Fourth Circuit Affirms Dismissal of Chapter 7 Case Based on Totality of Circumstances

04 May Fourth Circuit Affirms Dismissal of Chapter 7 Case Based on Totality of Circumstances

Yesterday, the United States Court of Appeals for the Fourth Circuit (Maryland, Virginia, West Virginia, North and South Carolina) affirmed the bankruptcy court’s decision to dismiss the debtors’ Chapter 7 case based on the totality of the circumstances under 11 U.S.C. § 707(b).

The court noted that the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was intended to “relax[ ] the standard for dismissing a petition brought under Chapter 7 and characterized as abusive.” An essential element is the “means test” formula in order to determine those debtors who can repay a portion of their debts and debtors who cannot. When a family’s household income exceeds the applicable State median income, the means test formula is applied to create a rebuttable presumption of abuse. The “means test” takes into account the debtor’s monthly income and allowed expenses under IRS collection standards and other authorized expenses. If there is sufficient income to pay creditors according to a statutory formula, then the presumption of abuse arises and the case is subject to dismissal.

In Calhoun v. United States Trustee, the debtors were a retired couple seeking to discharge over $100,000.00 in unsecured debt. The husband debtor received approximately $7,313.00 a month from two retirement plans and an additional $1,459.00 in Social Security benefits. After taking into account the authorized expenses and other allowed deductions, there was insufficient income remaining to trigger the presumption of abuse under the “means test.” However, the bankruptcy court then looked to § 707(b)(3) which allows a court to consider whether a bankruptcy filing is abusive based on “bad faith” or whether “the totality of the circumstances” of the case demonstrate abuse.

Here, the Fourth Circuit agreed with the bankruptcy court’s determination that the debtors’ filing was abusive based on the totality of the circumstances. The court specificially noted that the debtors’ had previously made payments to unsecured creditors of almost $2,700 a month prior to filing bankruptcy; that there was not sudden illness, calamity, disability or unemployment necessitating bankruptcy and that the debtors’ budget bordered on the “extravagent” and leaves “ample room for reduction.”

Of particular note and cause of concern is the Court’s questioning of $930.00 a month for food, clothing, housing supplies and personal careclaiming that such expense was excessive when the expense is expressly authorized under the IRS Collection standards. The court complained also that $439 a month was paid on a life insurance policy for which the spouse was the beneficiary even though upon husband debtor’s passing, wife would receive 75% of his monthly income yet life insurance is expressly authorized under the means test. The court was further bothered by the fact that the debtors were paying their unsecured creditors for a period of 22 months before filing for bankruptcy protection.

For attorneys in the Fourth Circuit, the court declined to expressly overrule In re: Green which sets forth five factors in identifying whether a chapter 7 case constitutes “substantial abuse.”

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Adrian Lapas, Esq.

I've been practicing bankruptcy law in North Carolina since 1993, and am certified as a specialist in consumer bankruptcy law by the North Carolina State Bar.
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