In Re Stewart
DECISION AND ORDER
This cause comes before the Court after a Hearing on the Motion of the United States Trustee to Dismiss Case Pursuant to 11 U.S.C. § 707(b)(1) and 11 U.S.C. § 707(b)(3). At the conclusion of the Hearing, the Court took the matter under
FACTS
On May 4, 2007, the Debtors, Lawrence and Robin Stewart, filed a petition with this Court for relief under Chapter 7 of the United States Bankruptcy Code. At the time they filed their petition, both the Debtors had been employed in their present position for just two months: Mr. Stewart as an electrician for a local nursery; Mrs. Stewart as a cashier for McDonald’s Restaurant. The Debtors have one dependent, a 13 year-old daughter.
In the schedules accompanying their petition, the Debtors (hereinafter referred to collectively as the “Debtors”) set forth $54,237.00 in unsecured debt. After accounting for mandatory payroll deductions, the Debtors further reported a combined monthly income of $3,165.49. Against this, the Debtors claimed monthly expenses of $2,841.00, leaving a surplus in their household budget of $324.49 a month. On July 27, 2007, the United States Trustee (hereinafter the “UST”), citing to this surplus, filed its Motion to Dismiss this case for abuse. (Doc. 27).
In response to the Motion of the UST, the Debtors amended their schedules so as to reflect an upward adjustment of $159.00 in their necessary, monthly expenses. This adjustment resulted from a previously undisclosed $70.00 per month expense for real estate taxes, as well as other minor modifications made to their budget for food, telephone, and home maintenance. After accounting for these adjustments, the Debtors’ monthly surplus in their budget decreased to $165.49.
DISCUSSION
This matter is before the Court on the Motion of the UST to Dismiss. Matters concerning the dismissal of a case, which affects both the ability of a debtor to receive a discharge and directly affects the creditor-debtor relationship, are core proceedings pursuant to 28 U.S.C. §§ 157(b)(2)(J)/(0). As a core proceeding, this Court has been conferred with jurisdictional authority to enter a final order in this matter. 28 U.S.C. § 157(b)(1).
The Motion of the UST to Dismiss is brought pursuant to 11 U.S.C. § 707(b)(1) and § 707(b)(3). These two provisions, which were implemented in 2005 by the Congressional Act known as “BAPCPA,” 1 operate in concert. First, § 707(b)(1) sets forth the blanket rule that a Chapter 7 case may be dismissed where abuse is found to exist, providing, in relevant part:
(b)(1) After notice and a hearing, the court ... may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts ... if it finds that the granting of relief would be an abuse of the provisions of this chapter.
Prior to the enactment of BAPCPA, the Bankruptcy Code had provided in § 707(b) that a case could only be dismissed for substantial abuse.
Section § 707(b)(3) then sets forth two mandatory considerations against which a court is to assess the existence of abuse under § 707(b)(1), providing:
(3) In considering under paragraph (1) whether the granting of relief would bean abuse of the provisions of this chapter in a case in which the presumption in subparagraph (A)(i) of such paragraph does not arise or is rebutted, the court shall consider—
(A) whether the debtor filed the petition in bad faith; or
(B) the totality of the circumstances (including whether the debtor seeks to reject a personal services contract and the financial need for such rejection as sought by the debtor) of the debtor’s financial situation demonstrates abuse.
For purposes of this particular provision, no allegations were made by the UST, either in its Motion or at the Hearing, of “bad faith” as set forth in subparagraph (A). Accordingly, it will be assumed that, in seeking to have the Debtors’ case dismissed under § 707(b)(3), the UST is relying exclusively on subparagraph (B), the totality of the circumstances.
In assessing whether the “totality of the circumstances” require the dismissal of a debtor’s case, no specific examples are provided in § 707(b)(3)(B). The only necessary requirement: that any consideration used in a “totality of the circumstances” analysis relate to the debtor’s financial situation. This Court, however, has previously recognized that the two grounds for dismissal under § 707(b)(3) are best understood as a codification of pre-BAPCPA case law, and as such, pre-BAPCPA case law is still applicable when determining whether to dismiss a case for abuse.
In re Wright,
The seminal pre-BAPCPA case in this circuit, the Sixth Circuit, addressing the issue of abuse under § 707(b) is
In re Krohn,
Among the factors to be considered in deciding whether a debtor is needy is his ability to repay his debts out of future earnings. That factor alone may be sufficient to warrant dismissal. For example, a court would not be justified in concluding that a debtor is needy and worthy of discharge, where his disposable income permits liquidation of his consumer debts with relative ease.
Id. (internal citations omitted). The UST relies exclusively on this ground for dismissal, setting forth in its Motion to Dismiss as follows: “The basis for this motion is that the debtors report excess income [of] $329.49 and therefore have the ability to repay their creditors.” (Doc. No. 27, at pg. 1).
A debtor’ ability to repay their debts for purposes of § 707(b)(3) is commonly made by looking to whether the debtor could adequately fund a Chapter 13 plan of reorganization.
