DALE L. SOMERS, Bankruptcy Judge.
This matter came before the Court on April 5, 2016, for a trial on creditor Security State Bank's motion to dismiss under § 707(b). The Debtors appeared by counsel Hoa Alec Nguyen, but did not appear in person. The Bank appeared by counsel Martin J. Peck. Chapter 7 Trustee Darcy D. Williamson appeared on her own behalf, and Assistant U.S. Trustee Richard A. Wieland appeared on behalf of the U.S. Trustee's Office. The Court received evidence and heard the arguments of counsel, and took the matter under advisement.
Although the Debtors submitted forms asserting they had no income for the six months before they filed their Chapter 7 bankruptcy petition, payment advices they filed show that Debtor Jimmy Nguyen actually had gross pay of more than $10,000 per month during that period. That income placed the Debtors well above the median for a family of two like theirs in the State of Kansas for 2015. The total of the Debtors' consumer debts was nearly double the total of their business debts, making them subject to the abuse standard imposed by § 707(b) of the Bankruptcy Code on debtors with primarily consumer debts. A correctly-completed Form B-122-A would show that the presumption of abuse arose in this case. The Debtors essentially asserted three defenses in an effort to avoid or overcome that presumption: (1) they paid off their home mortgage by selling their home shortly after the trial on the Bank's motion to dismiss and that made their consumer debts less than their business debts, so they should no longer be subject to the abuse test of § 707(b); (2) Mr. Nguyen quit his job on October 16, 2015, and did not obtain a new job until November 16, 2015, and the resulting 30-day loss of income constitutes a "special circumstance" rebutting the presumption of abuse; and (3) Mr. Nguyen suffers medical problems that create uninsured expenses that are so great that the presumption of abuse is rebutted. After considering the evidence and counsel's arguments, the Court concludes (1) the home sale came too late to change the Debtors' status as individuals who owe primarily consumer debts, (2) because Mr. Nguyen obtained a new job so soon after quitting the one he held during the six months before the Debtors filed bankruptcy and that job is paying him as much as he was making at his old job, any interruption in income that the Debtors suffered was too brief to qualify as a special circumstance that could overcome the presumption of abuse that arose in this case, and (3) the Debtors failed to present sufficient evidence to show that Mr. Nguyen's medical problems constitute a serious medical condition that could overcome the presumption of abuse.
With the help of an attorney, the Debtors filed a Chapter 7 petition on November 11, 2015. They reported owing debts totaling approximately $759,800. The Debtors had operated a restaurant until January 31, 2015, and some of their debts had been incurred in connection with that business. At the meeting of their creditors, the Debtors testified that $237,645 of their debts arose from the business and that $522,136 were personal consumer debts not related to the business. They reported owing $429,515 on their home mortgage, and identified that as a consumer debt. On their Schedule A, they listed the home mortgage as a joint debt.
Along with the Debtors' petition, their attorney prepared and filed on their behalf an Official Form 22A-1 showing that their average monthly income for the six months before they filed bankruptcy (their "current monthly income" as defined in § 101(10A)) was $0, which would have put them well below the $60,577 that was the median annual family income for a household of two (like theirs) in Kansas. Nevertheless, two days later, the attorney filed copies of payment advices showing that Mr. Nguyen had been paid by HollyFrontier Payroll Services during the six months ending in October 2015, with paychecks dated June 30, July 14, July 28, August 11, August 25, and September 8. In fact, the year-to-date figures on the June 30 pay stub show that Mr. Nguyen had been paid nearly the same amount every two weeks during 2015 from January through June 30. While testifying at the meeting of creditors, Mr. Nguyen confirmed that he had been employed by HollyFrontier throughout 2015, receiving a small pay increase early in the year and being paid the new amount every two weeks, until he quit his job on October 16. Furthermore, the Bank's records show it also received money garnished from Mr. Nguyen's November 3 and November 17 paychecks, indicating he continued to be paid for a time after he quit. In fact, the November 17 garnishment obtained almost twice as much as the Bank's earlier garnishments, indicating Mr. Nguyen's pay had increased for that check, perhaps to pay him for vacation or sick leave he had not used before he quit working for HollyFrontier.
The meeting of the Debtors' creditors pursuant to § 341(a) was held on February 8, 2016. During that meeting, the Debtors explained that they had moved to the State of Washington because Mr. Nguyen obtained a new job there. He had started work on November 16, 2015, so Mr. Nguyen's unemployment lasted only for a month. He was being paid approximately the same amount he had been earning at HollyFrontier, about $130,000 per year. When asked about the status of the Debtors' Wichita home, Mr. Nguyen reported that they had listed it for sale with a local realty company and were asking $485,000 for it. At the creditors' meeting, he did not mention any possibility that his new employer might be arranging a sale of the home for the Debtors because the employer was relocating them to Washington. On February 11, the Bank's motion to dismiss came up on a docket and was set for an evidentiary hearing on April 5, and there was still no mention of any sale of the Debtors' home through Mr. Nguyen's employer.
