Thomas J. Tucker, United States Bankruptcy Judge.
This is a no-asset Chapter 7 case — that is, the Chapter 7 Trustee has determined that there are no non-exempt assets he can administer for the benefit of creditors. But the Debtors, Wayne D. Meehean and Reda L. Meehean, have monthly Social Security income, that when combined with their other income, gives them the financial ability to pay off all of their unsecured debts in about 41 months. And they can do that while at the same time continuing to make the monthly mortgage payments for their home and the monthly lease payments on their two vehicles. But instead of seeking to repay their unsecured creditors, through a repayment plan in Chapter 13, the Debtors seek to discharge their unsecured debts in Chapter 7, without paying anything.
Is this attempted use of Chapter 7 by the Debtors an impermissible "abuse" of Chapter 7, within the meaning of 11 U.S.C. §§ 707(b)(1) and 707(b)(3)? What role, if any, does the Debtors' Social Security income play in this inquiry?
Pending before the Court is the United States Trustee's motion to dismiss this Chapter 7 bankruptcy case, based on 11 U.S.C. § 707(b)(3).
The Debtors object to the UST's motion.
This Court held a hearing on the UST's motion. The Court has considered all of the oral and written arguments of the parties as well as the briefs and exhibits filed by the parties. For the reasons explained in this Opinion, the Court agrees with the UST, and will grant the UST's motion, as described in part V of this Opinion.
This Court has subject matter jurisdiction over this bankruptcy case and this contested matter under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D. Mich.). This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) and 157(b)(2)(O).
This proceeding also is "core" because it falls within the definition of a proceeding "arising under title 11" and of a proceeding "arising in" a case under title 11. See 28 U.S.C. § 1334(b). Matters falling within either of these categories in § 1334(b) are deemed to be core proceedings. Allard v. Coenen (In re Trans-Industries, Inc.), 419 B.R. 21, 27 (Bankr. E.D. Mich. 2009). This is a proceeding "arising under title 11" because it is "created or determined by a statutory provision of title 11," including Bankruptcy Code § 707. Id. It is a proceeding "arising in" a case under title 11 because it is a proceeding that "by [its] very nature, could arise only in bankruptcy cases." Id.
The following facts are undisputed. The Debtors filed this Chapter 7 bankruptcy case on April 22, 2019. The Debtors' original Schedule E/F listed no priority unsecured claims, and non-priority unsecured claims totaling $202,696.97.
The Debtors' Schedule I lists $4,007.00 in combined monthly income from Social Security and $1,834.98 in combined monthly income from "Pension or retirement income," for a total monthly income of $5,814.98.
This surplus amount actually appears to be slightly lower than $1,396.43 per month. As explained in Part IV.E of this Opinion, two vehicle lease assumption agreements filed recently indicate that the Debtors' actual monthly net income (surplus) is $1,252.32.
On May 22, 2019, just after the Chapter 7 Trustee concluded the § 341 meeting of creditors, the Trustee filed a "no asset" report, indicating that there are no non-exempt assets in the bankruptcy estate that can be used to pay anything to creditors. From this it is clear that if this case remains in Chapter 7, creditors will be paid nothing.
As discussed in more detail in part IV.E of this Opinion, it is clear that if the Debtors wanted to do so, they could afford to propose, confirm, and perform a Chapter 13 plan that would pay their unsecured creditors in full in about 41 months. But instead of doing this, the Debtors seek to use Chapter 7 to discharge all of their unsecured debts, keep all of their income, including all of their Social Security income, and pay their unsecured creditors nothing. For the reasons stated below, the Court finds this to be an "abuse" of Chapter 7, within the meaning of §§ 707(b)(1) and 707(b)(3).
A court may dismiss a case filed under Chapter 7 or, with the debtor's consent, convert the case to Chapter 13, if the court finds that "the granting of relief would be an abuse of the provisions of [Chapter 7]." 11 U.S.C. § 707(b)(1).
In re Maura, 491 B.R. 493, 497 (Bankr. E.D. Mich. 2013).
In this case the UST does not argue that there is a presumption of abuse under the "means test" established by § 707(b)(2). Rather, the UST argues abuse based only on § 707(b)(3).
