BANKRUTPCY CHAPTER SEVEN DISMISSED , FLINT QUESTIONS CALL 235-1970


WHEN A COURT FINDS THAT YOU DO NOT QUALIFY FOR THE CHAPTER 7 AFTER FILING YOU MAY BE ALLOWED TO FILE FOR CHAPTER 13.

A Chapter Seven Bankruptcy is a partial.debt liquidation process while Chapter 13 is a multi year ( 3 or 5) repayment plan with debtors on a budget and ending with partial debt liquidation.

FOLLOWING IS THE BACKGROUND OF A RECENT CASE.

The Debtors filed their Chapter 7 bankruptcy petition on August 7,
2010.

ONE JOB OF A BANKRUPTCY TRUSTEE IS TO DETERMINE IF YOU QUALIFY FOR A CHAPTER SEVEN.

In this case The United States Trustee (“UST”) filed a Motion to Dismiss their case (Docket No. 21). Debtors oppose the Motion.

WHO WERE THE DEBTORS?

The Debtors are married and have two dependents, a one year old son and a three year
old daughter. Mr. Debtor is a Kxxx and Sxxx automotive technician working full-time at Gxxx
Automotive, and Mrs. Debtor works part-time as a registrar at Bxxx Hospital.

THE DEBTORS TAX RETURNS SHOWED AN INCOME OF $106,012

The Debtors tax returns reflect $106,012 in combined gross income in 2008, and $87,183 in combined gross income in 2009 (which decreased due to Mrs. Debtor taking time off work after the birth of their son).

THE DEBTORS PAYSTUBS SHOWED GROSS INCOME IN EXCESS OF $97,000

Debtors’ paystubs show that their gross income for 2010 exceeds $97,000. During the
evidential hearing, Mr. Debtor testified that there has been a decrease in the number of Kxxx and Sxxx vehicles being brought in for service at Gxxx Automotive and, as a result, his income
decreased at the end of 2010. Mr. Debtor also operated a landscaping and snow-plowing business, Bxxx, however he apparently ceased operating for some time after he sold his pick-up truck.

Mr. Debtor testified that he hoped to resume the landscaping portion of the

The UST’s ( Unites States Trustee) original Motion to Dismiss also raised issues under 11 U.S.C. § 707(b)(2). However, due to the responses provided by the Debtors to that original Motion and the figures provided on Debtors’ Amended Form 22A, the UST is no longer moving for dismissal under that section. 2 business, but he has not since filed any amendments to his schedules indicating any additional income from such.

DEBTORS DOCUMENTED THEIR DEBT.

Debtors’ Schedule F reflects $66,862 in unsecured debts, which almost entirely consists of credit card bills for consumer purchases.

WHY DEBTORS SAID THEY FILED FOR BANKRUPTCY

Debtors testified that their bankruptcy filing was primarily caused by those credit card debts, and that the minimum payments became too much for their budget to bear over time.

TRUSTEE ARGUED THAT THE DEBTOR SHOWED AS AN EXPENSE THEY MADE VOLUNTARILY GAVE THEM TOO MUCH INCOME.

In its Motion to Dismiss, the UST argues that elimination of only Mr. Debtor’s 401K
contribution of some $423.24 per month and contribution of Debtors’ continuing income tax
refunds (approximately $4,000 per year) for a 60 month period (the required length of a Chapter
13 plan), less potential attorney fees and Chapter 13 oversight expenses, would produce
payments of approximately 60% of the unsecured debt in this case.

THE BANKRUPTCY TRUSTEE AGRUES THE DEBTOR HAS THE MEANS TO PAY THEIR DEBT.

The Trustee argues that, even with no reduction in their current standard of living, the Debtors have the ability to make a significant repayment to their unsecured creditors.

II. DISCUSSION OF THE APPLICABLE LAW

Authority to dismiss a case under Chapter 7 is derived from 11 U.S.C. § 707(b)(1), which
provides, in part:

After notice and a hearing, the court, on its own motion or on a motion by the
United States trustee, trustee (or bankruptcy administrator, if any), or any party in
interest, 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. 11 U.S.C. § 707(b)(1).

TRUSTEE ARGUES THAT THE DEBTORS REAL INCOME CREATES AN ASSUMPTION OF ABUSE OF THE BANKRUPTCY SYSTEM.

In those cases where the presumption of abuse does not arise, as here, or
is otherwise rebutted, and where bad faith is not a factor, the Court is directed to consider the
totality of the circumstances in determining whether dismissal for abuse is warranted. 11 U.S.C.
§ 707(b)(3)(B).

