Chapter 7 With Your Fingers Crossed?

Debtors who file a chapter 7 petition without complying with the credit counseling requirements of BAPCPA are subject to dismissal of their cases under Bankruptcy Code section 109(h). But what if the Trustee discovers significant assets that can be liquidated for the benefit of creditors? In that case, it may be the debtor that wants to invoke section 109(h) and use the failure to obtain pre-petition credit counseling as an escape hatch.

In re Mendez, 2007 WL 1119891 (Bankr. App. 9th Cir. March 28, 2007) was such a case. In her motion to dismiss, the Debtor relied on several decisions which strictly enforced the credit counseling requirement against a debtor. These decisions rely on what seems like the clear language of section 109(h), that "an individual may not be a debtor " under chapter 7 unless he or she received pre-petition credit counseling. See, In re Fields, 337 B.R. 173 (Bankr. E. D. Tenn. 2005).

Nevertheless, the BAP has now held that section 109(h) is not jurisdictional, and that the requirement may be waived by a bankrutpcy court, at least in a case where the eligibility issue is invoked by the debtor.

Judge Tchaikovsky of the Northern District of California came to the same conclusion in February. See, In re Withers, 2007 WL 628078 (Bankr. N. D. Cal. 2007 ). Withers had the added feature that the Debtor had failed to file schedules, thus bringing him within the "mandatory dismissal" provision of 11 U.S.C. section 521(i). Judge Tchaivkovsky ruled that this requirement could also be waived.