537 B.R. 262
Bankr. W.D. Va.2015Background
- Debtors Mr. and Mrs. Alther filed a voluntary Chapter 7 petition; their debts are primarily consumer debts including $131,509 unsecured (mostly credit cards) and significant secured mortgage debt after purchasing a house in Sept. 2013.
- Debtors' annualized current monthly income exceeded Virginia median for a family of four (198% of median); Official Form 22A reported 60-month disposable income of $53,239.80, triggering the § 707(b)(2) presumption of abuse.
- On line 56 the debtors claimed additional monthly deductions (401(k) contributions, a $200 "clunker" expense, increased insurance/HSA payments, and an alleged $504.58 income reduction) that, if allowed, would eliminate the presumption.
- The U.S. Trustee moved to dismiss under § 707(b)(2), challenging several deductions (notably treating 401(k) loan repayments and voluntary 401(k) contributions as non-deductible) and calculated adjusted monthly disposable income of $1,434.33 (or at least $1,238.85 after court adjustments).
- The bankruptcy court held a hearing, adjusted the 22A calculation (disallowed the 401(k) loan repayment), found the means test presumption still arose, and concluded the debtors failed to prove "special circumstances" to rebut the presumption.
- Court granted the U.S. Trustee's motion to dismiss under § 707(b)(2) but permitted the debtors 21 days to move to convert to Chapter 13; did not address the § 707(b)(3) argument because dismissal under (b)(2) was warranted.
Issues
| Issue | U.S. Trustee's Argument | Debtors' Argument | Held |
|---|---|---|---|
| Whether § 707(b)(2) presumption of abuse arises | Means test shows 60‑month disposable income exceeds statutory threshold → presumption arises | Debtors conceded the presumption arose but argued they could rebut it via additional deductions | Presumption arose (debtors' 22A numbers produced $74,331 over 60 months after adjustment) |
| Whether 401(k) loan repayments are deductible as "payments on account of secured debts" under § 707(b)(2)(A)(iii) | 401(k) loan repayment is voluntary/unsecured and should be added back | Debtors claimed Prudential treats the loan as secured and deducted the payment | 401(k) loan repayments are not "secured debt" under § 707(b)(2); deduction disallowed (added back $351.52) |
| Whether voluntary 401(k) contributions on line 56 qualify as "special circumstances" under § 707(b)(2)(B) to rebut presumption | Such contributions are not necessary and have reasonable alternatives; not special circumstances | Debtors argued they should be allowed the chapter 13–type deductions and that a Chapter 13 calculation would yield no dividend | Voluntary 401(k) contributions are not ‘‘special circumstances’’; deduction disallowed |
| Whether the potential Chapter 13 dividend or chapter‑13‑type deductions can rebut the § 707(b)(2) presumption | Potential dividend is irrelevant to the § 707(b)(2) means test; special circumstances must adjust current monthly income | Debtors argued chapter 13 would require no dividend, so forcing chapter 7 is inconsistent | A potential Chapter 13 dividend is not a special circumstance under § 707(b)(2); cannot rebut the presumption |
Key Cases Cited
- Egebjerg v. Anderson, 574 F.3d 1045 (9th Cir. 2009) (401(k) loans are not "debts" under the Bankruptcy Code for purposes of means‑test secured‑debt deductions)
- In re Hanks, 362 B.R. 494 (Bankr. D. Utah 2007) (statutory examples of special circumstances are instructive; they must be unusual and directly affect expenses or income)
- In re Mravik, 399 B.R. 202 (Bankr. E.D. Wis. 2008) (voluntary retirement contributions are not special circumstances because debtor has reasonable alternative to stop or reduce them)
- In re Smith, 388 B.R. 885 (Bankr. C.D. Ill. 2008) (special circumstances must be necessary and typically affect earning capacity or cause unavoidable expenses)
- In re Maura, 491 B.R. 498 (Bankr. E.D. Mich. 2013) (discussing limits of § 707(b)(1) discretion to dismiss or convert when abuse is found)