Section 707(b)(3) states:
11 U.S.C. §§ 707(b)(3)(A) and (B).
The UST does not allege "bad faith" under § 707(b)(3)(A). Rather, the UST argues that dismissal is required because "the totality of circumstances of the debtor's financial situation demonstrates abuse."
In the Sixth Circuit, In re Krohn, 886 F.2d 123 (6th Cir. 1989) is the leading case for determining abuse under § 707(b)(3).
"Among the factors to be considered in deciding whether a debtor is needy is [his or her] ability to repay [his or her] debts out of future earnings." Id. (citing In re Walton, 866 F.2d 981 (8th Cir.1989) and In re Kelly, 841 F.2d 908 (9th Cir. 1988)). "That factor alone may be sufficient to warrant dismissal. For example, a court would not be justified in concluding that a debtor is needy and worthy of discharge, where his disposable income permits liquidation of his consumer debts with relative ease." Krohn, 886 F.2d at 126; see also In re Modiri, 474 B.R. 511, 514 (Bankr. E.D. Mich. 2012) ("Clearly, it is an abuse of Chapter 7 for a debtor to seek a discharge of debts that the debtor can pay, since the purpose of bankruptcy is to grant relief to those debtors who cannot pay their debts.").
The Court in Krohn further stated:
Krohn, 886 F.2d at 126-27.
The UST argues that when the Debtors' Social Security income is included, the Debtors have a substantial monthly surplus with which to pay their debts. But according to the Debtors, the Court cannot consider their Social Security income at all, in determining the Debtors' ability to pay their debts, as part of the "totality of the circumstances of [the Debtors'] financial situation" under § 707(b)(3)(B).
The Debtors point out that the Bankruptcy Code expressly excludes Social Security benefits from the definition of "current monthly income." 11 U.S.C. § 101(10A)(B)(ii)(I). This exclusion has two direct statutory effects of possible relevance here. First, in Chapter 7 cases, Social Security income is not considered in calculating whether a presumption of abuse exists under the means test provisions of § 707(b)(2). Rather, the only income considered under the means test is that which is within the definition of "current monthly income." See 11 U.S.C. § 707(b)(2)(A)(i).
Second, in Chapter 13 cases, Social Security income is not considered in determining whether a proposed plan meets the confirmation requirement that "all of the debtor's projected disposable income to be received" during the plan's "applicable commitment period"
The direct effect of these provisions in a Chapter 7 case is that a debtor's Social Security income is disregarded entirely in determining whether the case is an "abuse" of Chapter 7 under the means test provisions of § 707(b)(2). (The effect of these provisions in a Chapter 13 case is discussed in part IV.C of this Opinion.) This is why, for example, the Debtors in this case have no problem with the means test under § 707(b)(2). Disregarding the Debtors' Social Security income, which is roughly 69% of their total income, and counting only their other income, insures
But in contrast to § 707(b)(2), there is no language in the "totality of the circumstances" provision of § 707(b)(3) expressly requiring the Court to disregard the Debtors' Social Security income.
The Debtors further cite the anti-assignment provisions of a Social Security statute, 42 U.S.C. § 407. That section is discussed in more detail in part IV.D of this Opinion. Among other things, that section says that Social Security benefits are not "subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law." 42 U.S.C. § 407(a). Inclusion of the phrase "or to the operation of any bankruptcy ... law" in this section has led some courts to hold that a bankruptcy debtor's right to receive Social Security benefits is not property of the bankruptcy estate under 11 U.S.C. § 541. See, e.g., Carpenter v. Ries (In re Carpenter), 614 F.3d 930, 936 (8th Cir. 2010). This is so even though the Bankruptcy Code's exemption provisions, 11 U.S.C. § 522, provide exemptions for Social Security benefits. See 11 U.S.C. §§ 522(b)(3)(A) (a debtor electing state law exemptions also has the benefit of any non-bankruptcy exemptions under federal law); 522(b)(2) and 522(d)(10)(A) (a debtor electing the federal exemptions under § 522(d) has an exemption for the "right to receive — a social security benefit"). Providing exemptions for Social Security benefits in § 522 implies that Social Security benefits can be property of the bankruptcy estate under § 541. This is because § 522 only permits the debtor to "exempt from property of the estate" the types of property listed in § 522. See 11 U.S.C. § 522(b)(1).
