Andrea O'Halloran
Before the Court is the United States Trustee‘s (“UST“) motion to dismiss this chapter 7 case for abuse under
The parties stipulated to many of the background facts. See, Doc. No. 31. An evidentiary hearing was held on April 28, 2026, at which only the Debtor testified.
The Court has jurisdiction and the authority to decide this matter under
FINDINGS OF FACT
The Debtor has a bachelor‘s degree in math and English, is 42 years old, and is a single parent to one teenage dependent. Her ex-husband lives abroad and does not contribute to household expenses or pay any child support. The Debtor became engaged a second time in 2014 and lived with her fiancé and shared expenses until his unexpected death in 2018. From that point forward Debtor again became solely responsible for household expenses, which prevented her from accumulating meaningful personal savings.
Overall, the Debtor‘s employment history has been relatively stable. From March 2014 through July 31, 2023, Debtor worked in product development for CVS Health. On or about July 31, 2023, Debtor lost her job due to downsizing, and not because of job performance.
The Debtor did not regain full employment for approximately two years, resulting in financial distress. The Debtor received approximately $23,000 in unemployment income in 2024. She supplemented these benefits by withdrawing approximately $70,000 from her 401(k) account, paying a premature withdrawal penalty of $7,500. In January 2025, Debtor qualified for governmental food assistance SNAP benefits. The Debtor also received assistance from family members. The Debtor exhausted her financial resources to preserve her home and avoid bankruptcy.
During her unemployment, the Debtor submitted between 800 and 1,000 job applications and unsuccessfully participated in over two hundred interviews. Finding replacement employment became challenging because the availability of remote work for her type of position significantly strengthened the candidate pool competing with her. Beginning in March 2025, the Debtor located
Notwithstanding improved salary and benefits from BCBS, the debts incurred and accruing during her unemployment forced her to file bankruptcy on September 29, 2025. The Debtor‘s bankruptcy Schedule F estimates general unsecured claims of $134,969.62, which are primarily consumer debts.
The Debtor‘s Schedule I lists gross monthly wages, salary and commissions as $11,083.35,1 with monthly income after withholdings and other deductions of $7,445.38. Under Schedule J, she claims monthly household expenses of $4,907.82, leaving a monthly net income of $2,537.56. According to the UST, this monthly net income will repay more than 100% of the general unsecured claims through a 60-month chapter 13 plan.2
While the Debtor acknowledges that BCBS has provided a very positive employment experience and a high income, she fears industry changes threaten the stability of her position. The Debtor provided two press releases from the Office of Minnesota Governor Tim Walz and Lt.
The Debtor further states that imminent increases to her household expenses will consume her monthly net income. First, the Debtor testified that household maintenance and repair costs to her more than 100-year-old house typically exceed her budget. Currently, the Debtor‘s water heater needs replacement, and her family has lacked hot water since 2024. The Debtor obtained estimates for immediate replacement of the water heater and related improvements totaling $18,380.18 (Ex. 3 and Ex. F).3 This replacement cost would increase her normal monthly housing repair and maintenance cost from $150.00 to $1,681.70 for 12 months, reducing the Debtor‘s monthly net
Second, once she replaces the water heater, the Debtor intends to increase her voluntary retirement contributions to replenish withdrawals taken during her unemployment. She estimates that by increasing her monthly contributions from $849.745 to $2,041.66 (the maximum allowed by law for a participant under the age of 50), she can restore her retirement savings to pre-unemployment levels within five to seven years. These increased contributions would reduce her monthly net income to $1,381.70, starting in the second year of a hypothetical chapter 13 plan.
The Debtor‘s pay stubs filed with her bankruptcy petition show that in the sixty days prior to bankruptcy she had been making bi-weekly contributions to her 401(k) in the amount of $255.77. The Court therefore finds that the Debtor‘s monthly retirement contributions on the petition date totaled $554.17 (i.e., $255.77/2 *4.33333 weeks per month).
The UST argues that the Debtor may not contribute more than the amount necessary to maximize her employer‘s matching contribution at 5.0% of her gross salary, which the UST indicates also equates to $555.00 per month. The UST calculates that the Debtor‘s monthly net income after she completes her water heater replacement is $2,284.18, which would provide full repayment of her unsecured claims in a chapter 13 plan.
