14 Jul Means Test and 707(b): Huge House Payment, Motor Home, and Boat Payments Allowed for Chapter 7 Debtors
A surprising result in a California bankruptcy case: an $800,000 house with a monthly payment of $4,446, a motor home with a monthly payment of $396, and a boat with a monthly payment of $760 actually enabled a married couple to successfully file chapter 7. The court in In re Jensen, 2009 WL 1708229 (Bky.C.D.Cal. April 28, 2009), held that the monthly payments on these large secured debts were allowed, thereby consuming that part of the debtors’ income which, in the U.S. Trustee’s opinion, should have been used to force them into a chapter 13 repayment plan.
The court noted that the means test (section 707(b)(2)) allowed the debtors to include the monthly debt payments for any secured debts, even expensive houses, motor homes or boats. When the U.S. Trustee argued that under the totality of the debtors’ circumstances (section 707(b)(3)), they should quit paying for these unnecessary debts, the court rejected that reasoning. Although the debtors would have had significant disposable income with which to fund a chapter 13 plan if they were to quit paying for the house, motor home and boat, to require that they do so would contravene section 707(b)(2)’s allowance of those expentitures.
The court in Jensen thus recognized an interplay between section 707(b)(2)’s means test and section 707(b)(3)’s totality of the circumstances test. It would be anomalous for Congress to allow secured debt payments in section 707(b)(2), only to disallow such payments in section 707(b)(3), the court observed. Without some other evidence of fraudulent conduct by the debtors, the court allowed the secured debt expenses, and it declined to hold that the debtors should be required to file chapter 13.
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