Court Would Not use §105 to Dismiss Chapter 7 after it Found that Dismissal Wasn’t Warranted under §707

Court Would Not use §105 to Dismiss Chapter 7 after it Found that Dismissal Wasn’t Warranted under §707

Creditors ask the Court to convert Debtor’s Chapter 7 case to Chapter 11, Chapter 13, or to dismiss the case under various code sections. In general, the Creditors argue that Debtor should not receive Chapter 7 relief because he has substantial disposable income and a strong ability to pay. Debtor resists. Debtor argues that the sections the Creditors rely on do not apply here and that the cost of administering a Chapter 11 would be prohibitive.

The Movants are creditors in Debtor’s bankruptcy. In 2002, the Movants loaned money to Debtor for his business, Custom Dollar Systems, LLC. In 2010, these loans were rewritten into a single $75,000 promissory note. Debtor or Debtor’s business made one $1,000 payment on the note. Neither Debtor nor his business made any other payments.

On June 15, 2011, the Creditors sued Debtor and his business on the note in state court and obtained a judgment. The State District Court entered a $74,000 judgment against Debtor at 18% interest. The Court also awarded the Creditors attorney’s fees.

On February 17, 2017, Debtor filed this Chapter 7 bankruptcy. The Creditors’ $150,510.36 claim is the primary debt in this bankruptcy. Debtor’s total liabilities in this bankruptcy are $155,252.36.

According to Debtor’s tax returns, he made $46,473 in 2014, $56,152 in 2015, and $48,761 in 2016. In the first six months of 2017, Debtor received $33,829.10 in income. Debtor is a salaried employee, but part of his income is commission and varies significantly from month to month. Debtor has a disposable income of $1,988.29 per month. Debtor notes that he no longer operates the business for which he incurred the debt. Debtor also lives with and supports his girlfriend.

The Creditors filed a motion to convert or dismiss this bankruptcy. They ask the Court to convert the case to Chapter 11 or 13, or to dismiss the case under § 707(a), § 305(a)(1), or §105(a). Their primary argument under each of these sections is that Debtor has the ability to pay his debts.

The Creditors argue that the Court should convert the case to Chapter 11 under § 706(b) or Chapter 13 under § 105(a). The Creditors argue that a debtor’s ability to pay is the primary factor to consider when deciding whether to convert the case under § 706(b). The Creditors assert that, based on his tax returns and disposable income, Debtor has a strong ability to pay. The Creditors believe that, based on Debtor’s income in the first half of the year, his disposable income for 2017 will be even higher. Based on this evidence, the Creditors alternatively argue that the case should be dismissed under § 707(a), § 305(a)(1) or § 105(a).

Debtor resists. He argues that he does not have a strong ability to pay. He contends that conversion to a Chapter 11 under § 706 is improper because of the administrative costs. He argues that he does not even have assets with which to pay the filing or conversion fees, among other expenses that come with Chapter 11. Debtor argues that the law does not permit forced conversion to Chapter 13. Debtor also argues that there is no basis for dismissal under any of the sections on which the Creditors rely.

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