In re Clark is not just a means-test case. It is also a reminder that even if a debtor stumbles into Chapter 7 eligibility math, § 707(b)(3) still looms large—and can be dispositive—when the court looks at bad faith and the totality of the circumstances.
Judge Pamela W. McAfee used both tools, methodically and unapologetically.
The Short Story
The debtors, self-employed real estate agents whose income collapsed post-pandemic, filed Chapter 7 believing they were below median. During the six-month lookback, they liquidated cryptocurrency and received roughly $68,000 in proceeds. The Bankruptcy Administrator moved to dismiss, arguing that those proceeds pushed CMI above median, triggering a presumption of abuse. The debtors countered with three arguments: (1) crypto is “currency,” not an asset; (2) selling an asset doesn’t produce “income”; and (3) if it does, only gains realized during the six-month period should count.
Judge McAfee rejected the first two outright and the third on evidentiary grounds. Crypto was an investment, not “currency.” Gains from investment assets count as income for CMI. The debtors offered no evidence of basis or gain, so the court used what was proven: the money received.
That alone was enough for dismissal under § 707(b)(2).
But Judge McAfee didn’t stop there.
Crypto Is Not Cash—At Least on This Record
The court had little patience for the idea that cryptocurrency functioned like legal tender here. The debtor testified he bought it as an investment, held it long-term, then liquidated it to dollars to pay bills. Investments are “capital invested,” and income includes gains from capital. When the investment thesis is explicit, the characterization follows.
Income Means Gains—But Proof Is Everything
Judge McAfee walked a line many courts recognize: a gain realized on the sale of property is income; a mere return of capital is not. The problem wasn’t the law; it was proof. Absent evidence of basis or gains, the court could not carve out non-income. The proceeds received during the lookback period pushed CMI above median and triggered § 707(b)(2). Separately—and decisively—the court also found abuse under § 707(b)(3) based on lifestyle choices, inconsistent schedules, and a lack of meaningful belt-tightening.
Clark is not a declaration that every pre-petition sale equals income. Judge McAfee expressly distinguished personal, non-investment assets—cars, homes—from investments. The sky is not falling. Selling a vehicle to keep the lights on does not suddenly become “income.” This preserves Billy Brewer's post-BAPCPA truism that "moving a dollar bill from one pocket to another" is not income.
But the opinion does reject a comforting oversimplification: when the asset is an investment and the proceeds reflect gains, those gains belong in the CMI analysis—and when debtors can’t prove otherwise, courts will use what’s in front of them.
Exemption Planning Is Fine. Timing Still Matters.
Selling non-exempt investment assets and using the proceeds to acquire or preserve exempt assets can be lawful pre-bankruptcy planning. Bankruptcy courts have said for decades that this is permissible, even expected. The old bankruptcy saw still applies: pigs get fat, hogs get slaughtered. Reasonable planning is protected; overreach invites scrutiny.
What Clark reminds us is that means-test mechanics can trip-up otherwise legitimate planning if the timing is wrong. Liquidate an investment within the six-month lookback, and the resulting gains can spike Current Monthly Income (CMI). That spike can cascade into Disposable Monthly Income (DMI) and trigger a presumption of abuse—forcing a Chapter 13 or dismissal—even though the asset is gone and the income will never recur.
In other words, the exemption planning may be sound, but the filing date may not be.
One fix is often simple and unglamorous: delay filing until the lookback clears. This can require consumer bankruptcy attorneys to give their clients temporary relief from collection harassment through the use of Buzz Off Letters under the FDCPA and NC UDTPA and other hand-holding counseling during those delays, but those are arrows all of us need to have in our quivers.
Chapter 13 and Lanning: A Structural Irony
The same liquidation that doomed Chapter 7 would likely fare better in Chapter 13.
Under Hamilton v. Lanning, courts may exclude income events that are “known and virtually certain” not to recur. Once an investment asset is sold, it cannot be sold again. Those gains are prime candidates for a Lanning adjustment, excluded from projected disposable income.
Thus, the same transaction that can be fatal in Chapter 7 could be largely neutral in Chapter 13—a structural choice, not a contradiction.
§ 707(b)(3): When the Court Looks Past the Math
Even if the debtors had threaded the needle on the means test, § 707(b)(3) would have ended the case.
