California Court: $6,060 Monthly Mortgage Payment Not an Abuse of Chapter 7

23 Jan California Court: $6,060 Monthly Mortgage Payment Not an Abuse of Chapter 7

In In re Johnson, 2008 WL 5265740 (Bky.S.D.Cal. Dec. 8, 2008), a California bankruptcy court ruled that a debtor with a $6,060 monthly mortgage payment was not to be denied a bankruptcy discharge based solely upon the size of the mortgage payment. The court turned aside a challenge under section 707(b) which claimed that the $6,060 payment was unreasonably high, and claimed that the debtor could rent a more modest residence which would enable him to fund a chapter 13 repayment plan.

The court noted that the debtor had suffered a $60,000 cut in pay prior to filing chapter 7 bankruptcy. The debtor’s home was valued at $900,000 while the mortgage balance was about $1,100,000. Partly due the $6,060 monthly payment on this mortgage, the debtor “passed” the means test, and the presumption of abuse contained in section 707(b)(2) did not arise. However, the U.S. Trustee argued that under the “totality of the circumstances” test contained in section 707(b)(3), the debtor’s chapter 7 filing constituted an abuse, due to the unreasonably high $6,060 monthly mortgage payment.

The court observed that Congress allowed a bankruptcy debtor an expense on the means test equal to the amount of the debtor’s monthly mortgage payment, with no limitation on the amount of the monthly payment. It would be illogical for section 707(b)(2)’s means test to allow a mortgage payment regardless of the size of the payment, only to have the same mortgage payment disallowed by section 707(b)(3)’s totality of the circumstances test. Furthermore, if the debtor were forced to convert to chapter 13, the mortgage payment would once again be allowed by the means test contained in chapter 13. Creditors would not benefit from a conversion to chapter 13 if the mortgage payment were to be allowed in chapter 13 anyways.

The court concluded that a monthly mortgage payment allowed as an expense by the chapter 7 means test could not form the basis for dismissal under either section 707(b)(2) or (3).

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Craig Andresen is a Minnesota bankruptcy attorney who represents both consumers and small business owners in chapter 7 and chapter 13 cases. With thirty years experience, Mr. Andresen is a frequent speaker on the topics of stopping mortgage foreclosures, and stripping off second mortgages in chapter 13. His office is located in Bloomington just across the street from the Mall of America. Call his office at (952) 831-1995 for a free consultation about protecting your rights using bankruptcy.
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