In re Hamilton

655 B.R. 911

IN RE Gloria Jean HAMILTON, Debtor.

Case No. 21-12060

United States Bankruptcy Court, S.D. Ohio, Western Division

Signed January 5, 2024

Benjamin A. Sales, Office of the United States Trustee, Cincinnati, OH, for U.S. Trustee.

Arthur J. Southard, The Southard Law Firm, LLC, Cincinnati, OH, for Debtor.

MEMORANDUM OPINION DENYING UNITED STATES TRUSTEE'S MOTION TO DISMISS [Docket Number 18]

Beth A. Buchanan, United States Bankruptcy Judge

This matter is before this Court on the Motion of the United States Trustee to Dismiss Pursuant to 11 U.S.C. § 707(b)(3) with Memorandum in Support ("Motion to Dismiss") [Docket Number 18]; the Debtor's Response to the Motion of the United States Trustee to Dismiss Pursuant to 11 U.S.C. § 707(b)(3) ("Response") [Docket Number 25], and the Reply of the United States Trustee to Response Filed by the Debtor ("Reply") [Docket Number 26].

The United States Trustee ("UST") seeks to dismiss¹ the Chapter 7 bankruptcy case of Debtor Gloria Jean Hamilton ("Debtor") pursuant to 11 U.S.C. § 707(b)(3)(B). During a status conference held on January 12, 2023, the UST and Debtor agreed that the facts were not in dispute and the matter came down to two legal issues: when analyzing a debtor's budget for abuse and ability to pay creditors pursuant to 11 U.S.C. § 707(b)(3)(B), should a non-filing spouse's social security income and a debtor's monthly voluntary contributions to a retirement plan be included as income in the analysis? The parties indicated that the matter could be determined on the parties' briefing, the Debtor's Second Amended Schedules I and J [Docket Number 54], and the joint Stipulations of the Parties [Docket Number 55].

The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334 and the standing General Order of Reference in this district.

I. FACTUAL AND PROCEDURAL BACKGROUND

Debtor filed her petition for relief under chapter 7 of the United States Bankruptcy Code on September 23, 2021.² Debtor's Official Form 122A-1 (Chapter 7 Statement of Your Current Monthly Income) reflects that the Debtor's income is below the median income for a household of two. Schedule D of the Debtor's bankruptcy schedules lists secured debts totaling $124,249.47. Schedule E/F of the Debtor's bankruptcy schedules lists priority unsecured tax debt totaling $28,073.61 and non-priority unsecured debt totaling $54,754.08. The nature of the Debtor's debts is primarily consumer/non-business.

The Debtor is employed as a Production Manager for Hydro Systems, Inc. and earns approximately $6,380.00 per month, or $76,560.00 annually. The Debtor has worked for her current employer for approximately a year and a half. After taxes and certain pre-tax deductions for insurance and a $188.00 voluntary contribution to a retirement plan, the Debtor's monthly income totals $4,420.00.

The Debtor's husband, William Douglas Manning ("Non-filing Spouse"), is not employed. The Non-filing Spouse receives monthly social security income totaling $3,635.30, or $43,623.60 annually with an anticipated increase in this amount by 8.7% beginning in January of 2023.³ After deducting Medicare premiums of $697.20, the Non-filing Spouse receives net social security income of $2,938.10 per month. Accordingly, Debtor's gross annual household income, if the Non-filing Spouse's social security income is included, totals approximately $120,183.60.

Debtor's Second Amended Schedule J reveals monthly expenses totaling $3,938.10. This amount includes some joint expenses of the Debtor and her Non-filing Spouse such as their monthly mortgage payment, utilities and food. Subtracting the $3,938.10 in expenses from the Debtor's monthly income of $4,420.00 (after taxes and certain pre-tax deductions), the Debtor has monthly net income totaling $481.90.

The parties stipulated to these income and expense amounts listed on the Second Amended Schedules I and J, with the following qualifications:

a. The Second Amended Schedule I does not include the Non-filing Spouse's social security income.

b. The Second Amended Schedule J does not include the following expenses that are exclusive to the Non-filing Spouse:

i. Part-C Insurance: $114 per month;

ii. Chase Bank Credit Card: $390 per month;

iii. Capital One Credit Card: $87 per month;

iv. Macy's Credit Card: $40 per month.

c. If the Court determines that the Non-filing Spouse's social security income must be included on Schedule I under the totality of the circumstances analysis of § 707(b)(3), the United States Trustee will not object to inclusion of the above-referenced Non-filing Spouse expenses on Schedule J for purposes of evaluating the Debtor's ability to repay creditors over 36 months.