THE COURT MUST LOOK AT THE TOTALITY OF THE CIRCUMSTANCES.

The UST bears the burden of establishing by a preponderance of the evidence
that the case should be dismissed as an abuse under § 707(b)(3). In re Beckerman, 381 B.R. 841,844 (Bankr. E.D. Mich. 2008).

A. The Court looks at the debtors ability to pay.

THE COURT ASKS ARE THE DEBTORS TRUSTWORTHY AND NEEDY

In determining whether this case constitutes an “abuse” under § 707(b)(3), the Court must
examine the totality of the circumstances and determine whether the Debtors are “honest” and
“needy”. In re Krohn, 886 F.2d 123, 126 (6th Cir. 1989); In re Behlke, 358 F.3d 429, 434 (6th 3
Cir. 2004). “’[H]onest,’ in the sense that [Debtors’] relationship with [their] creditors has been
marked by essentially honorable and undeceptive dealings, and […] ‘needy’ in the sense that
[their] financial predicament warrants the discharge of [their] debts in exchange for liquidation
of [their] assets.” Krohn, 886 F.2d at 126.

IN THIS CASE THERE IS NO ALLEGATION THAT THE DEBTORS ARE NOT HONEST.

There is no allegation or indication that Debtors have been anything other than honest in
their relationship with their creditors, and therefore the inquiry is limited solely to whether
Debtors are “needy” of a chapter 7 discharge.

HOW DOES THE COURT DECIDE IF A DEBTOR IS NEEDY?

In making determinations as to neediness, courts have looked to the following non-exclusive factors:

(a) whether the Debtor has the ability to repay his debts out of future earnings;
(b) whether the Debtor enjoys a stable source of future income;
(c) whether the Debtor is eligible for chapter 13 relief;
(d) whether there are state remedies with the potential to ease the Debtor’s financial predicament;
(e) whether relief may be obtained through private negotiations with creditors; and (f) whether expenses can be reduced significantly without depriving the Debtor of adequate food, clothing,
shelter and other necessities. SEE In re Beckerman, 381 B.R. at 845 (citing In re Krohn, 886 F. 2d at 126-27).

HERE THE COURT FOUND THE DEBTORS WOULD QUALIFY FOR A CHAPTER 13 BANKRUPTCY.

In this case, the Debtor enjoys a stable source of future income and is eligible for Chapter
13 relief.

THE COURT FOUND THAT THE DEBTORS COULD REDUCE THEIR EXPENSES AND STILL GET THE NECESSITIES OF LIFE.

The factor most applicable to the Court’s analysis in this case is (f), whether the
Debtors’ expenses can be significantly reduced without depriving them of adequate food,
clothing, shelter and other necessities.

DEBTORS RESPONSE TO TRUSTEE CONCERNS

As noted, the UST argues that elimination of only Mr. Debtor’s 401K contribution of some
$423.24 per month and contribution of Debtors’ continuing income tax refunds (approximately
$4,000 per year) for a 60 month period (the required length of a Chapter 13 plan), less potential
attorney fees and Chapter 13 oversight expenses, would produce payments of approximately
60% (or approximately 39,850) of the unsecured debt in this case. Debtors respond by arguing
that (1) they will need the 401K plan for retirement purposes and (2) the may need their tax
refund to pay business taxes Mr. Debtor’s business accrued while it was operating.
i. 401K Contributions

THE COURT LOOKED AT THE VOLUNTARY PAYMENTS.

This Court has previously examined the issue of whether voluntary contributions to a
retirement plan are per se unnecessary expenses for purposes of determining disposable income in a hypothetical Chapter 13 plan, and found such contributions not to be per se unreasonable, but they must be examined on a case-by-case basis. In re Beckerman, 381 B.R. at 848.

HOW IS NECESSITY PROVEN?

In determining whether such a contribution is necessary to the maintenance and support of a debtor, the Court looks to factors such as:

(1) amount of any existing retirement savings;
(2) the debtor’s age and time left until retirement;
(3) annual income and overall budget;
(4) amount of monthly contributions; and
(5) needs of any dependents. Id.

DEBTORS BACKGROUND

Debtors are in their early thirties and have saved approximately $22,000 toward their
retirement. As noted, Mr. Debtor is currently contributing $423.24 per month toward his 401K
plan.
DEBTROS MAKE $20,000 MORE THAN THE MAXIMUM FOR A CHAPTER SEVEN.

