Debtor’s Guaranty of Wife’s Business Debt was a Non-consumer Debt, so he was Not Subject to Abuse Test under § 707(b)(1)

Debtor’s Guaranty of Wife’s Business Debt was a Non-consumer Debt, so he was Not Subject to Abuse Test under § 707(b)(1)

A guaranty of a business debt is generally not a consumer debt. In this chapter 7 case, the creditor contends that the debtor agreed to guarantee his estranged wife’s company’s industrial revenue bond obligations in connection with a commercial development project in exchange for her waiver of spousal support. Because spousal support is usually a consumer debt for Bankruptcy Code purposes, the guaranty holder asserts the debtor incurred the guaranty debt for “consumer purposes” and that it should count as such in determining whether the debtor’s chapter 7 petition constitutes abuse under § 707(b)(1). If the Court determines it is a consumer debt under 11 U.S.C. § 101(8), the debtor would be subject to the means test found in § 707(b)(2) or the totality of the circumstances test found in § 707(b)(3), possibly resulting in this case being dismissed.

Shortly after debtor’s chapter 7 filing, the creditor Security State Bank of Kansas City (“Bank”) moved to dismiss the case for abuse under § 707(b)(1). The debtor moved for summary judgment contending that § 707(b)(1) didn’t apply because debtor’s debts, including the guaranty, were not primarily consumer debts. The Court denied the motion because of open factual issues that precluded a summary determination on whether the guaranty debt was incurred “primarily for a personal, family, or household purpose.”

Debtor Steven  filed this chapter 7 case on July 8, 2016 to deal with several years of unpaid income taxes and shortly after the Bank obtained a state court judgment against Stephen on a guaranty he gave on his estranged wife’s company’s commercial debt. In his petition Stephen stated that his debts were primarily business debts and not primarily consumer debts. He did not complete Official Form 122A-1 to determine whether the means test applies, claiming to be exempt from a presumption of abuse.

Stephen is a 64-year-old emergency care staff physician who is a salaried employee at a hospital. He works for another medical center and holds a third job as a county EMS Director. He receives salary compensation for these services. Prior to 2013, Stephen had been employed by hospitals as an independent contractor. He underpaid his income taxes during that time and was attempting to pay those back taxes through asset sales and his income. At the petition date, Stephen owed $445,911 in back taxes, $246,936 of which is non-dischargeable priority taxes. The Internal Revenue Service’s tax claim comprises roughly 34% of Stephen’s $1.3 million in debt. The Bank holds a judgment against Stephen on the Guaranty that exceeds $642,000 and its claim comprises approximately 49% of Stephen’s debts


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