In any case, the Debtors argue that the statutory provisions just described show a Congressional intent to completely protect the Debtors' Social Security income from the effects of any bankruptcy case. And, the Debtors say, such Congressional intent requires the Court to disregard the Debtors' Social Security income in deciding whether this case is an abuse under § 707(b)(3).
But there is nothing that actually says this, in § 707(b)(3) or anywhere else in the Bankruptcy Code.
The Debtors also argue that it makes no sense to invoke § 707(b)(3) against them, because if they were forced to proceed in Chapter 13, they would be able to confirm a plan that pays nothing to their unsecured creditors. This argument is based, in part, on the fact that Social Security income is not counted as part of the Debtors' "projected disposable income" under § 1325(b)(1)(B), as noted above. The Court discusses that argument in part IV.C of this Opinion.
Courts have reached differing conclusions on the question of whether Social Security income may be considered in deciding whether to dismiss a Chapter 7 case for abuse under § 707(b)(3). The Sixth Circuit Court of Appeals has not ruled on the issue.
The court in the case of In re Calhoun, 396 B.R. 270 (Bankr. D.S.C. 2008), aff'd. on other grounds sub nom. Calhoun v. U.S. Trustee, 650 F.3d 338 (4th Cir. 2011),
Calhoun, 396 B.R. at 276 (citations omitted).
In re Riggs, 495 B.R. 704 (Bankr. W.D. Va. 2013), is another case where the court held that Social Security income should be considered under the § 707(b)(3)(B) "totality of the circumstances" test. In so holding, the court reconciled § 707(b)(2)(A) (the presumption of abuse standard which utilizes the debtor's "current monthly income" — defined in § 101(10A) as excluding Social Security income) with § 707(b)(3)(B) (the totality of circumstances standard):
Riggs, 495 B.R. at 716-17 (footnote omitted) (footnote added).
In re Booker, 399 B.R. 662, 667 (Bankr. W.D. Mo. 2009), also held that Social Security income could be considered in determining whether the totality of the circumstances demonstrates abuse under § 707(b)(3). The Booker court rejected the debtors' argument that the exclusion of Social Security income from the definition of current monthly income in 11 U.S.C. § 101(10A)(B) indicated Congressional intent that Social Security income was not required to be committed to the payment of unsecured creditors.
Other courts have held that Social Security income cannot be considered part of the "totality of circumstances" under § 707(b)(3)(B). In re Moriarty, 530 B.R. 637 (Bankr. W.D. Va. 2015), for example, rejected the distinction made by the Riggs case, between the statutory exclusion of Social Security income under § 707(b)(2)(A) (the means test) and the absence of such exclusion language in § 707(b)(3)(B). Id. at 645.
Id. at 646 (footnote omitted); see also In re Suttice, 487 B.R. 245, 254 (Bankr. C.D. Cal.2013) ("[T]his Court is persuaded that Congress intended social security benefits to be protected from inclusion in a § 707(b)(3)(B) analysis ... as shown by the Debtors' social security income being definitively excluded from the means test of § 707(b)(2)."). Both Moriarty and Suttice cited § 407 of the Social Security Act as further support for the conclusion that Social Security benefits are excluded from the totality of circumstances test. See Moriarty, 530 B.R. at 649; Suttice, 487 B.R. at 254. This Court addresses § 407 in part IV.C of this Opinion.
This Court is persuaded by Calhoun and Riggs that those cases take the better view — that Social Security income should be included in the § 707(b)(3)(B) totality of circumstances analysis. The Court finds it telling that the exclusion of Social Security income from consideration for purposes of the § 707(b)(2) means test is made by clear and explicit language in the Bankruptcy Code, while there is no such language in the Code that excludes such income for purposes of the § 707(b)(3) "totality of the circumstances" test. If Congress intended to exclude Social Security income from consideration under § 707(b)(3), Congress could have done so expressly in Bankruptcy Code. The fact that Congress did not do so indicates that Congress did not intend such an exclusion.
