Warning to Debtors – Do Not Spend Lavishly Before Filing for Chapter 7 Bankruptcy

Note: This is a guest post contributed by Robert W. Glantz, Esq.

In a recent decision, In re Michael D. Schwartz and Aseneta Schwartz, the United States Court of Appeals for the Seventh Circuit (Illinois is within the Seventh Circuit), the Seventh Circuit warned debtors who plan to file for Chapter 7 Bankruptcy Protection to not spend lavishly before they file, or risk that their bankruptcy case will be dismissed for cause under Section 707(a) of the Bankruptcy Code.

WHAT HAPPENED IN THE SCHWARTZ CASE?

Michael Schwartz was hired by Barclay Capital, Inc. As a part of his compensation, Barclays loaned him $400,000, which they both agreed would be forgiven over time. Shortly after he was hired, he was fired. Barclays then demanded that he return the unforgiven principal of the loan (approximately, $340,000). Mr. Schwartz refused and Barclays filed suit and eventually won a judgment against him in the amount of $568,568 ($340,000 plus a boatload of attorneys’ fees and interest).

In response to the judgment, Mr. and Mrs. Schwartz filed for protection under Chapter 7 of the Bankruptcy Code. Their hope was to obtain a discharge of their debts, including the amounts due Barclays. As the Seventh Circuit pointed out:

“A discharge would have given them a “fresh start” which is to say a future without debt, until they borrowed again or otherwise accrued new debt.”         

Between the time of the $568,568 award to Barclays and the time they filed under Chapter 7, the Schwartzes spent thousands of dollars on inessential consumer goods and services, including a trip to Disney World. In addition, even though it was plain to see that they would lose the suit filed by Barclays, the Schwartzes continued to spend lavishly (well above their monthly net income) including private-school for their children and a luxury SUV.

The Seventh Circuit upheld the dismissal of the Schwartz’ Chapter 7 for cause under Section 707(a) of the Bankruptcy Code stating:

“Suppose the debtor can pay all or some of his debts without hardship yet refuses without any plausible excuse. We agree with the cases that allow “for cause” to embrace conduct that, while not a violation of the required procedures, avoids repayment of debt without adequate reason.”      

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