As also noted, Debtors make approximately $97,000 per year, which is more than $20,000
above the applicable median income for a family of four in Michigan.

THERE IS ROOM IN THEIR BUDGET FOR BELT TIGHTENING

Their overall budget also has some room for some belt-tightening, if necessary, and for additional unexpected expenditures.

THE COURT FINDS THAT DEBTORS RETIREMENT WILL CONTINUE TO GROW EVEN IF THEY ARE IN CHAPTER 13.

With continuing contributions after the completion of a 60-month plan at the same
level as before, and assuming a modest 3% return on investments, the Debtors will have
approximately $232,093 by the time they reach the age of 60. The point here is that, even if
Debtors were in a Chapter 13 plan, their age and circumstances are such that, absent any
contributions during the life of the plan, that account would still accrue a substantial amount to
help see the Debtors thru their retirement years.

TOTALITY OF CIRCUMSTANCES DETERMINATION OF THE COURT

Under the totality of the circumstances, the Court finds that the 401K contribution in this
case is unnecessary and should not be deducted when determining disposable income for the
fund of a hypothetical Chapter 13 plan. In light of the above, the Court finds that the $423.24

IN CHAPTER 13 THE DEBTORS IN A FIVE YEAR PLAN HAVE THE ABILITY TO PAY THEIR CREDITORS $25,394.40

401K contribution should be included in disposable income available to fund a hypothetical plan.
Eliminating that monthly expense alone from Debtors’ budget would produce a significant and
meaningful distribution (some $25,394.40) to unsecured creditors in a Chapter 13 case, as such, the Court concludes that Debtors are not “needy” of a Chapter 7 discharge.

ii. Debtor did not argue Tax Refunds were necessary for the debtors.

Debtors’ Schedule B reflected an anticipated income tax refund of some $4,611.00 for
2010, which is apparently the typical refund that Debtors have historically received. Debtors
argue that they may need their tax refund to pay business taxes accrued by Mr. Debtor’s business in 2009.

The UST argues that, even if that were true, that argument is insufficient to support a
complete disregard of the Debtors’ future tax refunds.

Even conservatively estimating the Debtors’ expected tax refunds at $4,000 per year
going forward, those refunds would generate some $20,000 per year in a 60-month Chapter 13
plan. As Debtors have not made an argument that those refunds are necessary for their support, the Court agrees with the UST that such should be considered disposable income available to fund a Chapter 13 plan.

iii. What about the Decrease in Debtors’ Income

As noted, Mr. Debtor testified that his income decreased toward the end of 2010 due to a
decrease in the number of Kxxx and Sxxx vehicles being brought in for service at Gxxx. This decision takes that particular decrease into account.

THE DEBTORS DID NOT PROVE THEIR LOSS IN INCOME

The evidence as to any further decreases actually occurring, or if likely to occur, and by what amount, is not sufficiently sure or clear as would permit a change in the result.

IF THE DECREASE IN INCOME OCCURS THE DOOR IS OPEN TO CONVERT A CHAPTER 13 BACK TO A CHAPTER SEVEN

In that regard, it needs to be kept in mind that if Debtors convert their case to Chapter 13 and those decreases materialize in the future, Debtors can account for such by filing a proposed Chapter 13 plan modification, or possibly converting the case back to Chapter 7 if the circumstances call for such.

THE COURT FINDS THAT A CHAPTER SEVEN UNDER THESE CIRCUMSTANCE IS AN
ABUSE.

How ever at this time and based on the facts and circumstances presently before the Court, granting the Debtors relief under Chapter 7 of the Code would be an abuse of the provisions of that chapter given the totality of the circumstances.

III. CONCLUSION , CHAPTER SEVEN DISMISSED THE DEBTORS HAVE 30 DAYS TO FILE FOR CHAPTER 13

For the forgoing reasons, the UST’s Motion to Dismiss pursuant to 11 U.S.C. § 707(b)(3)
is GRANTED. Debtors are allowed thirty days from the date of this opinion to file a motion to
convert to a Chapter 13 case. If such is not done within that time period, the case will be
dismissed by separate order of the court.

-END-

This court opinion has been modified for Blog presentation . Do not rely on its content until you read the original opinion and seek the advice of Bankruptcy Council. Primary source.Case No. 10-65068 , Chapter 7,Opinion by Hon. Walter Shapero
[The debtors names sand employeers have been modified, they have been through enough.]

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