And it is clear that §§ 707(b)(2) and 707(b)(3) are separate and independent grounds for finding abuse under § 707(b)(1). Courts "have uniformly held that the debtor's ability to pay may still be considered under Section 707(b)(3)'s totality of circumstances test notwithstanding the debtor's avoidance of the Section 707(b)(2) presumption [of abuse]." In re Mains, 451 B.R. 428, 435 (Bankr. W.D. Mich. 2011). As stated in In re Mestemaker, 359 B.R. 849, 854-55 (Bankr. N.D. Ohio 2007):
Id.; see also In re Zaporski, 366 B.R. 758, 770 (Bankr. E.D. Mich. 2007) ("Section 707(b)(2)(A) creates a statutory presumption of abuse in certain circumstances but offers no safe harbor to those debtors with respect to whom this statutory presumption does not arise. Section 707(b)(3) permits a court to dismiss for abuse even absent the statutory presumption....").
Thus, contrary to the conclusions reached by the courts in Moriarty and Suttice, the exclusion of the Debtors' Social Security income from the calculation of the means test under § 707(b)(2) does not imply that such income is also excluded under the totality of the circumstances test of § 707(b)(3). Rather, it implies just the opposite. "Congress clearly knew how to exclude benefits under the Social Security Act from consideration but did not do so in connection with the § 707(b)(3)(B) totality of the circumstances test." Calhoun, 396 B.R. at 276.
The Court also finds it telling that in providing for dismissal of a Chapter 7 case for abuse in § 707(b)(1), Congress expressly precluded the courts from considering the debtor's making certain charitable contributions. See 11 U.S.C. § 707(b)(1).
A primary way courts consider a debtor's ability to pay, for the purposes of determining whether there is abuse under 11 U.S.C. 707(b)(3)(B), is to assess whether the debtor has sufficient disposable income to fund a Chapter 13 plan. See Behlke, 358 F.3d at 435; see also In re Jones, 556 B.R. 327, 334 (Bankr. E.D. Mich. 2016).
In this case, the Debtors argue that it would be pointless for this Court to find abuse under § 707(b)(3), and thereby force the Debtors to convert to Chapter 13 or face dismissal. This is so, the Debtors say, because in Chapter 13 they could confirm a plan that paid nothing to the unsecured creditors. The Debtors argue that such a plan would meet all the requirements for confirmation, including those in §§ 1325(b)(1)(B) and 1325(a)(3). Section 1325(b)(1)(B) requires that if the Chapter
The Debtors correctly note that their Social Security income cannot be considered in calculating their "projected disposable income" for purposes of § 1325(b)(1)(B). See discussion in part IV. B.1 of this Opinion; 11 U.S.C. §§ 1325(b)(1)(B), 1325(b)(2); Baud v. Carroll, 634 F.3d 327, 345 (6th Cir. 2011). So the Debtors could meet the requirement of § 1325(b)(1)(B) without paying their unsecured creditors anything.
The Debtors also argue that, as a matter of law, the Court could not find a lack of good faith solely because the Debtors proposed a plan that does not include the income they receive from Social Security. Therefore, according to the Debtors, they could propose and confirm a Chapter 13 plan that pays nothing to their unsecured creditors.
The Court disagrees, because the Debtors are incorrect about the § 1325(a)(3) good faith requirement.
The Debtors' argument raises an issue that is not yet settled in this Circuit — namely, whether a court may find that a Chapter 13 plan is not "proposed in good faith" under 11 U.S.C. § 1325(a)(3), because the plan does not propose to pay available Social Security income. In Baud, the Sixth Circuit recognized that courts around the country were split on a similar issue — i.e., whether an above-median-income debtor's failure to commit available Social Security income to pay unsecured creditors could be considered in the good faith analysis under 11 U.S.C. § 1325(a)(3). Baud, 634 F.3d at 346 n.13. The Sixth Circuit did not decide that issue in Baud, because the debtors in that case had proposed to commit their Social Security income to pay unsecured creditors. Id.
More generally, Sixth Circuit cases have held that in assessing a Chapter 13 debtor's "good faith," the courts must consider the totality of the circumstances, including the debtor's ability to pay creditors. See Soc'y Nat'l Bank v. Barrett (In re Barrett), 964 F.2d 588, 591-92 (6th Cir. 1992). In conducting a good faith analysis, "[t]he bankruptcy court must ultimately determine whether the debtor's plan, given his or her individual circumstances, satisfies the purposes undergirding Chapter 13: a sincerely-intended repayment of pre-petition debt
Okoreeh-Baah, 836 F.2d at 1032 n.3 (emphasis added); see also Hardin v. Caldwell (In re Caldwell), 851 F.2d 852, 859 (6th Cir. 1988); Hardin v. Caldwell (In re Caldwell), 895 F.2d 1123, 1126-27 (6th Cir. 1990); Alt v. United States (In re Alt), 305 F.3d 413, 419 (6th Cir. 2002); Copper v. Copper (In re Copper), 426 F.3d 810, 815 (6th Cir. 2005).
