By Columbia-Lexington Bankruptcy Attorney Lex Rogerson
For many years the Bankruptcy Code has attempted to put chapter 7 off limits to those who can afford to pay a significant portion of their debts. Those people, the law says, need to be in chapter 13 plans, paying their creditors as much as they can afford.
But what about people with limited income that are married to highly paid spouses? Should the spouse who is not filing bankruptcy be saddled with the debts of the other? An appellate court opinion filed in November 2013 indicates the answer is at least sometimes yes.
The Kulakowski case
Susan and Edmund Kulakowski of Winter Haven, Florida, had been married for 21 years, filed joint tax returns, owned their home jointly, and generally ran their household economics jointly. Susan accumulated over $130,00o in unsecured debt, much of which was for the household and some specifically for the benefit of her husband Edmund. He earned over $100,000 per year, although Susan herself was not employed. When Susan alone filed chapter 7, the United States Trustee moved to dismiss the case as an abuse of the bankruptcy system.
Under the abuse rules, a bankruptcy court may dismiss a consumer chapter 7 case under either of two approaches. The first involves the means test, a formula designed to determine the debtor’s disposable income under certain standardized assumptions. If the debtor “fails” the means test, meaning the formula finds she could pay at least a meaningful part of his debt, the presumption arises that chapter 7 would be an abuse. If the debtor then cannot rebut the presumption by showing special circumstances, the bankruptcy can be dismissed or converted to chapter 13. Significantly, on the income side of the means test, the only portion of the other spouse’s income that counts is the amount he regularly contributes to household expenses. The debtor can exclude amounts the non-filing spouse spends solely for himself.
The second approach is much looser: the court can dismiss if a case is deemed abusive under the “totality of the circumstances.” The bankruptcy court has wide discretion to determine which circumstances count and the importance of each. But the debtor’s ability to pay is the dominant consideration under this approach as well.
In Susan Kulakowski’s case, the US Trustee did not assert the means test but argued her case was abusive solely under the totality of circumstances. The bankruptcy court agreed and dismissed. Susan appealed, and the district court affirmed. She then appealed to the US Court of Appeals for the Eleventh Circuit in New Orleans, one of the second-tier courts below only the US Supreme Court.
The Eleventh Circuit opinion
Susan first argued that, because the means test takes into consideration only the part of her husband’s expenses that he regularly contributed to the household, the court should consider only that amount in considering the totality of circumstances. The court of appeals disagreed, pointing out that this limitation was part of the definition of “current monthly income,” a term used in the means test. By comparison, the subsection of the Bankruptcy Code dealing with the totality of circumstances does not use that term at all. Therefore, in considering the overall circumstances of the debtor’s case, the bankruptcy court could consider all the spouse’s income, not just that part he contributed to the household.
Having concluded that the husband’s full income was not off limits as a matter of law, the appeals court then decided the bankruptcy court did not abuse its discretion in dismissing Ms. Kulakowski’s bankruptcy. It pointed to the facts that:
- the Kulakowskis had been married for over 20 years and pooled their income and expenses;
- Edmund had benefited directly from the debts Susan was seeking to discharge; and
- Susan had in turn benefited from Edmund’s income, which might just as readily benefit her creditors.
What the decision means
One could argue that the decision has very limited impact. The court of appeals was careful to state its ruling was based on the particular circumstances of Ms. Kulakowski’s case. The court added, “We do not opine on how much weight, if any, a non-debtor spouse’s income should carry in a bankruptcy court’s [abuse] analysis, nor do we suggest that a bankruptcy court’s discretion in applying this provision is unlimited.”
On the other hand, the holding that the entirety of a spouse’s income counts in the totality-of-circumstances question tends to say that the rules applied in the means test have little impact when the court considers abuse under the totality-of-circumstances test. While some courts hold that means test allowances tend to set presumptively reasonable standards, the Eleventh Circuit appears to see the means test as a sort of “heads I win, tails you lose” proposition. It can hurt the debtor if it goes badly, but the standards cannot help her if it goes well.
To be fair to the court, this is not all its fault. Its interpretation has substantial merit as an interpretation of the current language of the Bankruptcy Code. If the field is slanted against the debtor, Congress is responsible for tipping it in that direction.