On a question where the courts are split, a district judge in Detroit upheld Bankruptcy Judge Thomas J. Tucker by ruling 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.
Even though Social Security benefits are not included in the chapter 13 calculation of disposable income, District Judge Bernard A. Friedman also said that Social Security benefits could be considered in deciding whether a plan was filed in bad faith.
Full-Payment Chapter 13 Was Possible
The husband and wife debtors were not sympathetic litigants. In his August 18 opinion, Judge Friedman referred to their “outrageous abuse of consumer credit.”
The couple 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 $43,000.
If the debtors had remained in chapter 7, unsecured creditors would receive nothing while the pension income and Social Security benefits would have been insulated from creditors’ claims under 42 U.S.C. § 407, which bars the garnishment or attachment of Social Security benefits.
If Social Security benefits were considered, Judge Friedman agreed with Judge Tucker by saying that the debtors would have had 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, both judges concluded that the debtors could pay their creditors in full over the course of a 41-month chapter 13 plan.
Making the debtors less sympathetic, Judge Friedman noted that their $43,000 in unsecured debt, mostly on credit cards, had been incurred after they discharged $164,000 in debt through a chapter 7 discharge in 2008.
The Motion to Dismiss for ‘Abuse’
The U.S. Trustee moved to dismiss the case for “abuse” under Section 707(b)(3). Judge Tucker granted the motion but gave the debtors the option of converting the case to chapter 13. They declined the offer, and the chapter 7 case was dismissed. To read ABI’s report on Judge Tucker’s opinion, click here.
The debtors appealed, but to no avail.
The outcome of the appeal turned on the question of whether Social Security benefits, otherwise an exempt asset, can be included in the “abuse” determination. The courts are divided.
Social Security benefits are explicitly excluded from the definition of “current monthly income” under Section 101(10A)(B)(ii)(I) and are therefore not considered in calculating 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.
Likewise, 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 they in chapter 13, the debtors argued that their plan would pay nothing to creditors but 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.
Of course, Social Security benefits are exempt assets under state law and under Section 522(d)(10)(A).
The Debtors Lose on ‘Totality of the Circumstances’
Lower courts are split on whether Social Security benefits can be considered in deciding whether there is “abuse” under Section 707(b)(3). When there is no presumption of abuse, the statute still allows the court to dismiss if the “totality of the circumstances . . . of the debtor’s financial situation demonstrates abuse.”
Judge Friedman observed that charitable contributions under Section 707(b)(1) are the only exception to the “totality of the circumstances” in Section 707(b)(3). “Totality” is an expansive term, he said. If Congress had intended to exclude Social Security benefits, “it could have done so,” he said.
Like Judge Tucker, Judge Friedman took guidance from “the leading Sixth Circuit case addressing Section 707(b)(3)(B).” In In re Krohn, 886 F.2d 123, 126 (6th Cir. 1989), the appeals court focused on whether the debtor was “needy.”
In the case on appeal, Judge Friedman said the debtors were not “needy” because their income exceeded their expenses by about $1,250 a month and could pay off all their unsecured debt in 41 months.
Judge Friedman rejected the notion that 42 U.S.C. § 407 barred the use of Social Security benefits in a chapter 13 plan. Section 407 says that the benefits are not subject to garnishment or attachement, “or to the operation of any bankruptcy or insolvency law.”
Judge Friedman said that taking the benefits into consideration in the abuse test does not “subject those benefits to legal process or to the ‘operation of any bankruptcy or insolvency law.’”
Judge Friedman also rejected the idea that conversion to chapter 13 would be senseless because they could confirm a plan paying nothing to their unsecured creditors.
On another issue where the courts are split, Judge Friedman decided that Social Security benefits can be “properly considered in determining whether a Chapter 13 plan has been proposed in good faith.”
Upholding Judge Tucker, Judge Friedman said it comes down to this: “Plainly, debtors in this case do not deserve a fresh start in light of their outrageous abuse of consumer credit.”
On a question where the courts are split, a district judge in Detroit upheld Bankruptcy Judge Thomas J. Tucker by ruling 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.
Even though Social Security benefits are not included in the chapter 13 calculation of disposable income, District Judge Bernard A. Friedman also said that Social Security benefits could be considered in deciding whether a plan was filed in bad faith.
Full-Payment Chapter 13 Was Possible
The husband and wife debtors were not sympathetic litigants. In his August 18 opinion, Judge Friedman referred to their “outrageous abuse of consumer credit.”
The couple 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 $43,000.
If the debtors had remained in chapter 7, unsecured creditors would receive nothing while the pension income and Social Security benefits would have been insulated from creditors’ claims under 42 U.S.C. § 407, which bars the garnishment or attachment of Social Security benefits.