At trial, the Debtors offered into evidence a copy of a contract to sell their home to a company called RELO Direct, Inc., that indicated the sale was being made because the Debtors were being relocated by Mr. Nguyen's new employer. The Bank objected because the proferred copy had not been signed by either the Debtors or the buyer. The Court decided to keep the record open for 30 days to permit the Debtors to submit a signed copy of the contract. During that time, the Debtors submitted a copy showing they had signed the contract the day before the trial, but the buyer did not sign it until April 14, nine days after the trial.
At the meeting of creditors, Mr. Nguyen testified he had missed perhaps as much as 30 days of work during 2015 because of illness. He said he was in and out of both the doctor's office and the hospital during that year. He also said the stress of having no money to pay bills had caused his work for HollyFrontier to "go down" and he became afraid the company would let him go, so he quit before they decided to do that. Mr. Nguyen added, however, that the Debtors' move to Washington for his new job had improved their financial situation because the Bank was not garnishing his wages there.
At trial, the Debtors' attorney offered some of Mr. Nguyen's medical records, and the Bank objected that (1) the records were hearsay, and (2) they were not relevant without an explanation of what effect Mr. Nguyen's medical condition would have on his ongoing ability to have income. The Court ruled the records had not been shown to be admissible. The Debtors' attorney also offered a letter Mr. Nguyen had sent to the Chapter 7 Trustee which included assertions about his medical problems, but the Bank objected to its admission on the ground it was hearsay and Mr. Nguyen was not available to be cross-examined. The Court sustained that objection. Consequently, there is insufficient evidence before the Court to show that Mr. Nguyen's medical problems will either limit his ability to continue to earn the income he is being paid by his new employer or generate excessive medical expenses for the Debtors.
Before the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA)
As indicated, a short time after the trial on the Bank's motion to dismiss, the Debtors sold their home, eliminating the home mortgage that constituted roughly 80% of their consumer debts. Because the amount of their remaining consumer debts is substantially less than the amount of their business debts, they suggest they should no longer be subject to the § 707(b) standard for individuals whose debts are primarily consumer debts. They cited no case involving a similar postpetition change in the composition of a debtor's debts, and the Court has found none. In any event, under the circumstances of this case, the Court concludes that the change in the Debtors' debt composition came too late. Even if the Debtors' status as owing primarily consumer debts was not fixed as of the day they filed their bankruptcy petition, this change after the Court held a trial on the Bank's motion to dismiss doesn't change the facts that the parties relied on in litigating that motion.
A leading bankruptcy treatise says:
The meeting of creditors pursuant to § 341(a) was first set in this case for December 14, 2015, making the deadline for filing a motion to dismiss under § 707(b) for abuse February 12, 2016. Because the Bank was required to bring its motion to dismiss under § 707(b) by that date, necessarily relying on the facts that existed before the deadline expired, it would not be appropriate to immunize the Debtors from the Bank's abuse claim under § 707(b) because the composition of their debts changed more than two months after that deadline.
Furthermore, § 707(a) authorizes the dismissal of any Chapter 7 case, no matter what types of debts the debtor owes, for "cause." Courts have held that a debtor's substantial financial means or ability to repay creditors can be considered but cannot by itself constitute cause for dismissal under that provision.
For these reasons, the Court concludes the Debtors must be treated as "individual[s] . . . whose debts are primarily consumer debts" even though the post-trial sale of their home eliminated the major debt that made the amount of their consumer debts exceed the amount of their business debts.
The Debtors filed a Form 22A-1 that incorrectly showed their average monthly income for the six months before they filed bankruptcy was zero and they were therefore not subject to the abuse standard of § 707(b). The Bank completed a new Form 122A-1
According to the Debtors' Schedule F, their nonpriority unsecured claims totaled $158,622; twenty-five percent of that amount is $39,655.50. Under § 707(b)(2)A)(i)(I) and (II), the Court is to presume abuse exists if the difference between the Debtors' current monthly income and their allowable expenses, multiplied by 60, exceeds the lesser of $39,655.50 or $12,475. The calculations the Bank made show the Debtors could pay much more than $12,475 under either the Kansas or the Washington expense standards. In effect, then, the Debtors admitted at trial that the presumption of abuse of the provisions of Chapter 7 arose in their case. Besides claiming they should not be subject to the means test at all, the Debtors sought to avoid the dismissal of their case only on the grounds that special circumstances existed to rebut the presumption.
In § 707(b)(2)(B)(i), the Bankruptcy Code addresses the "special circumstances" that can rebut the presumption of abuse:
A debtor seeking to establish special circumstances must comply with the procedural requirements of § 707(b)(2)(B)(ii) and (iii). These subsections require the debtor to itemize and document each additional expense or adjustment to income, explain in detail why it is necessary and reasonable, and attest under oath to the accuracy of any supporting information provided. In this case, the Debtors did not comply with these requirements, so their defenses could be rejected on that basis. However, as explained below, their defenses fail on substantive grounds as well.