Some courts have held that Social Security income cannot be considered in the Chapter 13 good faith analysis. See, e.g., Anderson v. Cranmer (In re Cranmer), 697 F.3d 1314, 1319 (10th Cir. 2012); Drummond v. Welsh (In re Welsh), 711 F.3d 1120, 1132 (9th Cir. 2013); Vandenbosch v. Waage (In re Vandenbosch), 459 B.R. 140, 144 (M.D. Fla. 2011); In re Manzo, 577 B.R. 759, 768 (N.D. Ill. 2017); In re Ogden, 570 B.R. 432, 438 (Bankr. N.D. Ga. 2017), amended on other grounds, No. 16-12280, 2017 WL 2124413 (Bankr. N.D. Ga. May 15, 2017); see also Beaulieu v. Ragos (In re Ragos), 700 F.3d 220, 226-27 (5th Cir. 2012). These courts are persuaded by the fact that Congress specifically excluded Social Security income from the calculation of "projected disposable income" that must be paid to unsecured creditors in a Chapter 13 case under § 1325(b)(1)(B). See, e.g., Welsh, 711 F.3d at 1131 ("We cannot conclude, however, that a plan prepared completely in accordance with the very detailed calculations that Congress set forth is not proposed in good faith. To hold otherwise would be to allow the bankruptcy court to substitute its judgment of how much and what kind of income should be dedicated to the payment of unsecured creditors for the judgment of Congress."); Ragos, 700 F.3d at 227 ("Having already concluded that Debtors' plan fully complied with the Bankruptcy Code, it is apparent that Debtors are not in bad faith merely for doing what the Code permits them to do. We thus hold that retention of exempt social security benefits alone is legally insufficient to support a finding of bad faith under the Bankruptcy Code.").
In the case of In re Mihal, No. 13-54435, 2015 WL 2265790 (Bankr. E.D. Mich. May 6, 2015) another judge of this Court followed the Welsh and Cranmer line of cases discussed above, and concluded that the Chapter 13 debtors' failure to include any of their Social Security income in their plan did not constitute a lack of good faith
In re Mihal, 2015 WL 2265790, at *2.
Other courts have held that Social Security income may be considered as part of the Chapter 13 good faith analysis. In the case of In re Upton, 363 B.R. 528 (Bankr. S.D. Ohio 2007), the debtors proposed a Chapter 13 plan that committed only a portion of their monthly Social Security income to pay unsecured creditors. The court noted that some courts have "opined that the express exclusion of social security income [from the calculation of `projected disposable income' under § 1325(b)(1)(B)] eliminates the elements of debtor's income and surplus from the good faith analysis." Id. at 536. But the Upton court rejected that view:
In re Upton, 363 B.R. at 536-37 (citation omitted); see also In re Bartelini, 434 B.R. 285, 297 (Bankr. N.D.N.Y. 2010) (citing 11 U.S.C. § 1325(a)(3) ("[T]his Court also recognizes, as did [the court in Upton], that a debtor's failure to commit [Social Security Income] for purposes of repaying the maximum amount to creditors may be considered as one of many factors under a totality of the circumstances inquiry to determine good faith.").
Similarly, the court in In re Thomas, 443 B.R. 213, 217 (Bankr. N.D. Ga. 2010), rejected the notion that compliance with § 1325(b) is sufficient to satisfy the good faith requirement of 11 U.S.C. § 1325(a)(3). Although the court in Thomas stated "it should be the rare debtor whose proposed plan is technically in compliance with § 1325(b) but cannot meet the burden of good faith," the court went on to conclude, that, in the case before it:
Id. at 219 (emphasis in original).
