Summary:
The Debtor filed Chapter 7 and was the subject of a random audit. The audit determined that the Debtor had understated her Current Monthly Income by $4,572. In response, the Debtor filed multiple amendments variously showing net monthly income of $589.92 (original), $4,272.71 (first amendment), $2,446.71 (second amendment), or -$179.29 (third amendment).
The Bankruptcy Administrator moved to dismiss based on the schedules being a “moving target”. The Debtor explained the difficulty as resulting from the Debtor’s non-filing spouse, who is the family ‘breadwinner’ and an independent truck driver, being unwilling to share his financial information with his wife. As such, the Debtor’s original petition was a “best guess” as to her non-filing spouse’s income. Only following the Motion to Dismiss, did the non-filing spouse begin to cooperate and provide detailed information.
The Bankruptcy Court held that “[l]acking the necessary information to file an accurate bankruptcy petition, [the Debtor] should not have filed one at all.” As such, cause existed to both dismiss the case and require Debtor’s counsel to disgorge his fees. Because accurate schedules had ultimately been filed, showing that the Debtor was in need of bankruptcy relief, Bankruptcy Court declined to impose such drastic sanctions.
Commentary:
This case points to the difficulties that exist in representing only one spouse in a bankruptcy case. (There are a whole other host of problems representing both spouses.) It is not uncommon for only one spouse to want to file bankruptcy, with the recalcitrant spouse refusing to provide any information at all.
This problem is actually worse in Chapter 13- Chapter 7 requires inclusion of the income of a non-filing spouse, unless the couple is separated, in which case only any actual contribution to the Debtor’s household is include. Chapter 13 requires inclusion of all of the income, regardless of contribution, in the CMI calculation. Only after such inclusion of the income can it then be ‘backed-out’ with a marital adjustment. Add this the fact that many Chapter 13 are filed under pressing circumstances, such as foreclosure or repossession, and the problem is compounded to the point where the “best guess” approach is unavoidable.
The solution to this, however, would have been to simply disclose that the non-filing spouse’s income was estimated. The penalty of perjury and obligation to disclose can be limited to what the Debtor actually know, particularly when such limited knowledge is disclosed. Then the Bankruptcy Administrator, Trustee, Auditor or creditors would be in a position to evaluate the petition in light of the estimates and, if necessary, obtain additional information (including directly from the non-filing spouse by means of a subpoena.)
For a copy of the opinion, please see:
Alvarez- Accuracy of Schedules and Non-Filing Spouse.pdf
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