If the Non-filing Spouse's social security income of $2,938.10 is included in the calculation of net income, and the Non-filing Spouse's additional expenses described above are subtracted out, the Debtor's household monthly net income totals $2,789.00.

II. LEGAL ANALYSIS

Pursuant to 11 U.S.C. § 707(b)(1), a bankruptcy court may dismiss a case filed under chapter 7 by an individual debtor whose debts are primarily consumer debts or convert the case to chapter 11 or 13 with the debtor's consent, if the court finds that the "granting of relief would be an abuse of the provisions of [chapter 7]." 11 U.S.C. § 707(b)(1). Unless rebutted by "special circumstances," abuse is presumed under § 707(b)(2) if a debtor fails to pass the so-called "means test," which is a mathematical calculation based on a debtor's "current monthly income" (as defined by § 101(10A)) less various monthly expenses allowed by the statute. 11 U.S.C. § 707(b)(2); In re Goble, 401 B.R. 261, 276 (Bankr. S.D. Ohio 2009). A court may also find abuse under § 707(b)(3) if a debtor files a petition in "bad faith" or when "the totality of the circumstances . . . of the debtor's financial situation demonstrates abuse." 11 U.S.C. § 707(b)(3)(A) and (B).

In this case, the UST requests dismissal under § 707(b)(3)(B) arguing that the totality of the circumstances of the Debtor's financial situation demonstrates an abuse of chapter 7. The UST, as the movant, carries the burden of demonstrating that the Debtor's case should be dismissed under this provision. In re Phillips, 417 B.R. 30, 39 (Bankr. S.D. Ohio 2009); Goble, 401 B.R. at 274.

In re Krohn, 886 F.2d 123 (6th Cir. 1989) and Behlke v. Eisen (In re Behlke), 358 F.3d 429 (6th Cir. 2004) are the "seminal pre-BAPCPA cases in the Sixth Circuit addressing the 'totality of circumstances" test under former § 707(b)."⁴ Phillips, 417 B.R. at 39. In Krohn and Behlke, the Sixth Circuit held that a case should be dismissed if the totality of a debtor's circumstances demonstrate a lack of "need" and provided factors relevant to the analysis. "Among the factors to be considered in deciding whether a debtor is needy is his ability to repay his debts out of future income. That factor alone may be sufficient to warrant dismissal." Krohn, 886 F.2d at 126; Behlke, 358 F.3d at 434-35 (noting that "Krohn clearly holds that the ability to pay may be but is not necessarily sufficient to warrant dismissal for . . . abuse"). Other relevant factors include "whether the debtor enjoys a stable source of future income, whether he is eligible for adjustment of his debts through Chapter 13 of the Bankruptcy Code, whether there are state remedies with the potential to ease his financial predicament, the degree of relief obtainable through private negotiations, and whether his expenses can be reduced significantly without depriving him of adequate food, clothing, shelter and other necessities." Behlke, 358 F.3d at 434 (quoting Krohn, 886 F.2d at 126-27).

Focusing on the ability to repay debts out of future income factor emphasized in Krohn, the UST maintains that the Non-filing Spouse's social security income and the Debtor's voluntary retirement contributions should be considered when determining whether the Debtor's financial situation, under the totality of the circumstances, demonstrates abuse under § 707(b)(3)(B). The UST notes that if these two income sources are factored in, the Debtor would have the ability to repay 100% of her priority and non-priority unsecured debts listed on Schedule E/F within 36 months.⁵

A. SOCIAL SECURITY INCOME

1. Social Security Income—The Parties' Positions

On the issue of social security income, the UST relies heavily on In re Meehean for the proposition the social security income may still be considered under § 707(b)(3)(B)'s totality of circumstances analysis notwithstanding the exclusion of social security income from the presumption of abuse analysis under § 707(b)(2). In re Meehean, 611 B.R. 574, 585 (Bankr. E.D. Mich. 2020), aff'd, Meehean v. Vara (In re Meehean), 619 B.R. 371, 379 (E.D. Mich. 2020). Noting that "totality" is an "inclusive term," the UST argues that § 707(b)(3)(B) permits inquiry into the entirety of a debtor's financial situation. Id. at 376. Referencing § 707(b)(1), the UST observes that the only limit that Congress placed on what a bankruptcy court may consider in evaluating a debtor's financial situation under the totality of circumstances analysis is a debtor's contributions to qualified religious or charitable organizations. If Congress had wanted to exclude social security income from the totality of circumstances analysis under § 707(b)(3)(B), it could have done so.

The Debtor disputes that her Non-filing Spouse's social security income should be included in the § 707(b)(3)(B) totality of circumstances analysis. The Debtor relies on § 407 of the Social Security Act, which provides that:

(a) In general

The right of any person to any future payment under this subchapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.

(b)

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