Mental Incapacity Excuses Debtor From Credit Counseling; Prior History Proves Insufficient Grounds for Dismissal

Judge Robert Jones from the Northern District of Texas was recently faced with a situation which looked like an easy candidate for dismissal. The debtor filed pro se, did not obtain credit counseling, had previously filed ten unsuccessful bankruptcy cases and had filed over 100 suits against various parties. Despite the debtor's unsympathetic profile, the court carefully read the statute and considered the circumstances in determining not to dismiss the case. In re Jarrell, No. 06-10409 (Bankr. N.D. Tex. 3/9/07).

The Incapacity Exception to Credit Counseling

While the requirement to obtain credit counseling is well known, the exceptions are somewhat more obscure. Under Sec. 109(h)(4), a debtor may be excused from credit counseling if he has an incapacity or a disability. Incapacity is defined as meaning that the debtor "is impaired by reason of mental illness or mental deficiency so that he is incapable of realizing and making rational decisions with respect to his financial responsibilities." Disability means that "the debtor is so physically impaired as to be unable, after reasonable effort, to participate in an in person, telephone, or Internet briefing."

At the hearing on the motion to dismiss, the debtor's psychologist testified he had diagnosed the debtor with bipolar disorder, schizophrenia and clinical depression. The psychologist testified that the debtor "is severely impaired to the point where he is unable to make rational decisions regarding his financial responsibilities and ... doesn't have the mental ability to realize his decisions are irresponsible." On the other hand, the debtor had sufficient capacity to recognize his income and specific assets and debts. The court was satisfied that the debtor had a mental illness and commented that his filing of over 100 lawsuits "may in and of itself be evidence of mental illness." Based on the undisputed testimony of the psychologist, the court found that the debtor's mental incapacity was sufficient to justify a waiver of the pre-filing credit counseling briefing.

Judge Jones's ruling should be unremarkable for the reason that he read the statute and applied it as written. However, the exception which the court applied highlights a weakness in the statute itself. The credit counseling requirement has been described as "absurd," "a meaningless formality" and "a trap for the unwary" by Texas judges. In re Sosa, 336 B.R. 115 (Bankr. W.D. Tex. 2005); In re Navarro, No. 06-51007 (Bankr. W.D. Tex. 6/27/06). While the mentally ill may escape credit counseling due to the fact that they would not receive a benefit from it, other debtors must still fulfill the requirement regardless of whether it serves a useful purpose.

Dismissal for Bad Faith/Totality of the Circumstances

The court also considered whether the case should be dismissed under Sec. 707(b)(3) based on bad faith or totality of the circumstances. The court noted that there was certainly plenty of evidence to raise the specter of bad faith. Double-digit bankruptcy filings, triple-digit lawsuits and dilatory conduct in dealing with his major creditor all pointed to a debtor who was out of control and gaming the system. However, Judge Jones made an admirable effort to go below the surface and analyze the significance of the facts.

First, the court examined the circumstances of the present case. The debtor filed after Huntington State Bank obtained a judgment against him. The debtor testified that he was concerned that the judgment could cause him to lose his home and social security payments. The court found that this was a legitimate reason for filing.

It was true that the debtor filed many unsuccessful bankruptcies and frivolous lawsuits. However, this conduct occurred before the debtor moved to Texas and incurred the debt which ultimately caused him to file bankruptcy. As a result, the court found that there no connection between the prior pattern of bad conduct and the present case. Additionally, the present case was distinguishable from the typical serial filing abuser. As Judge Jones noted, the modus operendi of a serial filer involves the filing and dismissal of multiple cases. Failure to follow through with the bankruptcy case is part and parcel of what makes it abusive. Here, the debtor, after filing pro se, retained qualified counsel, filed schedules and the statement of financial affairs and appeared at his first meeting of creditors. Thus, the debtor was faced with possible dismissal for bad faith at the point where he was finally taking his obligations to the bankruptcy court seriously.

The court considered the effect of allowing the bankruptcy case to proceed on each of the constituent parties. The court found that creditors would not be harmed since it was unlikely that the debtor would ever accumulate significant wealth. (Left unasked was the question of what the bank was thinking when it extended credit to a person who had previously filed ten bankruptcies, whose only income consisted of social security and who had serious mental health issues.).

The court found that the debtor would benefit:

"Jarrell has more problems than should be visited upon any human being. His wife and four children suffer from various illnesses; Jarrell is very sick. While no one deserves a free pass by simply offering up the excuse that he does not know wht he is doing, Jarrell's situation is unique. This bankruptcy will not begin to address the majority of the many problems that Jarrell has, but it may provide token relief from some of his debts."

Finally, the court considered the interests of the court and judicial process. The court found that Mr. Jarrell's conduct had burdened both the state and federal courts and the public at large. Nevertheless, the court decided to give him one last chance. "The Court concludes that it will take Jarrell with his many problems and issues, at least one more time, and allow him the opportunity to pursue some modicum of relief." Thus, the court decided to retain the case even though it was undesirable.

Recognition to Debtor's Counsel

Debtor's counsel, Dick Harris, should be commended for taking on a difficult and unsympathetic client. While he may not be paid much (or at all) for his efforts, the court's opinion recognizes him as a "competent counsel (who) has for many years practiced before this Court representing both creditors and debtors in a professional manner."