Finally, in the case of In re Mains, 451 B.R. 428 (Bankr. W.D. Mich. 2011), aff'd sub nom. Mains v. Foley, Nos. 1:11-CV-456, 1:11-CV-740, 2012 WL 612006 (W.D. Mich. 2012), the debtors had $6,321.19 in after tax monthly income, $2,905.00 of which was from Social Security benefits. The debtors' Schedules I and J showed a monthly net income of $1,339.30. Id. at 429. But the debtors proposed in their Chapter 13 plan to pay only $324.00 per month. They argued that the plan was proposed in good faith because their Social Security benefits should not be considered. Id. at 429-30.
The bankruptcy court in Mains noted that, although the Sixth Circuit has not yet decided whether Social Security benefits should be included in the § 1325(a)(3) good faith analysis, Sixth Circuit decisions "clearly establish that ability to pay remains
In re Mains, 451 B.R. at 434 (quoting Hardin v. Caldwell (In re Caldwell), 895 F.2d 1123, 1126 (6th Cir. 1990)).
The Mains court went on to note that courts that have adopted a "safe harbor" approach to § 1325(b) ignore how courts have "addressed similar issues in connection with the interplay between Sections 707(b)(2) and (b)(3)." Id.
In re Mains, 451 B.R. at 434-36 (footnotes omitted).
This Court respectfully declines to follow Mihal and the other cases that take a narrower view of the good faith requirement in § 1325(a)(3). Rather, this Court finds more persuasive the reasoning in the Upton, Bartelini, Thomas, and Mains cases discussed above.
Under this Court's view of the "good faith" confirmation requirement of § 1325(a)(3), it is very doubtful that the Debtors in this case could confirm a plan that paid the unsecured creditors nothing. It is much more likely that the Debtors could confirm only a plan that paid their unsecured creditors in full.
Contrary to the Debtors' argument, therefore, it is not pointless to find that the Debtors' attempted use of Chapter 7, rather than pursuing relief under Chapter 13, is an abuse.
The Debtors argue that regardless of whether the Bankruptcy Code permits the consideration of Social Security income for the purposes of § 707(b)(3)(B) or § 1325(a)(3), the Social Security Act prevents consideration of such income. The Debtors cite the "anti-assignment" provision in 42 U.S.C. § 407(a). That section states, in pertinent part:
42 U.S.C. § 407(a). Additionally, § 407(b) states:
42 U.S.C. § 407(b).
Section 407 "imposes a broad bar against the use of any legal process to reach all social security benefits." Hildebrand v. Soc. Sec. Admin. (In re Buren), 725 F.2d 1080, 1084 (6th Cir. 1984) (quoting Philpott v. Essex Cty. Welfare Bd., 409 U.S. 413, 416, 93 S.Ct. 590, 34 L.Ed.2d 608 (1973)). The Sixth Circuit in Buren held that § 407 prevents bankruptcy courts from compelling the Social Security Administration to pay a debtor's Social Security benefits directly to a Chapter 13 trustee. Buren, 725 F.2d at 1087.
The Sixth Circuit has not ruled on whether § 407 prevents the consideration of Social Security income in the Chapter 7 abuse analysis under § 707(b)(3), or in the § 1325(a)(3) good faith analysis in a Chapter 13 case. Courts have reached differing results on the issue, with respect to the Chapter 13 good faith analysis.
Some courts have held that the consideration of Social Security income in the Chapter 13 good faith analysis would violate 42 U.S.C. § 407. In Mihal, for example, the Court stated:
In re Mihal, 2015 WL 2265790, at *3 (italics in original).
Again, this Court respectfully disagrees with Mihal. Rather, this Court finds persuasive the § 407 analysis employed by the district court in the case of Mains v. Foley, Nos. 1:11-CV-456, 1:11-CV 740, 2012 WL 612006 (W.D. Mich. Feb. 24, 2012). In that case, the district court affirmed the decision of the bankruptcy court, described in Part IV.C.2 above. This Court agrees with the district court's reasoning about § 407:
Mains v. Foley, 2012 WL 612006, at *5-6.
The Court also finds persuasive the dissenting opinion in Drummond v. Welsh (In re Welsh), 465 B.R. 843 (9th Cir. BAP 2012), aff'd, 711 F.3d 1120 (9th Cir 2013), which stated:
Welsh, 465 B.R. at 859-60 (Pappas, J., dissenting).