Behlke v. Eisen (In re Behlke),
As a purely evidentiary matter, the Court is inclined to utilize those income and expense figures originally provided by the Debtors when they first filed their petition. In this regard, while a debtor is permitted to amend their schedules at anytime, self-serving amendments, such as those here, which are made in direct response to an unfavorable action, are not viewed favorably. Debtors are expected, on their own accord, to correct errors in their schedules; not just when faced with a Motion to Dismiss or other adverse action. Especially problematic in this regard is the following inconsistency:
The record in this case shows that after filing their amended financial figures, the Debtors filed with the Court a reaffirmation agreement, wherein the Debtors disclosed, as required by § 524(k)(6)(A), their current income and expenses. (Doc. No. 34). However, despite this sequence of events, with the Debtors amending their schedules after they filed their reaffirmation agreement, those budgetary figures provided in their reaffirmation agreement aligned with those income and expense totals as contained in the Debtors’ original bankruptcy schedules; not those amended figures which the Debtors now advocate the Court utilize for purposes of the UST’s Motion to Dismiss. The Debtors, however, cannot have it both ways: A higher “disposable income” figure as needed to reaffirm on a secured debt; 2 and a lower “disposable income” figure when it is expedient to defend against a motion to dismiss under § 707(b).
Notwithstanding, utilizing the $324.49 disposable income figure as advocated by the UST does not necessarily mean that this case must be dismissed for abuse. As a legal matter, the mere existence of a surplus in a debtor’s monthly budget will not, as intimated by the UST, automatically warrant the dismissal of a case for abuse under § 707(b)(3). To hold otherwise would paint § 707(b)(3) with too broad a stroke.
To begin with, the overall test, as set forth § 707(b)(3)(B), is not whether a debtor has an “ability to pay,” but whether, based on the totality of the circumstances, a debtor has a “need” for bankruptcy relief. The ability of a debtor to pay, therefore, is just one facet of this larger test. In this way, it was set forth in
In re Krohn:
“Other factors relevant to ‘need’ include whether the debtor enjoys a stable source of future income, whether he is eligible for adjustment of his debts through Chapter 13 of the Bankruptcy Code, ... and whether his expenses can be reduced significantly without depriving him of adequate food, clothing, shelter and other necessities.”
Looked at in this light, the Debtors’ disposable income figure of $324.49, while hardly nominal, does not strike this Court as excessive. The Debtors have one young child and, in reviewing their monthly budget, the Court could not discern any significant leeway. What particularly stands out in this regard is that the Debtors, in arriving at their original disposable income figure of $324.49, only allocated $300.00 per month toward food. For each individual family member, this amounts to approximately $25.00 per week for food, a very low sum.
The Debtors’ budget also does not show any other extravagant spending. To the contrary, as with their monthly allocation for food, all of the Debtors’ expenses seem very reasonable. E.g., the Debtors’ total automobile payments are only $341.00; they do not have cell phone service, allocating only $45.00 for a land line; and the Debtors spend just $50.00 per month for clothing. The Debtors are also surrendering property so as to lower their monthly expenses—specifically, a rental unit and a 2004 Pick-up truck.
Given these observations, the Debtors, far from resembling those persons who seek to use the bankruptcy process to continue to living beyond their means, strike this Court as persons who have sought to do everything in their power to pay their legal obligations, but now are simply unable to do so. Further reinforcing this observation is the questionable stability of the Debtors’ employment. At the time they filed for relief, each of the Debtors had been employed in their current occupation for only two months. Not only does this bring to the fore a factor often mitigating against dismissal under § 707(b)(3),—that the events precipitating the bankruptcy have arisen from events beyond the debtor’s control 3 —but the short-term scope of their employment makes the viability of Chapter 13 relief for the Debtors questionable. Pursuant to § 1325(a)(6) a plan must be feasible for it to be confirmed, meaning that “the debtor will be able to make all payments under the plan....” In turn, § 109(e) limits eligibility for Chapter 13 relief to only debtors with a “regular income” which is defined by reference to income that is both stable and regular. 11 U.S.C. § 101(30). 4
Finally, the Court also notes that some other attributes, typically present
In addition, in many cases where abuse is found to exist, the debtor has a high annual salary.
See In re Oot,
Therefore, for all these reasons, the Court, in weighing the totality of the circumstances pursuant to § 707(b)(3), is not convinced that allowing the Debtors relief under Chapter 7 of the United States Bankruptcy Code would constitute an abuse for purposes of § 707(b)(1). As such, the Debtors’ case will not be dismissed as sought by the Motion of the UST. In reaching the conclusions found herein, the Court has considered all of the evidence, exhibits and arguments of counsel, regardless of whether or not they are specifically referred to in this Decision.
Accordingly, it is
ORDERED that the Motion of the United States Trustee to Dismiss pursuant to 11 U.S.C. § 707(b)(1) and 11 U.S.C. § 707(b)(3), be, and is hereby, DENIED.
Notes
. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005; Pub.L. No. 109-8, 119 Stat. 23 (2005).
. Under 11 U.S.C. § 524(k)(6)(A), a debtor is required in a reaffirmation agreement to disclose their monthly income and expenses. Section 524(m)(l) then provides that if the debtor’s monthly income less the debtor’s monthly expenses is insufficient to service the debt which is sought to be reaffirmed, a presumption arises that the repayment of that debt will constitute an "undue hardship,” after which the Court may disapprove the agreement.
Importantly, to avoid any inconsistencies between a debtor’s statement of income and expenses in a reaffirmation agreement when compared to the debtor’s bankruptcy schedules, Interim Bankruptcy Rule 4008 provides, in relevant part:
The debtor’s statement required under § 524(k) shall be accompanied by a statement of the total income and total expense amounts stated on schedules I & J. If there is a difference between the income and expense amounts state on schedules I and J and the statement required under § 524(k), the accompanying statement shall include an explanation of any difference.
.
See In re Burge,
. The term "individual with regular income" means individual whose income is sufficiently stable and regular to enable such individual to make payments under a plan under chapter 13 of this tide, other than a stockbroker or a commodity broker.