Judge McAfee conducted a classic totality-of-the-circumstances analysis, grounded in Fourth Circuit precedent, and found abuse on multiple, reinforcing grounds:
1. Lifestyle Choices and Lack of Belt-Tightening
The court focused heavily on expenses that, taken together, signaled an unwillingness to adjust lifestyle while seeking to discharge over $300,000 in unsecured debt:
-
Private school tuition for three children, without evidence of special educational need
-
Ongoing discretionary spending (subscriptions, alcohol, seafood delivery, entertainment)
-
Family vacations and recreational expenses
-
Minimal reduction in personal expenses despite claimed financial distress
The court was explicit: bankruptcy relief is for the truly needy, not for preserving a comfortable pre-petition lifestyle at creditors’ expense.
2. Inconsistent and Unreliable Schedules
The schedules and statements of income and expenses did not “reasonably and accurately reflect” the debtors’ financial condition:
-
Schedule I income figures conflicted with the means-test numbers
-
Schedule J understated recurring expenses (including tuition and health-sharing costs)
-
Business and personal expenses were blurred
-
Operating expenses used to calculate CMI were unsupported
These inconsistencies mattered. Schedules are not aspirational documents; they are supposed to tell the truth.
3. Asset Liquidation and Pre-Filing Conduct
The court was clearly troubled by testimony that the debtors were advised to “burn through” cryptocurrency before filing. (This unfortunately sounds rather similar to the "manipulation" the judges at the 4th Circuit were concerned about in the recently argued Goddard v. Burnett case.) While Judge McAfee stopped short of making this dispositive bad faith—crediting evidence that liquidation had begun earlier—it still weighed against the debtors in the overall analysis.
Likewise, the last-minute change in the debtors’ business entity, which effectively cut off creditor access to future commissions while discharging the associated debts, did not help. Standing alone it might not prove abuse; combined with everything else, it tipped the scale.
4. The Big Picture
Viewed holistically, the court found:
-
No meaningful effort to repay creditors
-
No meaningful effort to reduce discretionary spending
-
Financial disclosures that obscured rather than clarified
-
Strategic choices that benefited the debtors while freezing out creditors
That combination, not any single act, demonstrated abuse under § 707(b)(3).
Practice Pointers With § 707 in Mind
-
Document basis and gains for any investment liquidation in the lookback.
-
Mind the calendar; delay filing if liquidation inflates CMI.
-
Use Chapter 13 strategically and invoke Lanning for non-recurring gains.
-
Expect lifestyle scrutiny under § 707(b)(3), even if the means test is close.
-
Get the schedules right—internally consistent, well-supported, and boring.
An Additional Practice Point on Attorney Fees
This was not a routine no-asset Chapter 7. The debtors liquidated more than $90,000 in cryptocurrency, triggered extensive discovery, evidentiary hearings, contested § 707(b)(2) and (b)(3) litigation, and presented complex exemption-planning and income-characterization issues.
Yet the attorney fee was $1,925—essentially the median Chapter 7 fee throughout all three districts in North Carolina.
That disconnect matters. Cases like this are structurally different from ordinary no-asset filings. Pricing them as if they are the same is a recipe for uncompensated risk and unhappy outcomes- not just for the attorney taking on a case for far less than the amount of time required, but also for the clients, since the low cost can lull them into a false sense of security about their risks.
This is complicated by the fact that in North Carolina, Chapter 7 debtors and their attorneys cannot "unbundle" the costs of defending against a Motion to Dismiss, etc. from the underlying costs of a Chapter 7. One untested possibility for cases such as this would be to charge and collect a much higher fee prior to filing, refunding unearned portions if no problems arise. Whether that would pass muster with the Bankruptcy Administrator (or USTP) or get snagged by the sticky fingers of a Chapter 7 trustee as non-exempt are additional questions.
Bottom Line
Clark is not an anti-crypto opinion, nor an attack on exemption planning. It is a reminder that Chapter 7 relief is both mathematical and equitable. You must pass the means test—and still convince the court that, under the totality of the circumstances, granting a discharge makes sense.
Exemption planning remains valid.
Chapter 13 remains flexible.
But Chapter 7, when paired with recent investment liquidation and an unreformed lifestyle, is unforgiving.
Feed the means test too much, too fast—and ignore § 707(b)(3)—and don’t be surprised when the court shuts the door.
To read a copy of the transcript, please see:
Blog comments