On an issue where the courts are divided, Bankruptcy Judge Beth A. Buchanan of Cincinnati decided that the Social Security benefits of a nonfiling spouse are not to be included in deciding whether the chapter 7 case should be dismissed for “abuse” under Section 707(b).

In her January 5 opinion, Judge Buchanan also decided that the debtor’s age entitled her to deduct 401(k) contributions that amounted to 3% of her gross income.

Below median income, the debtor filed a chapter 7 petition showing income of $4,400 a month after a $188 monthly contribution to a retirement plan. In her income, the debtor did not include her nonfiling husband’s net monthly Social Security benefits of about $3,000. Her 72-year-old husband was retired.

After expenses on Schedule J, the debtor had $482 in monthly net income.

Were the husband’s Social Security benefits included in income, the U.S. Trustee calculated that the couple’s monthly net income of some $3,000 would be sufficient for a 100% payment of the debtor’s priority and nonpriority unsecured claims amounting to about $100,000. The U.S. Trustee therefore filed a motion to dismiss the case for abuse under Section 707(b).

The Relevant Statutes

Section 707(b)(1) allows the court to dismiss a case or convert to chapter 13 (with the debtor’s consent) if the court “finds that the granting of relief would be an abuse of the provisions of this chapter.” The subsection goes on to bar the court from considering charitable contributions “to any qualified religious or charitable entity.”

Section 707(b)(3)(B) permits the court to consider “the totality of the circumstances” in deciding whether there is abuse. The U.S. Trustee argued that the “totality” indicated abuse, given the retired husband’s Social Security benefits.

The U.S. Trustee’s pursuit of Social Security benefits invoked the exemption given by federal law under 42 U.S.C. § 407(a) and (b). Subsection (a) says that “none” of someone’s Social Security benefits “shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.”

To avoid implied exceptions to the exemption for Social Security benefits, subsection (b) says:

No other provision of law, enacted before, on, or after April 20, 1983, may be construed to limit, supersede, or otherwise modify the provisions of this section except to the extent that it does so by express reference to this section.

The Split on Social Security Benefits

Judge Buchanan said that “there is much debate over the treatment of social security income in bankruptcy, particularly in the context of whether social security income should be considered when determining if a debtor is entitled to bankruptcy relief.” She found “many well written and reasoned opinions on both sides of this divide.”

Citing the Fifth, Sixth and Eighth Circuits, Judge Buchanan said that the “circuit courts of appeal[s] have upheld the protection of social security income within the confines of the Bankruptcy Code.” However, she said that lower courts “continue to disagree on the scope of the safeguard provided by § 407 of the Social Security Act.”

“Some courts,” Judge Buchanan said, “conclude that § 407’s directive is not implicated by consideration of a debtor’s social security income when determining if a debtor has sufficient income to pay the debts sought to be discharged in bankruptcy.” Other courts have held that a bankruptcy court cannot “do indirectly what it is forbidden to do directly by § 407.”

Although she found “well reasoned opinions on both sides,” Judge Buchanan held “that excluding the Non-filing Spouse’s social security income from the analysis of the Debtor’s ability to pay does not result in an abuse of the chapter 7 process such as to warrant dismissal of this case under § 707(b)(3)(B).”

Retirement Contributions

The U.S. Trustee also objected to permitting the debtor to deduct $188 a month for contributions to a retirement plan. Judge Buchanan described the U.S. Trustee as believing that “chapter 7 debtors may never deduct 401(k) contributions from disposable income when doing so would be to the detriment of their creditors.”

Judge Buchanan said that “some courts” have interpreted the Sixth Circuit as adopting “a per se rule that 401(k) contributions are not permissible deductions when determining a debtor’s ability to pay under a § 707(b)(3)(B) totality of the circumstances analysis.”

Judge Buchanan did not find a per se rule. She cited courts that “found it appropriate to consider such factors as whether the debtor is at or near retirement age and the extent of the debtor’s retirement savings.” She noted that the debtor was 62 years of age and was contributing only 3% of her income to a retirement plan. The debtor’s husband was retired at age 72. Together, the couple had only $600 in savings.

Judge Buchanan denied the U.S. Trustee’s motion to dismiss, finding that the retirement contribution did not support “dismissal or conversion pursuant to § 707(b)(3)(B).”