In addition to increasing her retirement contributions, the Debtor intends to use any remaining monthly net income to pay a portion of her daughter‘s college tuition and transportation
CONCLUSIONS OF LAW AND DISCUSSION
A motion to dismiss for abuse arises under
After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, . . . may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor‘s consent, convert such a case to a case under chapter 11 or 13 of this title, if it finds that the granting of relief would be an abuse of the provisions of this chapter.
Subparts of Section 707(b) provide three alternatives for considering potential abuse: (1) applying the means test; (2) considering the Debtor‘s bad faith; or (3) if the “totality of the circumstances . . . of the debtor‘s financial situation demonstrates abuse.” See,
The totality of the circumstances test in BAPCPA codified caselaw that permitted dismissal of chapter 7 cases for substantial abuse6 when a debtor appeared to have the ability to repay a
The ability to repay unsecured debts remains the primary consideration when determining when abuse arises under the totality of the circumstances, and courts have largely adhered to the standards by the pre-BAPCPA Eighth Circuit decisions cited above. See, In re Honkomp, 416 B.R. 647, 649 (Bankr. N.D. Iowa 2009), citing, In re Booker, 399 B.R. 662, 667 (Bankr. W.D. Mo. 2009); In re Budig, 387 B.R. 12, 16 (Bankr. N.D. Iowa 2008) (actual ability to pay is an important, if not primary consideration).
Projecting a debtor‘s ability to repay his or her debts under the totality of circumstances test requires consideration of the reasonableness of deductions to the debtor‘s gross income and the debtor‘s expenses. In re Smith, 447 B.R. 832, 834 (Bankr. N.D. Ohio 2011) (stating that a court should scrutinize and “make downward adjustments” to expenses to “ensure that [they] are reasonable.“); Booker, 399 B.R. at 668 (stating that courts expect that “the current monthly expenses of debtors seeking a discharge under Chapter 7 should show some evidence of ‘belt tightening‘“). Because the Debtor is a below median income earner, calculating projected disposable income under a chapter 13 plan would consider the reasonableness of her actual income
After estimating a projected disposable income based on the Debtor‘s income and reasonable expenses, the Court must decide if any resulting hypothetical chapter 13 plan would result in substantial repayment to the debtor‘s unsecured creditors. In re Ellison, 663 B.R. 743, 749-750 (Bankr. E.D. Mo. 2024). Bankruptcy courts in the Eighth Circuit prior to and after BAPCPA have consistently found substantial abuse or abuse even when the projected repayment would provide a recovery to general unsecured creditors as low as 20 to 30 percent of their total estimated claims. In re Wilkins, 1997 WL 1047545, at *5 (Bankr. D. Minn. 1997) (finding substantial abuse where a hypothetical chapter 13 plan could pay 28% of unsecured claims over three years or 49% over five years); Booker, 399 B.R. at 671 (finding abuse where debtor could make 36.8%, repayment to general unsecured creditors); Ellison, 663 B.R. at 749 (finding that a hypothetical repayment of 21% to general unsecured creditors constituted substantial repayment).
While the ability to substantially pay unsecured debt through a chapter 13 plan is the primary consideration in the Eighth Circuit, some courts have listed a broader set of factors under the totality of the circumstances, including:
whether the bankruptcy filing was precipitated by an unforeseen catastrophic event, such as a sudden illness or unemployment; whether the debtor is eligible for relief under another chapter; whether there are non-bankruptcy remedies available to the debtor; whether the debtor can obtain relief through private negotiations; whether the debtor‘s proposed budget is excessive or unreasonable; whether the debtor has a stable source of future income; whether the debtor could provide a meaningful distribution in a Chapter 13 case; and whether the debtors’ expenses could be reduced significantly without depriving them and their dependents of necessities.
1. Resolving Disputed Income and Expense Issues for Calculating Projected Disposable Income in a Hypothetical Chapter 13 Plan.
In calculating a projected monthly disposable income for a hypothetical chapter 13 plan, the parties dispute two issues: the Debtor‘s proposed increase of retirement contributions, and Debtor‘s intent to pay her daughter‘s future college tuition and related commuting expenses.
