OWNING BOAT MAY COST CHAPTER 7 DISCHARGE

Section 707 (a) of the bankruptcy code states that “The court may dismiss a case under this chapter only after notice and a hearing and only for cause,…” This means that the bankruptcy court has the power to dismiss a chapter 7 case and by so doing deny debtor a chapter 7 discharge. But what is “cause” for dismissal of a chapter 7 bankruptcy? Does owning a boat qualify as “cause” for dismissal of debtor’s chapter 7 case?

 In Re Falch, the debtor operated a general contracting business from 1987 to 2008. During that time, Patrick & Cynthia Young hired debtor’s company for a big construction project on their residence. A dispute subsequently ensued between the company and the Youngs. Debtor sued the Youngs for $120,000 that he believed they owed on the contract. The Youngs counterclaimed for damages. Eventually a judgment for $295,008 was entered against the debtor. The general slowing down of the contracting business due to the mortgage and housing meltdown that started in 2007 and this judgment caused debtor’s business to fail in 2008.

In 2009, debtor found a good paying job and a free home. He was hired as the property manager of a 52 acre residential estate at an annual salary of $150,000. He was allowed to live in a farmhouse on the property rent free. When debtor filed for chapter 7 relief, his schedule I showed take home pay of $7,809 and schedule J showed total monthly expenses of $7,742. These monthly expenses included $2,700 for payments and maintenance of a 40 foot boat worth $178,000. He also owned a 2007 Lexus that he purchased a few months before filing for bankruptcy. He paid $43,000 for the Lexus after trading in a 2003 Jaguar and a 2006 Lincoln Truck. His monthly payment on the car loan was $419.79.

The Youngs who held a judgment for $295,008 against debtor, filed a motion to dismiss the debtor’s case pursuant to Section 707(a). They characterized the bankruptcy filing as an attempt for debtor to maintain business as usual while discharging their claim. The debtor argued that the boat was a reasonable recreational expense that simply replaced the housing expense. “The difficulty with the debtor’s position is that he is not expending the funds for a home. He is spending the money to retain ownership and use of large boat for recreational use. There is no rational economic purpose served by retention of the boat. Whatever symbolic role the boat plays in the debtor’s inner emotional life, that factor does not outweigh the fact that the debtor proposes to pay more than $30,000 per year to retain and maintain the boat while certain creditors, to whom he owes substantial sums, go unpaid,” the court said.

But what if debtor actually lived in the boat and kept the boat as his residence? That would be a different story altogether. If that were the case, his boat payments would be treated as mortgage payment for his residence. Then the boat would not be considered solely for recreational use but for both residential and recreational use. If this were the case, there would be a rational economic purpose served by keeping the boat and the boat would not merely have a symbolic role in debtor’s emotional life because he would actually be living in it.

 Section 707 dismissal for “cause” states that “After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, trustee… or any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts… if it finds that the granting of relief would be an abuse of the provisions of this chapter.” Apparently, the court found that giving a chapter 7 discharge to a debtor who was making payments and maintenance on a 40 foot boat purely for recreational purposes would be an abuse of bankruptcy law. Therefore, creditors’ motion to dismiss chapter 7 case is GRANTED.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than five thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.