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California Bankruptcy Court Reviews Grounds for Dismissing a Chapter 7 Case for Abuse

Luc Viatour [GFDL (http://www.gnu.org/copyleft/fdl.html), CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0/) or CC-BY-SA-2.5-2.0-1.0 (http://creativecommons.org/licenses/by-sa/2.5-2.0-1.0)], via Wikimedia CommonsFederal law allows bankruptcy courts to dismiss a Chapter 7 petition if it finds that granting a discharge of debt would constitute an abuse of the bankruptcy system. A debtor must overcome a presumption of abuse by using the Chapter 7 “means test” to show that their income and assets are below a certain amount, and courts may consider several other factors in determining whether abuse has occurred. A bankruptcy court in Santa Ana, California reviewed the grounds for dismissing a petition last year, offering an overview of the applicable federal statutes and Ninth Circuit cases. In re Suttice, 487 B.R. 245 (Bankr. C.D. Cal. 2013).

The debtors in Suttice filed a Chapter 7 petition with financial documents that reportedly met the requirements of the means test. The debtors’ financial statements, however, showed combined monthly income of just over $8,500, including $1,100 in social security benefits, and monthly expenses of about $7,600. This appeared to give them monthly surplus income of almost $900. The trustee filed a motion to dismiss for abuse about a month after the case was filed.

A court may dismiss a Chapter 7 case for abuse for failing to pass the means test, 11 U.S.C. § 707(b)(2); upon a finding that a debtor filed a petition in bad faith, id. at § 707(b)(3)(A); or based on the “totality of the circumstances,” id. at § 707(b)(3)(B). The trustee based his motion on this last provision. He cited several factors established by the Ninth Circuit for a “totality of the circumstances” inquiry in In re Price, 353 F.3d 1135 (9th Cir. 2004), specifically claiming that the debtors had sufficient income to fund a Chapter 13 plan. The debtors argued in part that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) had supplanted Price, and that their social security benefits should not count towards a Chapter 13 plan.

The bankruptcy court denied the trustee’s motion to dismiss, but first addressed the question of whether the Price factors are still the law. It found that courts in the Ninth Circuit have continued to apply the Price factors to “totality of the circumstances” analyses since the enactment of BAPCPA, and that § 707(b)(3)(B) is viewed as “a codification of pre-BAPCPA case law.” Suttice, 487 B.R. at 250, citing In re Ng, 477 B.R. 118 (9th Cir. BAP 2012). Price is therefore still controlling precedent for motions to dismiss for abuse.

The court rejected the trustee’s arguments regarding the debtors’ ability to fund a Chapter 13 plan. It noted that the Social Security Act protects social security income from bankruptcy. 42 U.S.C. § 407(a). While the Ninth Circuit has not ruled on how this applies to a totality of the circumstances analysis, other circuits have held that social security income is excluded from the bankruptcy estate. The debtors therefore did not have surplus income, in a legal sense, and could not fund a Chapter 13 plan. The court quickly reviewed the other five Price factors and found that none of them applied to the debtors.

Bankruptcy attorney Devin Sawdayi has over eighteen years’ experience guiding clients in the Los Angeles area through Chapter 7 and Chapter 13 bankruptcies. Contact us today online or at (310) 475-9399 for a free and confidential consultation to see how we can assist you.

More Blog Posts:

Court Converts Bankruptcy Case from Chapter 13 to Chapter 7 Based on Finding that Debtor Withheld Information, Los Angeles Bankruptcy Lawyer Blawg, January 27, 2014

Understanding the Chapter 7 “Means Test”, Los Angeles Bankruptcy Lawyer Blawg, October 4, 2013

How Is Social Security Income Treated in a Chapter 13 Bankruptcy? Los Angeles Bankruptcy Lawyer Blawg, June 9, 2013

Photo credit: Luc Viatour [GFDL, CC-BY-SA-3.0 or CC-BY-SA-2.5-2.0-1.0], via Wikimedia Commons.