Summary of a Recent
Judicial Development in
Bankruptcy

The Court Has Discretion to Dismiss a Chapter 7 Case
Based On Failure to Obtain Credit Counseling

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In In re Timmerman, 379 B.R. 838 (Bankr. N.D. Iowa 2007), the United States Bankruptcy Court for the Northern District of Iowa held that the court had discretion to dismiss the Debtors' case based on their failure to obtain credit counseling, but after considering the relevant factors denied the Debtors' motion to voluntarily dismiss their case.

Background

The Debtors filed their Chapter 12 petition in March 2006. Id. at 840. The petition stated that they had received credit counseling and listed them as non-business/consumer debtors instead of business debtors. Id. The Debtors subsequently received a notice that they had not properly complied with credit counseling requirements, and they filed a new notice of credit counseling on May 2, 2006. Id. at 841. The Debtors converted their case to one under Chapter 7 in February 2007. Id. at 842. The Debtors faced objections to their discharge and homestead exemption claim, and moved to dismiss their case on the grounds that they were ineligible for relief because they did not obtain credit counseling prior to filing their original petition pursuant to 11 U.S.C. § 109(h)(1). Id. at 843.

Arguments

Debtors argued that they are ineligible for Chapter 7 relief because they did not obtain credit counseling pursuant to 11 U.S.C. § 109(h)(1) prior to filing their Chapter 12 petition, nor did they obtain a waiver of the requirement. Id. at 843-44.

Creditors argued that to allow dismissal would result in prejudicial delay of payment. Id. at 845.

Analysis and Holdings

The court rejected the Debtors' argument that the court lacked discretion in the matter and must dismiss. Id. The Timmermans' motion to dismiss was brought under 11 U.S.C. § 707(a), which states that the court may dismiss a case under this chapter only after notice and a hearing and only for cause. Id. The court noted that in determining whether to dismiss a case, they must balance the equities and weigh the benefits and prejudices of a dismissal. Id. Further, a debtor does not have an absolute right to dismiss a Chapter 7 case. Id. When deciding whether to exercise its discretion to dismiss, a court generally considers the following factors: "(1) whether all of the creditors have consented; (2) whether the debtor is acting in good faith; (3) whether dismissal would result in a prejudicial delay in payment; (4) whether dismissal would result in a reordering of priorities; (5) whether there is another proceeding through which the payment of claims can be handled; and (6) whether an objection to discharge, an objection to exemptions, or a preference claim is pending." Id. Several creditors objected to the Debtors' dismissal, and none of them consented. Id. Moreover, the court determined that there was a lack of good faith in the Debtors' motion because they had accepted the benefits of bankruptcy for 21 months, and their statement that they had received credit counseling already was misleading to their creditors. Id. at 845-46. The court further found that dismissal would result in prejudicial delay in payment to creditors, and would result in a reordering of priorities. Id. at 846. The court concluded that the factors overwhelmingly favored denying the Timmermans' motion to dismiss. Id.

The case was decided on December 10, 2007.