In Determining Whether Debts are Primarily Consumer or Business Debts for Means Test Purpose, the Terms “Debt” and “Claim” are Synonymous

In Determining Whether Debts are Primarily Consumer or Business Debts for Means Test Purpose, the Terms “Debt” and “Claim” are Synonymous

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) draws a critical distinction between whether the debts of a particular debtor are primarily consumer debts or primarily business debts in a Chapter 7 case. If the debts are primarily consumer debts in a Chapter 7 case, the court may dismiss such a case if the granting of Chapter 7 relief would be an “abuse” of the Bankruptcy Code. If the debts are primarily business debts, the abuse analysis is not applicable.

The threshold issue presented in this case is whether a mortgage encumbering a debtor’s 50% interest in a home, for which the debtor is not personally liable, is still a “debt” for the purpose of calculating whether the debtor has primarily consumer debts. The Bankruptcy Code defines “debt” and “claim.” Generally, the debtor owes a debt to the creditor and the creditor holds a claim against the debtor. Are the words “debt” and “claim” as used in the Bankruptcy Code synonymous?

The Debtor, a medical doctor, filed for relief under Chapter 7 on September 9, 2016. On Schedule A, he identified a fifty percent interest in certain real property (the “Property”) valued at $1,774,000, with the value of the fifty percent portion he owned as $887,000.  On Schedule D, the Debtor identified the amount of the mortgage on the Property as $1,858.681.

The United States Trustee (“UST”) moved to dismiss the Debtor’s case as an abusive case under §§ 707(b)(1), (2) and (3)1, asserting the mortgage on the Property, a secured claim in the case, was also a “debt” for purposes of determining whether the Debtor had primarily consumer debts, citing numerous cases and legislative history in support of that position discussed below. The UST further argues under the specific facts of this case, the Debtor’s case should be dismissed as abusive. If the Debtor has primarily consumer debts, the analysis of whether his case is an “abuse” must be undertaken.

In response, the Debtor argues the mortgage is a “claim” but not a “debt,” because in § 101(12), the Bankruptcy Code defines a “debt” as “liability on a claim,” and the Debtor was not personally liable for the mortgage. The Debtor acknowledges the mortgage is a “claim” against the estate, but contends that because he is not personally liable for the mortgage, the mortgage is not a “debt” within the plain language of the Bankruptcy Code. The Debtor reasons: “Under the plain language of the statute, § 707(b) looks to the nature and amount of debts for which the debtor is liable, not to claims against the debtor’s estate. Accordingly, because the debtor is not personally liable for the mortgage on his residence, and his business debt therefore outweighs his consumer debt, the debtor is a business debtor, and the ‘abuse’ provisions of §707(b) are not applicable.”3 The Debtor further contends other sections of the Bankruptcy Code support the argument that a ‘debt’ is intended to refer to in personam liability on a claim, citing to § 727(b) as referring to the discharge of “debts” and any “liability on a claim that is determined under section 502.” Because a discharge, under § 727(a), discharges only in personam liability, Debtor asserts “it is evident that ‘debt’ is intended to refer to personal liability, not a claim against property.” The Debtor also argues the absence of the word “debt” in 11 U.S.C. § 506 is indicative that “debt” and “claim” are not interchangeable terms.

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