Calculation of Monthly Income – Resolving the Amount of Retirement Contributions
The first issue is the calculation of the Debtor‘s monthly income, which requires resolving a dispute over the retirement contributions the Debtor could make during a chapter 13 plan. The Debtor argues that she may increase her current monthly contributions from $555.00 to $2,041.66, starting in year two of a chapter 13 plan. The UST argues that the Debtor is limited to her current contributions of $555.00 per month.
This question continues to generate disagreement among the courts. The applicable provision of the Code at issue is
(b) Property of the estate does not include . . . (7) any amount—
(A) withheld by an employer from the wages of employees for payment as contributions— (i) to—(I) [an ERISA-qualified plan, such as a 401(k)] . . . except that such amount under this subparagraph shall not constitute disposable income, as defined in
section 1325(b)(2) ; or . . .(B) received by an employer from employees for payment as contributions—(i) to— (I) [an ERISA-qualified plan, such as a 401(k)] . . . except that such amount under this subparagraph shall not constitute disposable income, as defined in
section 1325(b)(2) ;
Courts have run the gamut in interpreting this language with four divergent outcomes: (1) disallowance of any contributions during a chapter 13 plan; (2) allowance of contributions during a chapter 13 plan up to the maximum permitted under non-bankruptcy law—subject only to the
The issue has caused a recent split between two United States Courts of Appeals. In re Davis, 960 F.3d 346, 357 (6th Cir. 2020) (holding that a debtor can exclude monthly 401(k) contributions from disposable income “so long as those contributions were regularly withheld from the debtor‘s wages prior to her bankruptcy.“); Saldana, 122 F.4th at 345 (stating that “the Bankruptcy Code does not provide any basis to limit the amount of voluntary retirement contributions a debtor can exclude to their prepetition contribution amount.“).
The Eighth Circuit has not addressed this issue. The parties did not provide any information as to the current local practice. There is a single published decision in this district holding that a debtor may continue making voluntary retirement contributions to an ERISA-qualified plan, such as a 401(k), to the extent the proposed contributions align with the amounts the debtor regularly made prepetition. In re Melander, 506 B.R. 855, 868 (Bankr. D. Minn. 2014) (holding that the debtor could continue making contributions at the level that she had made for 14 years prior to filing bankruptcy),8 citing, In re Seafort, 669 F.3d 662, 667-668 (6th Cir. 2012) (stating that the majority view is that the “the debtor may continue making voluntary contributions in the same
The Court sees no reason to depart from Melander, despite the continued disagreement among courts. For a Section 707(b) motion, the Court believes it should proceed in formulating a hypothetical chapter 13 plan based on existing law and practice, and without making any major changes to the law, particularly since the standing chapter 13 trustee is not part of this proceeding.
Further, even if the Debtor could increase her 401(k) contributions, her plan proposal remains subject to the good faith confirmation standard of
In this case, the record shows that the Debtor made prepetition contributions to her 401(k) account at BCBS in the amount of $554.17 per month. This amount would remain excluded from the Debtor‘s projected disposable income in a hypothetical chapter 13 plan under
Calculation of Reasonable Expenses – Tuition and Commuting Expenses for Adult Daughter
For the first year of a hypothetical plan, the Court finds that the replacement of the water heater would increase monthly expenses to $7,190.60. Beginning in the second year of a hypothetical plan, monthly expenses would decrease to $5,148.94, and both parties appear to agree with this figure. The parties dispute whether the Debtor may then pay additional expenses for her adult daughter‘s college tuition and related commuting costs, thereby eliminating any monthly disposable income after the first year of a hypothetical plan.
Courts appear uniform in finding that expenses for supporting adult children and contributions to their college education are not reasonable, absent an established legal obligation to support the adult child as a dependent, such as by a court-ordered domestic support obligation. See, e.g., In re Schumacher, 495 B.R. 735, 742 (Bankr. W.D. Tex. 2013); In re Kubatka, 605 B.R. 339 (Bankr. W.D. Pa. 2019) (stating that “it is universally accepted that ‘support for adult children
“Although a parent‘s aspiration to put his or her children through college is commendable, parents do not normally have a legal duty to do this. Debtors, however, have a legal duty to pay their creditors.” Schumacher, 495 B.R. at 741–42, citing, In re Mastromarino, 197 B.R. 171, 178 (Bankr. D. Me. 1996). The bankruptcy system “is not designed to enable debtors to fund their adult children‘s college education at their creditors’ expense.” Schumacher, 495 B.R. at 742.
