by A debtor’s social security income is a proper factor to consider in an abuse analysis under section 707(b)(3)(B) and in a good faith analysis under section 1325(a)(3). Meehean v. Vara (In re Meehean), No. 20-10380 (E.D. Mich. Aug. 18, 2020).
When they filed their chapter 7 petition, debtors listed $5,842 in monthly income ($4,007 in Social Security benefits and $1,835 in pension income) and $4,446 in monthly expenses. They had $142,871 in secured mortgage debt and $43,100 in unsecured non-priority debt. The trustee moved to dismiss the petition as an abuse of bankruptcy, arguing that, if the debtors committed their social security income to a chapter 13 plan, they could pay off their unsecured debt over five years. The bankruptcy court agreed and granted the trustee’s motion. In re Meehean, 611 B.R. 574 (Bankr. E.D. Mich. 2020).
The debtors appealed to the district court arguing that the bankruptcy court erred by considering social security income as a factor in a totality of circumstances test for abuse of bankruptcy under section 707(b)(3)(B).
Section 707(b)(1) permits a bankruptcy court to dismiss a chapter 7 case “if it finds that the granting of relief would be an abuse of the provisions of this chapter.” Section 707(b)(3)(B) instructs the court to consider the “totality of circumstances” to determine if abuse is present. The district court found “totality” was not constrained by Congress except to the extent that section 707(b)(1) prohibits consideration of a debtor’s charitable donations. The court reasoned that, where section 707(b)(2) creates a presumption of abuse under a formula using a debtor’s current monthly income, which by definition excludes social security benefits, the absence of reference to a debtor’s current monthly income in subparagraph (b)(3)(B) is an indication that Congress intended that a bankruptcy court consider the entirety of the debtor’s financial situation, including social security income when applying that provision. Though it apparently did not involve social security income, the court cited at length the case of In re Krohn, 886 F.2d 123, 126 (6th Cir. 1989), for the proposition that, when applying the totality of circumstances test, a bankruptcy court properly considers whether the debtor has a reliable source of income that could be devoted to a chapter 13 plan. The Meehean court found that social security income qualified as a reliable source of income.
The court turned to the issue of whether consideration of a debtor’s social security income violates 42 U.S.C § 407(a). That section provides that social security benefits may not be “subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.” The court found that considering social security income in the abuse of bankruptcy analysis “did nothing to subject those benefits to . . . the operation of any bankruptcy or insolvency law.” Rather, the court reasoned, finding that a debtor has a reliable source of income in the form of social security benefits was a factor in whether the debtor was entitled to relief under chapter 7, not an effort to subject those benefits to collection under bankruptcy law.
The court also rejected the debtors’ argument that because they were not able to fund a chapter 13 plan, the bankruptcy court committed error in forcing them to choose between dismissal of their chapter 7 case, or conversion to chapter 13. The court found that, while the ability to fund a chapter 13 plan was deemed a relevant factor in the Krohn analysis, the factor was not dispositive. Rather, the court found that Congress simply did not offer bankruptcy’s fresh start to all seekers of it. Noting that the debtors had had over $160,000 in credit card debt discharged in an earlier chapter 7 case, the court stated, “Plainly, debtors in this case do not deserve a fresh start in light of their outrageous abuse of consumer credit.”
Although it found that the debtors’ ability to fund a chapter 13 plan would not change the outcome, the court nonetheless addressed the issue of whether the debtors’ social security income would have been a proper consideration in the context of chapter 13. Relying on In re Mains, 451 B.R. 428, 434 (Bankr. W.D. Mich. 2011), the court found that, in fact, social security income is a proper consideration in determining whether a debtor has proposed a chapter 13 plan in good faith. In that regard, the court concluded that, “given the totality of the circumstances of debtors’ financial situation in the present case, including the income they receive from Social Security benefits, the Bankruptcy Court did not err in concluding that debtors could have proposed a good-faith Chapter 13 plan that paid off all of their unsecured non-priority debt in less than five years, while a plan that proposed to pay none of this debt would have been rejected for lacking good faith.”
The court affirmed the order of the bankruptcy court.