Employment After Bankruptcy Could Botch Relief Grant

August 1, 2006 (PLANSPONSOR.com) - A decision by the 5th Circuit Court of Appeals says a bankruptcy court can consider a debtor's employment status even after he files a petition for bankruptcy.

Bankruptcy courts have traditionally looked at only a person’s financial standing as of the day they file for bankruptcy to gauge whether the person would qualify for financial relief under Chapter 7, which allows debtors to clear their debts after liquidating their assets and distributing the proceeds among creditors.

However, the appeals court upheld the decision of a lower district court that said post-petition circumstances, such as employment that draws in more income, could be considered as well  – a decision that could send out the message to individuals to wait until bankruptcy is over until getting a job.

Carlos Cortez and his wife Suzanne, a registered nurse, filed for bankruptcy under Chapter 7 in April 2004, when the couple’s monthly expenses exceeded their monthly income, because Carlos had been without a job for four months, according to the opinion .

Four days after the couple filed the bankruptcy petition, Carlos landed a job as a human resources director for Aramark Healthcare Management services, which paid an annual salary of $95,000, at which point they had enough money to cover monthly expenses by $1,325 per month.

The Cortez’s gave documents to the United States Trustee in May 2004 testifying to his new job, but two months later the trustee filed a motion to dismiss the bankruptcy claim. The trustee asserted the couple had enough money to repay their debt under a Chapter 13 plan and the trustee argued that because the Cortez’s income then exceeded their expenses, it would be a “substantial abuse of relief” to grant relief.

US Bankruptcy Judge Michael Lynn in Fort Worth denied the trustee’s motion to dismiss the petition, saying that “post-petition events should not be considered in deciding whether to throw out a case” under the provision of a statue that governs dismissals.

A district court overturned Lynn’s decision and the 5 th Circuit upheld the district court decision.