As has been widely reported, the football coach of the University of Arkansas Razorbacks, John L. Smith, has filed chapter 7 bankruptcy. ESPN summarized his financial circumstances:
Arkansas coach John L. Smith is trying to wipe away $25.7 million in debt in bankruptcy court and hang onto $1.2 million in retirement accounts and some personal property . . . .
Smith was coaching Louisville when he began investing in real estate, which he has said, was profitable until land values took a nosedive. Smith filed for Chapter 7 bankruptcy on Sept. 6, and court papers filed Wednesday detail the depth of his financial losses.
As of the filing, Smith had received $115,000 from his 10-month, $850,000 contract with Arkansas, plus $35,643 from his alma mater, Weber State, which he left before coaching a game to return to Fayetteville after Bobby Petrino's firing. He also picked up $9,810 from Nike and $1,057 from a football camp, according to the court documents.
Smith has two retirement accounts, each worth about $600,000, which his filing lists as exempt from liquidation, along with household furnishings.
If you want to see for yourself, Smith's bankruptcy schedules are availabe at Scribd.
In 2011, the median chapter 7 debtor had $32,556 in annual income. WIth an $850,000 salary, Smith is certainly not the typical chapter 7 filer, and the Bankruptcy Code will protect his future salary. Moreover, Smith's principal assets--his retirement accounts--are exempt from the bankruptcy process. Thus, barring any hiccups, Smith should be able to walk way from $25.7 in million debts with a substantial salary and retirement savings.Granted, Smith's salary would cover only a small percentage of his $25.7 million in debts, but it is still a nontrivial sum in absolute terms. Smith would seem to have the capacity to make some partial repayment to creditors. Congress should do something to deal with "can pay" debtors using the bankruptcy system to walk away from obligations where they can make some repayment.
Oh, that's right, Congress did make these changes in 2005, adopting a "means test" that was supposed to direct people into a chapter 13 repayment plan when they had the capacity to repay. The means test, however, does not apply to Smith because his debts are related to a business and not "primarily consumer debts." Even the general standard of dismissal of a chapter 7 for "abuse" does not apply.
On the other hand, a single Arkansan like Smith with consumer debts and with an income over $35,283 potentially gets caught in the means test web. Congress was quick to go after $35,000/year debtors but did almost nothing to deal with cases like Smith's. The financial industry was lobbying against their credit card customers not persons who can afford to participate in high stakes real-estate partnerships. Congress listened to the lobbyists. The game does seem to be rigged against the middle class (to quote Elizabeth Warren . . . whatever happened to her after she left the blog?).
No blame attaches to Coach Smith. He is only doing what the law permits him to do. Smith's case is a reminder that, although almost seven years have passed since the 2005 bankruptcy law went into effect, it still needs fixing.
And, it is possible that there may still be a move to dismiss Smith's chapter 7 case given his apparent ability to repay at least some of his debt. Courts have sometimes read a "good-faith" filing requirement into chapter 7, which makes sense as a policy matter but is hard to justify as a matter of sound statutory interpretation when Congress has so clearly spoken on the issue of who belongs in chapter 7. There is the related question of how it is "bad faith" to do something permitted by statute. Yeah, the courts can "fix" the problem, but if the courts shoud just fix the statute's problems, why do we have a statute? In class, I refer to this idea as the "Bill & Ted" problem. If we can trust the courts to do what is right, why don't we just have one statute that reads "Be excellent to each other." Once you commit to the idea that the legislature writes the rules, the courts have constraints.
Hat tip to my former student Dimitris for both directing me to the story and for the subject line.
Source: http://www.creditslips.org/creditslips/2012/09/means-test-fail.html
hook troy miracle andy whitfield kennedy demi moore roy oswalt
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