This Court agrees that the consideration of Social Security income in the good faith analysis of 11 U.S.C. § 1325(a)(3) is not contrary to § 407 of the Social Security Act. Given the similarities between the "subjective tests" of § 1325(a) ("good faith") and § 707(b)(3)(B) ("totality of circumstances ... of the debtor's financial situation"), see In re Mains, 451 B.R. at 434, it follows that 42 U.S.C. § 407 does not bar the Court from considering the Debtors' Social Security income in the abuse inquiry under § 707(b)(3)(B).
This Court now considers "the totality of the circumstances" of the Debtors' "financial situation." 11 U.S.C. § 707(b)(3)(B). As discussed previously, 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 under § 707(b)(3), based upon lack of need. Krohn, 886 F.2d at 126. Courts have found an ability to pay under § 707(b)(3) when a debtor has sufficient disposable income to fund a Chapter 13 plan. Behlke, 358 F.3d at 435; Jones, 556 B.R. at 334. As discussed in Part IV.D above, this Court agrees with the UST that the Debtors' monthly Social Security income is properly considered under § 707(b)(3).
When the Debtors' total monthly income, including their Social Security income, is considered, the Debtors have disposable income of $1,252.32 per month. As described in Part III of this Opinion, the Debtors' Schedules I and J show a monthly surplus of total income over total expenses (i.e., disposable income) of $1,396.43 per month. This amount is what Schedules I and J show the Debtors have left each month, after paying their living expenses, including their home mortgage payment of $900.00 per month and monthly payments totaling $630.55 on their two vehicle leases.
The Debtors lease two vehicles, a 2019 Ford F150 pickup truck and 2018 Ford
Based on this, it is clear that the Debtors could fund a Chapter 13 plan under which the Debtors continue to pay their home mortgage and their vehicle lease payments, and repay all of the their unsecured debts (which total $43,099.97) in full, in only 41 months, which is far less time than the maximum 60 months that a Chapter 13 plan may run.
Monthly surplus ($1,252.32) × 41 $ 51,345.12 less Chapter 13 Trustee Fee (7.5%) - $3,850.88 Subtotal $ 47,494.24 less attorney fee (if case converts) - $3,500.00 Amount available to pay unsecured creditors $43,994.24
In considering the totality of the circumstances of the Debtors' financial situation, the Court finds it significant that the Debtors' sources of future income (social security and private pension/retirement income) are stable and, as the above computation shows, the Debtors clearly have the ability to fund a Chapter 13 that pays all of their unsecured debts in only 41 months. And the Debtors, who have no dependents,
The Court finds that granting the Debtors in this case a discharge under Chapter 7 would be an abuse of Chapter 7. So under §§ 707(b)(1) and 707(b)(3), this case must be dismissed, or, if the Debtors so choose, converted to Chapter 13.
For the reasons stated in this Opinion, the Court will enter an order granting the UST's Motion. The Order will allow the Debtors 14 days to file a motion to convert
Moutousis, 418 B.R. at 709.
The change in position was based upon an intervening decision by the Eighth Circuit Court of Appeals, Carpenter v. Ries (In re Carpenter), 614 F.3d 930 (8th Cir. 2010). The Eighth Circuit, in Carpenter, held that the "anti-assignment" provision of the Social Security Act, 42 U.S.C. § 407, "operates as a complete bar to the forced inclusion of past and future social security proceeds in the bankruptcy estate." Id. at 936. The 42 U.S.C. § 407 issue was not raised in the Booker case. This Court addresses the § 407 issue in part IV.C of this Opinion.
On appeal, the Bankruptcy Appellate Panel for the Ninth Circuit affirmed, and its majority quoted 42 U.S.C. § 407, but did not analyze why consideration of Social Security income in the good faith analysis under § 1325(a)(3) would violate 42 U.S.C. § 407. See In re Welsh, 465 B.R. 843, 855-56 (9th Cir. BAP 2012). The Ninth Circuit affirmed the bankruptcy court and the BAP decisions, but noted that "[b]ecause we conclude that Congress's adoption of the means test precludes us from considering, as part of our good faith inquiry, a debtor's retention of Social Security income, we have no occasion to decide whether such consideration would violate § 407's prohibition." In re Welsh, 711 F.3d 1120, 1132 n.56 (9th Cir. 2013).
