Addressing several issues where the courts are deeply split, Bankruptcy Judge Thomas J. Tucker of Detroit concluded that Social Security benefits can be considered in deciding whether a chapter 7 petition should be dismissed for “abuse” under the “totality of the circumstances” test.
In a 32-page opinion, Judge Tucker even disagreed with another bankruptcy judge in his district.
No-Asset Chapter 7 vs. Full-Payment Chapter 13
The husband and wife debtors had two sources of income: combined Social Security benefits of about $4,000 and a monthly pension of some $1,800, for total monthly income of approximately $5,800. They had no priority claims. Their unsecured debt aggregated about $40,000. It was a no-asset chapter 7 case.
If the debtors were to remain in chapter 7, creditors would receive nothing while the pension income and Social Security benefits would be insulated from creditors’ claims.
If Social Security benefits were considered, however, Judge Tucker calculated that the debtors would have about $1,250 left over every month after paying living expenses, including their $900 monthly mortgage and lease payments on two almost-new automobiles. Taking Social Security benefits into consideration, he deduced that the debtors could pay their creditors in full over the course of a 41-month chapter 13 plan.
The Statutes and the Motion to Dismiss for ‘Abuse’
The U.S. Trustee moved to dismiss the case for “abuse” under Section 707(b)(3). In his opinion on January 27, Judge Tucker granted the motion but gave the debtors the option of converting the case to chapter 13.
The outcome of the motion to dismiss turned the question of whether Social Security benefits, otherwise an exempt asset, can be included in the “abuse” determination. The courts are divided.
The debtors had several statutory provisions on their side.
Social Security benefits are explicitly excluded from the definition of “current monthly income” under Section 101(10A)(B)(ii)(I). Consequently, Social Security benefits are not considered in the calculation to determine whether there is a presumption of abuse under the means test in Section 707(b)(2).
As a result, there was no presumption of abuse that could result in dismissal or importuning the debtors to convert to chapter 13.
Social Security benefits are not taken into consideration in the chapter 13 confirmation requirement that the debtors commit all of their “projected disposable income” to creditor payments under the plan. Were the debtors in chapter 13, a plan paying nothing to creditors would be presumptively confirmable under Section 1325(b)(1)(B), because “disposable income” includes only “current monthly income,” which does not include Social Security benefits.
The debtors also relied on 42 U.S.C. § 407, barring the garnishment or attachment of Social Security benefits.
Finally, of course, Social Security benefits are exempt assets under state law and under Section 522(d)(10)(A).
For whatever it could be worth, the debtors might not have been able to argue successfully that Social Security benefits were not estate assets, because exemptions only apply to property of the estate, thus possibly implying that Social Security benefits are estate property.
The Debtors Lose on Every Count
Judge Tucker knocked down the debtors’ theories, one by one.
Lower courts are split on whether Social Security benefits can be considered in deciding whether there is “abuse” under Section 707(b)(3). Judge Tucker cited a Virginia bankruptcy judge who said it made no sense for Congress to exclude benefits from the presumption-of-abuse test while allowing a judge to use the same benefits and find abuse under the “totality” test.
Judge Tucker decided to consider Social Security benefits because the statute has no “clear and explicit” exclusion of the benefits under the “totality” test. Indeed, he said, Congress knew how to exclude the benefits and did so in several Code provisions. Thus, the lack of a specific exclusion suggested to him that Congress intended to include the benefits under the “totality” test.
Judge Tucker also rejected the debtor’s contention that it would be pointless to compel them to convert to chapter 13 because they could confirm a plan paying nothing to unsecured creditors.
Again, the courts are split. Judge Tucker cited the Fifth, Ninth and Tenth Circuits, along with several lower courts, for holding that Social Security benefits are not considered in the good faith analysis. He cited Walter Shapero, a bankruptcy judge in his district who retired in 2016. Judge Shapero held in 2015 that the failure to include Social Security income in calculating plan payments did not constitute lack of good faith under Section 1325(a)(3). In re Mihal, 13-54435, 2015 WL 2265790 (Bankr. E.D. Mich. May 6, 2015).
However, the Sixth Circuit had provided some guidance about the “good faith” finding required for confirmation of a chapter 13 plan under Section 1325(a)(3). The appeals court had said that a plan must be “consistent with the debtor’s available resources,” thus allowing the court to consider a debtor’s income “from all sources.” Metro Employees Credit Union v. Okoreeh-Baah (In re Okoreeh-Baah), 836 F.2d 1030, 1033, 1032 n.3 (6th Cir. 1988).
Although he did not rule definitively, Judge Tucker decided it was “very doubtful” that the debtors could confirm a plan paying nothing to unsecured creditors, in view of the good faith requirement. Therefore, he said, it was not “pointless” for him to cajole the debtors into chapter 13.
With regard to the insulation of Social Security benefits from attachment under title 42, the courts again are split. Some hold that the anti-assignment statute precludes consideration of the benefits in a good faith analysis.
The Sixth Circuit has not spoken, but Judge Tucker held “that the consideration of Social Security income in the good faith analysis . . . is not contrary to § 407 of the Social Security Act.”
Wrapping up his opinion, Judge Tucker held that the “ability of a debtor to repay his or her debts out of future earnings is relevant to the determination of whether there is abuse.” Because the debtors could propose a chapter 13 plan paying unsecured creditors in full in 41 months, he concluded that the chapter 7 case “must be dismissed, or, if the debtors so choose, converted to chapter 13.”
Questions of Statutory Interpretation
The case raises fundamental questions about statutory interpretation.
Does the plain meaning doctrine always ascribe contrary intent to Congress when a statute is silent about a particular situation? Is statutory silence in itself enough to justify a result, or should the result also consider whether the statute in general terms evidences a congressional policy?
May we assume that Congress drafts statutes to cover every conceivable permutation? Or, does Congress indicate a general policy informing the outcome on a topic like Social Security benefits by prescribing the result in some but not all possible circumstances? Does a statute’s omission of the result under a particular set of facts require the court to reach a conclusion opposite to the outcome when the answer is bluntly stated?
Does statutory silence on a particular circumstance enable a judge to impose her or his own sense of fairness when the statute demonstrates a policy outcome in related areas?
In other words, can there be policies in a statute that will ordinarily prescribe the outcome when the statute is silent about a given set of facts?
Addressing several issues where the courts are deeply split, Bankruptcy Judge Thomas J. Tucker of Detroit concluded that Social Security benefits can be considered in deciding whether a chapter 7 petition should be dismissed for “abuse” under the “totality of the circumstances” test.
In a 32-page opinion, Judge Tucker even disagreed with another bankruptcy judge in his district.
No-Asset Chapter 7 vs. Full-Payment Chapter 13
The husband and wife debtors had two sources of income: combined Social Security benefits of about $4,000 and a monthly pension of some $1,800, for total monthly income of approximately $5,800. They had no priority claims. Their unsecured debt aggregated about $40,000. It was a no-asset chapter 7 case.
If the debtors were to remain in chapter 7, creditors would receive nothing while the pension income and Social Security benefits would be insulated from creditors’ claims.
If Social Security benefits were considered, however, Judge Tucker calculated that the debtors would have about $1,250 left over every month after paying living expenses, including their $900 monthly mortgage and lease payments on two almost-new automobiles. Taking Social Security benefits into consideration, he deduced that the debtors could pay their creditors in full over the course of a 41-month chapter 13 plan.