Social Security May Not Be Considered in 707(b)(3)(B) Totality of Circumstances Test

The Catch 22 of considering social security income for a chapter 7 abuse analysis while excluding its use in a chapter 13 plan was recently addressed by a bankruptcy court in the Central District of California. In In re Suttice, No. 12-21006 (Bankr. C.D. Cal. Jan. 9, 2013), the debtors were an 85 year old husband and 69 year old wife, both with significant medical concerns. The bulk of their income consisted of social security benefits, pension and retirement accounts, and Veterans Benefits with a small amount coming from family contributions. Their combined income minus expenses left them with a monthly surplus of $896.94. The trustee sought to dismiss their chapter 7 bankruptcy on the basis that the totality of the circumstances indicated abuse of bankruptcy under section 707(b)(3)(B). Specifically, the trustee sought to have the debtors’ social security income considered in their ability to pay.

The debtors argued that the means test, added to the Code in the 2005 amendments and set forth in section 707(b)(2), did away with the totality of the circumstances test for debtors who pass that test. The court disagreed, finding that BAPCPA did not abrogate the totality of the circumstances test, and that pre-BAPCPA factors for that analysis as set forth in In re Price, 353 F.3d 1135, 1139-40 (9th Cir. 2004), were still applicable. In re Ng, 477 B.R. 118, 126 (B.A.P. 9th Cir. 2012). Under Price, a significant factor in an abuse inquiry is the debtor’s ability to pay. The question remained, however, whether social security income could be considered in that inquiry. The court found that it could not.

The court began with a survey of cases addressing the treatment of social security income in chapter 13 noting that the general consensus among courts of appeals is that Congress has taken decisive steps in both the Social Security Act, in section 407, and the Bankruptcy Code, in section 101(10A), to remove social security income from the grasp of creditors. In re Cranmer, 697 F.3d 1314, 1319 (10th Cir. 2012) (citing In re Welsh, 465 B.R. 843, 856 (9th Cir. BAP 2012); Baud v. Carroll, 634 F.3d 327, 345 (6th Cir. 2011) cert. denied, 132 S. Ct. 997, 181 L. Ed. 2d 732 (U.S. 2012); In re Carpenter, 614 F.3d 930, 936 (8th Cir. 2010); COLLIER ON BANKRUPTCY, ¶ 522.09[10][a] n.76 (16th ed. 2012). Likewise, the court in Suttice was “persuaded that Congress intended social security benefits to be protected from inclusion in a § 707(b)(3)(B) analysis, based upon § 407(a) of the Social Security Act and as shown by the Debtors’ social security income being definitively excluded from the means test of § 707(b)(2).” Therefore, while the means test was not found to have supplanted the totality of circumstance test, social security income could not be considered under either analysis.

From a pragmatic standpoint, the court found that if social security income were to be determinative of the totality of circumstances, the debtors in this case would be forced into chapter 13 where contribution of their social security income would not be compulsory. Therefore, the debtors would be in the untenable position of being ineligible for chapter 7 while at the same time being unable to confirm a chapter 13 unless they voluntarily committed otherwise unreachable income.

Suttice opinion