Local case law has likewise held that paying tuition and similar expenses for college-aged children are not reasonable for Section 707(b) purposes, or in calculating disposable income for a chapter 13 plan. See, Wilkins, 1997 WL 1047545 at *4 (holding that the debtor could not budget for support of her adult non-dependent children and that support payments to third parties is limited to those individuals for whom the debtor has a legal obligation to support); In re Gyurci, 95 B.R. 639, 643 (Bankr. D. Minn. 1989) (stating in a motion under Section 707(b) that the debtor could not pay for son‘s college tuition); In re McKee, BKY 99-33636, slip op. (Bankr. D. Minn., Nov. 23, 1999) (O‘Brien, J.) (holding that a debtor‘s payment of loans, insurance costs, and maintenance expenses for automobiles for college-age sons was not reasonable or necessary).9
2. Determining if the Debtor‘s Projected Disposable Income Would Result in Substantial Repayment of her General Unsecured Creditors.
The Court must next consider whether the Debtor‘s estimated monthly disposable income would result in substantial repayment to her unsecured creditors in a hypothetical chapter 13 plan. As the Debtor‘s current monthly income is below the median income in Minnesota for her household size, it appears that she can convert her case and confirm a chapter 13 plan with a three-year commitment period. See,
Using the determined monthly income and expense figures, the Court projects a hypothetical chapter 13 plan repayment based on a three-year commitment period as follows:
| Plan Year | Monthly Income | Monthly Expenses | Monthly Net Income | Annualized Net Income |
|---|---|---|---|---|
| 1 | $7,740.12 | $6,680.64 | $1,059.48 | $12,713.76 |
| 2 | $7,740.12 | $5,148.94 | $2,591.18 | $31,094.17 |
| 3 | $7,740.12 | $5,148.94 | $2,591.18 | $31,094.17 |
| Total (3-year plan) | $74,902.10 |
On the gross payments of $74,902.10, the standing chapter 13 trustee would receive a 10% fee.
3. Considering Other Circumstances.
Although she appears to have the ability to substantially repay unsecured claims through a chapter 13 plan, the Debtor argues special circumstances warrant denial of the UST‘s motion to dismiss, primarily her recent unemployment and uncertainty with her current position. This argument is the focal point of the Debtor‘s trial brief, where she requested that this Court “accord significant weight to factors other than her ability to pay” and argued that her “actual ability to pay is hamstrung by her need to recover from the financial disasters that led to her filing bankruptcy...” See, Doc. No. 33 at 4 (emphasis added).
The legislative history related to BAPCPA‘s codification of the totality of the circumstances test reinforces the pre-existing Eighth Circuit case law. Prior to BAPCPA, the Fourth Circuit rejected what it characterized as a per se test for substantial abuse based solely on the debtor‘s ability to repay his or her debts. In re Green, 934 F.2d 568, 572-573 (4th Cir. 1991). The court instead required the weighing of an additional five factors that in the court‘s view demonstrated the necessary substantial abuse by a debtor attempting to “take unfair advantage of his creditors“:
(1) Whether the bankruptcy petition was filed because of sudden illness, calamity, disability, or unemployment; (2) Whether the debtor incurred cash advances and made consumer purchases far in excess of his ability to repay; (3) Whether the debtor‘s proposed family budget is excessive or unreasonable; (4) Whether the debtor‘s schedules and statement of current income and expenses reasonably and accurately reflect the true financial condition; and (5) Whether the petition was filed in good faith.
BAPCPA‘s legislative history expressly rejected Green, stating that:
No inference should be drawn, however that by referencing the ‘totality of the circumstances’ Congress intended to approve the result in In re Green, 934 F.2d 568 (4th Cir. 1991) or similar cases. Such cases are rejected by the means test reforms and the change in the standard from “substantial abuse” to “abuse” in H.R. 2415.
