in similar circumstances. Although the statute as written gives some debtors credit for expense amounts that they do not actually pay, this interpretation incentivizes financial responsibility among bankruptcy debtors, which is consistent with the goals of the bankruptcy code in general.

Finding the Right Bankruptcy Attorney

If you or a loved one is considering bankruptcy, you may be entitled to more favorable terms than you initially thought. The skilled bankruptcy lawyers at the Schwartz Bankruptcy Law Center can help you get your finances back on the right track, and we can make sure that you claim all of the exemptions and credits to which you may be entitled. Our knowledgeable and competent bankruptcy lawyers know that your financial situation may change with time, and we consider that when preparing your case. At the Schwartz Bankruptcy Law Center, we represent clients throughout the U.S. in many bankruptcy proceedings. Call 866-366-3328 or contact us through our website to schedule a risk-free consultation.

More Blog Posts:

Appeals Panel Upholds Dismissal of Pro Se Debtor’s Bankruptcy Case, Kentucky Bankruptcy Lawyers Blog, published December 2, 2016.

Appellate Panel Reverses Bankruptcy Court Ruling that Had Refused to Reopen Debtor’s Bankruptcy, Kentucky Bankruptcy Lawyers Blog, published December 28, 2016.

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