Property of the Estate. John Patrick Goulding filed for Chapter 7 bankruptcy relief in 1987. In his schedules, he listed assets of $62,000 and debts of over $670,000. The majority of these debts were unsecured and were not consumer debts. The Federal

Question

Deposit Insurance Corp (FDIC), as successor to two banks, was the largest unsecured creditor ($379,000). The FDIC and the trustee learned that Goulding was the beneficiary of three irrevocable spendthrift trusts (the assets of which cannot be reached by creditors) that provided him with $12,000 per month, and that he would receive from the corpus (principal) of one trust $200,000 on January 30, 1988. The trustee and the FDIC filed a joint motion requesting the court to dismiss Goulding's Chapter 7 petition. Discuss whether the court should have dismissed Goulding's petition and whether any payments made from the trusts were part of the debtor's estate.

Answer 1

Property of the estate
A bankruptcy court can dismiss or suspend a petition in bankruptcy if the interests of the creditors and the debtor would be better served by dismissal or suspension. Unless the debtor's unsecured debts are consumer debts, in which case the court on its own motion can dismiss a petition if the debtor's ability to pay constitutes grounds for dismissal, the court can only grant dismissal by showing cause. Here, the debts were not primarily consumer debts, and the debtor's ability to pay was not adequate cause for dismissal. Therefore, the court denied the trustee's and the FDIC's motion. The court did, however, declare that the payments of $12,000 received during the six months after the filing of the petition ($72,000) were the property of the debtor's estate and available to the trustee for distribution. This case was decided before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, but the result under that act would likely have been the same.