The phrase "special circumstances" is not defined in the Bankruptcy Code. The Court finds the phrase to be open-ended. For example, it could refer to the circumstances that caused the debtor to incur an expense, to the reasons for a debtor's financial circumstances at the time of filing, to the debtor's anticipated financial circumstances, or to the consequences of the debtor's filing for bankruptcy relief. The Court will therefore consider the purpose of the provision, as reflected in the legislative history,
The legislative history of the BAPCPA establishes that the concept of "special circumstances" was first introduced to the means test in 1999 in Senate Bill 625.
The report further states the following regarding "special circumstances:"
The statutory examples of special circumstances — medical expenses and active service in the military — were added in 2005 by an amendment offered by Senator Sessions.
From the foregoing, the Court determines that the presumption of abuse under the means test was adopted to cure the perceived problem of debtors electing to file under Chapter 7 when they had the ability to pay a meaningful portion of their nonpriority unsecured debts, calculated using the objective criteria of the means test and based on their average monthly income during the six months before they filed bankruptcy. "Special circumstances" focuses on financial conditions that justify including additional expenses or reducing average monthly income. The burden to establish special circumstances was not set particularly high, making the presumption truly rebuttable. The standard for making adjustments is special, not extraordinary, circumstances. The procedural requirements impose the conditions that the adjustments to income or expenses be itemized, documented, and explained in detail to show they are necessary and reasonable. The medical expenses and military service circumstances listed in the statute are just examples of circumstances where the results of the means test, based primarily on IRS national and local standards, may not accurately demonstrate an ability to repay. The statutory requirement that there be no reasonable alternative is linked to the concern that the special circumstances rebuttal not be used as a convenient way for Chapter 7 debtors to choose a more expensive lifestyle. The question is whether, given the individual debtor's circumstances, the presumption of abuse has erroneously identified the debtor as having the ability to pay a meaningful portion of his or her unsecured debts.
The Debtors contend that Mr. Nguyen's 30-day period of unemployment is sufficient to overcome the presumption of abuse in this case. Although a period of unemployment that occurs after most or all of the six months immediately before a debtor files bankruptcy certainly reduces the debtor's income while the unemployment lasts and suggests the calculation of his or her "current monthly income" might have exaggerated his or her ability to pay debts in the future, such a brief period as Mr. Nguyen experienced cannot be considered to have seriously affected the Debtors' ability to pay a meaningful portion of their unsecured debts. Furthermore, Mr. Nguyen testified at the meeting of creditors that his job performance had "gone down" before he quit his pre-bankruptcy job because of the stress of not having money to pay bills, but the Debtors' move to Washington for his new job had improved their financial situation because the garnishment of his Kansas wages that the Bank had been doing was not occurring there. This indicates the circumstances that led him to quit his job do not exist for the Debtors in Washington. The Debtors' assertion that Mr. Nguyen's brief period of unemployment rebuts the presumption of abuse must fail.
At the meeting of the Debtors' creditors, Mr. Nguyen testified that he had missed about 30 days of work during 2015 because of medical problems. But only a very small portion of the unpaid debts the Debtors listed on their bankruptcy schedules — a total of $1,046 being collected by Central States Recovery — appear to be related to those medical problems, so before the Debtors filed bankruptcy, the problems did not generate substantial expenses for them beyond those allowed under the means test. And while Mr. Nguyen missed 30 days of work during 2015, he had vacation and sick leave he used so his absences did not affect the income he received from his job. At trial, the Debtors tried to provide other evidence about Mr. Nguyen's medical condition, but they failed to establish that the documents they proferred were admissible. The evidence that was properly presented at trial is simply not enough to convince the Court that Mr. Nguyen's condition either generates substantial expenses that are not accounted for under the mechanical means test or significantly impairs his ability to earn the high income he was being paid at his old job and is now being paid at his new job. In short, the Debtors have failed to show that Mr. Nguyen's medical problems should overcome the presumption of abuse.
The Court concludes that (1) § 707(b) applies to these Debtors, (2) the presumption of abuse arose in this case, and (3) the Debtors have failed to establish the existence of special circumstances that overcome the presumption. The Bank has asked the Court to dismiss the case and not mentioned the possibility of converting it to Chapter 13. The Debtors have not suggested they have any desire to convert the case to Chapter 13. The fact the Debtors have now moved to the State of Washington would also make it more difficult to administer their case from here in Kansas if it were converted. Consequently, the Court concludes the case should be dismissed.
For these reasons, judgment is hereby entered dismissing this case. Pursuant to Fed. R. Bankr. P. 9021, this judgment will become effective when it is entered on the docket pursuant to Fed. R. Bankr. P. 5003.