The legislative history describing the need to overhaul Section 707(b) criticized Green, indicating that it had been improperly relied upon by bankruptcy courts as “justification” for “ignoring ability to pay” and stated that other circuits, including the Eighth Circuit, had followed the original intent of Section 707(b) to “insist[] that debtors with ability to pay must do so.” Id.
The Congressional Record instead spoke favorably of the approach applied by the First Circuit in In re Lamanna, 153 F.3d 1 (1st Cir. 1998), which, similar to the Eighth Circuit decisions in Walton, Harris and Fonder, endorsed giving primary weight to a debtor‘s ability to repay his or her debts in a hypothetical chapter 13 plan. Id.; see also, Lamanna, 153 F.3d at 4-5 (stating that in considering the totality of the circumstances “courts should regard the debtor‘s ability to repay out of future disposable income as the primary, but not necessarily conclusive, factor of ‘substantial abuse‘“). Lammana further joined the Eighth Circuit in finding that “a bankruptcy court may, but is not required to, find ‘substantial abuse’ if the debtor has an ability to repay, in light of all of the circumstances.” 153 F.3d at 5.
The Eighth Circuit has since recognized “the clear congressional intent of BAPCPA, which was enacted ‘to ensure that debtors repay creditors the maximum they can afford.‘” In re Frederickson, 545 F.3d 652, 657 (8th Cir. 2008), citing, In re Gonzalez, 388 B.R. 292, 309 (Bank.S.D.Tex.2008), (quoting H.R. Rep. No. 109–31, pt. 1, at 2 (2005), U.S. Code Cong. & Admin. News 2005, pp. 88, 89).
In reviewing the legislative history, this Court may give some limited consideration to other factors, such as the Debtor‘s sudden prepetition unemployment. Such a circumstance could
The Court believes that the Debtor‘s prepetition unemployment constituted a substantial hardship on her family and that any circumstance suggesting jeopardy to her current employment will reasonably cause physical and emotional stress for the Debtor. But deciding motions to dismiss for abuse by weighing the degree of each debtor‘s unique circumstances of prepetition hardship would lead to uneven results, an outcome the drafters of BAPCPA explicitly sought to lessen when revising
Even courts that have referenced a debtor‘s prepetition unemployment as a factor under
Here, the Debtor has recovered full employment in advance of filing bankruptcy that has created meaningful monthly net income to substantially repay her unsecured creditors. She has
Further, it appears that the Debtor would still benefit from her prepetition underemployment if she converted this case to chapter 13. The Bankruptcy Code‘s strict averaging of six months of prepetition income for the purposes of the means test would classify the Debtor as a below-median income debtor, thereby reducing her applicable commitment period under a chapter 13 plan from five years to three years. See, supra at fn.1 and 14-15. This greatly reduces her financial burdens to discharge her debts and places her in a more advantageous position relative to debtors who presently earn equivalent or even less income than she does but maintained consistent earnings during the six months prior to filing their petitions.
Finally, even if the Debtor‘s arguments in this case, including her desire to increase retirement contributions, had provided a justification to, at most, modestly discount her repayment potential in a hypothetical chapter 13 plan, the Court would nonetheless still find it abusive for the Debtor to use all her remaining disposable income to pay her adult daughter‘s future tuition and related transportation costs without repaying any amount to her unsecured creditors. See, In re Praleikas, 248 B.R. 140, 145 (Bankr. W.D. Mo. 2000) (providing that while the debtor‘s disposable income would pay only 20% of his unsecured debts, his proposed payment of most of that disposable income to pay his parents’ unsecured loan constituted substantial abuse).
IT IS ORDERED
- The UST‘s motion is granted and there are grounds to dismiss the case for abuse under
11 U.S.C. § 707(b)(1) due to the totality of the circumstances under11 U.S.C. § 707(b)(3)(B) . The Court will suspend dismissal for 30 days for the Debtor to request conversion of this case to chapter 13.
Dated: July 16, 2026
s/ Mychal A. Bruggeman
Mychal A. Bruggeman
United States Bankruptcy Judge