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A recent 5th U.S. Circuit Court of Appeals decision that gets tough on debtors who file for Chapter 7 bankruptcy protection may have some unintended consequences. In a case of first impression in the nation, the 5th Circuit found that a bankruptcy court can consider post-petition events-particularly a debtor’s changed employment status-when deciding whether to dismiss a Chapter 7 petition. In determining whether debtors qualify for debt relief, bankruptcy courts have traditionally looked only at their financial situation as of the day they filed their petitions . Cortez v. United States Trustee, No. 05-10459, involved Carlos Vincente Cortez and his wife, Suzanne Hallman Cortez, who filed jointly for Chapter 7 bankruptcy protection on April 8, 2004, in a U.S. bankruptcy court in the Northern District of Texas. At the time of the filing, Carlos Cortez was unemployed and Suzanne Cortez worked as a registered nurse. Their monthly expenses exceeded their monthly income, which qualified them for Chapter 7 relief under pre-reform laws. But four days after they filed their bankruptcy petition, Carlos Cortez was offered a position making $95,000 a year as a human resources director of a company. He accepted the job. That income made the couple’s monthly income higher than their monthly expenses. The U.S. trustee, William Neary, subsequently moved to dismiss their petition under 11 U.S.C. 707(b), the statute that governs bankruptcy dismissals. The means to repay Neary asserted that the Cortezes “appear to have the means to repay a substantial portion of their debts through a Chapter 13 plan,” and that it would be “substantial abuse” under Section 707(b) to grant the Cortezes relief under Chapter 7. Chapter 13 bankruptcy allows debtors to reorganize their finances and pay off debtors over a period of years. Debtors often favor Chapter 7 bankruptcy, because it allows them to clear their debts after liquidating their assets and distributing the proceeds among creditors. Last year, Congress tightened Chapter 7 so that, among other things, debtors are subject to a means test that evaluates their finances for the six months prior to the filing. U.S. Bankruptcy Judge Michael Lynn of Fort Worth, Texas, denied the trustee’s motion to dismiss, concluding that he could only consider the Cortezes’ financial circumstances as they existed on the date they filed their bankruptcy petition. U.S. District Judge John McBryde of Fort Worth reversed, saying that Section 707(b) makes clear “that post-petition events are to be taken into account in ruling” on a bankruptcy petition. The 5th Circuit affirmed McBryde’s decision on July 20. The appellate court found that Section 707(b) does not contain language limiting consideration of ongoing developments in a debtor’s financial situation. Rather, it suggests that bankruptcy courts can consider subsequent developments in a debtor’s financial situation when determining whether to dismiss a Chapter 7 petition. “Given that post-petition events should be considered up until the date of discharge, we remand this case to the district court with the instructions to return it to the bankruptcy court,” the 5th Circuit said. Behrooz Vida, a partner in Venable & Vida in Bedford, Texas, who represents the Cortezes, believes that Cortez will encourage unemployed debtors to maintain that state, because trustees likely will move to dismiss cases should they become employed during the pendency of a bankruptcy. “I would have to tell a client if you get a job, you may end up in a 13. By that I mean anyone who [should] qualify as a 7,” Vida said.

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