Friday, November 1, 2013

The Nonfiling Spouse and Chapter 7's Section 707(b)(3) "Totality of the Circumstances" Test - Nonfiling Spouse's Income Taken Into Consideration

Miami Personal Bankruptcy Lawyer Jordan E. Bublick has over 25 years of experience in filing Chapter 13 and Chapter 7 bankruptcy cases. His office is centrally located in Miami at 1221 Brickell Avenue, 9th Fl., Miami and may be reached at (305) 891-4055.

The court in In re Adams, 2007 WL 3091583 (Bkrtcy.D.Md. October 18, 2007)(Schneider, J.) dismissed the debtor's chapter 7 case as an "abuse" under section 707(b)(1) based on the "totality of the circumstances" test of section 707(b)(3). Section 707(b)(3)'s totality of the circumstances test applies even if the presumption of abuse pursuant to section 707(b)(2) does not arise or is rebutted.

The court applied the test adopted by the Fourth Circuit in Green v. Staples (In re Green), 934 F.2d 568(4th Cir.1991) to determine whether the "totality of the circumstances" demonstrates abuse. The court noted that in Green it was held that in the finding of abuse, the court should consider 1. the debtor's ability to repay his debts, 2. whether the bankruptcy was due to sudden illness, calamity, disability, or unemployment, 3. whether the debtor incurred cash advances and made consumer purchases far in excess of his ability to repay, 4, whether the debtor's proposed family budget is excessive or unreasonable, 5., whether the debtor's schedules I and J of income and expenses reasonably reflect the true financial condition, and 6, whether the petition was filed in good faith.

The court found that five out of the six factors of In re Green applied in this case. The court found that the debtor, despite her lack of income, did have the ability to repay her debts based on the income of her non-filing spouse. The court found that the reported cases agree that if the debtor herself has no income, the court must take into account the income of the debtor's nonfiling spouse when the spouse receives significant income. See In re Travis, 353 B.R. 520, 530 (Bankr.E.D.Mich.2006)(the court should consider a non-filing spouse's income when it is "substantial enough to significantly raise the debtor's standard of living and generate total household income in excess of the reasonable costs of food, clothing, shelter, and other necessities"), In re Welch, 347 B.R. 247(W.D.Mich.2006), In re Staub, 256 B.R. 567, 571 (Bankr.M.D.Pa.2000)(considering nonfiling spouse's income when it was so great that it could pay off the entirety of debtor's unsecured debt in a matter of months). Contra, In re Baldino, 369 B.R. 858 (M.D. Pa. June 14, 2007)(nonfiling spouse's income considered only to the extent it contributes to household expenses of the debtor or his dependents and Bankruptcy Code does not mandate a non-filing spouse to live modestly or to devote hi income to the repayment of the filing spouse's debt). The court found that the debtor could repay her debtor if she made a reasonable budget. The court further found that it was not reasonable to pay $6,581 a month in mortgage payments and $1,884 a month in car payment with a household monthly net income of $7,740.

The court further found that the case was not filed due to a sudden illness, calamity, disability or unemployment. The court noted that the debtor's inability to sell their real property was not a "calamity" which contemplates a catastrophic event and not the mere inability to sell real property. The next factor the court found met was that the debtor incurred consumer expenses beyond her ability to repay at least under her present budget. Another factor the court found met was that the debtor's proposed budget was excessive and unreasonable.

Lastly, the court found that the case was not filed in good faith. The court found that the debtor and her husband engaged in acts designed to hinder, delay, and defraud creditors. The court noted that they built up debts in the debtor's name in order to invest in exempt assets or to reduce her nonfiling spouse's debts. The court pointed to the use of the debtor's credit cards to pay off the couple's jointly held exempt residence. The court also found that the couple lived a lavish lifestyle up to and during the bankruptcy case.

Further Cases:

In re Sharp, No. 07-72222, 2008 Bankr. LEXIS 2861 (Bankr. C.D. Ill. Aug. 21, 2008), found that “the portion of such spouse’s income which is not used on a regular basis for the household expenses of a debtor or debtor’s dependents may be subtracted” from current monthly income.

In re Coup, No. 07-34195, 2008 Bankr. LEXIS 1792 (Bankr. N.D. Ohio June 6, 2008), finds it appropriate for a nonfiling spouse to contribute income to at least some of the household expenses.

In re Grubbs, No. 07-32822, 2007 Bankr. LEXIS 4282 (Bankr. E.D. Va. Dec. 14, 2007), holds that a nonfiling spouse’s income is “considered only to extent that the income is regularly contributed to the household expenses of the debtor.”

In re Barnes, 378 B.R. 774 (Bankr. D. S.C. 2007), include a nonfiling spouse’s bonus income in current monthly income “if it is paid on a regular basis for debtor’s household expenses”

In re Lightsey, 2007 WL 2363025 (Bkrtcy. S.D. Ga.)