Florida bankruptcy court denies request to dismiss chapter 7 for bad faith under §707(b)(3) totality of the circumstances

In a case that the US Trustee’s office alleged expenses were overstated on schedule J, and that schedule I should have included a draw from his business for cancer treatment as a special circumstance rather than including in monthly income, the court sided with the Debtor in denying the motion to dismiss under 11 U.S.C. §707(b)(1) and (b)(3).  In re Miller, 2022 Bankr. LEXIS 1382, Case No. 3:21-bk-02093-BAJ (Bankr. M.D. Fl., 13 May 2022).  J. Burgess.

The debtor is the owner of two businesses, one of which owned a commercial property in Nebraska which was foreclosed on, resulting in a deficiency judgment of $128,903 against both the debtor and that company.  Debtor’s ongoing income is primarily from the other business (GMI) in the form of draws and payroll.  Debtor scheduled $232,124 in unsecured debt including $75,000 in non-dischargeable student loan debt.

Debtor scheduled $9,014.50 monthly income and $9,000.98 in monthly expenses on schedules I & J.  The trustee disputed these figures, asserting $9,698.13 income and $8,086.56 in expenses, thereby asserting $1,611.57 in net monthly income.   The $638.63 income discrepancy is based on a draw debtor took out to pay for cancer treatments.  The court noted that the monthly draws from GMI were funded from an EIDL loan which GMI will have to repay.

The expenses showed a $915 discrepancy, primarily based on an anticipated $500/month car payment and $200/mo for car insurance.  While debtor intends to surrender his current vehicle, he will still require a stable vehicle for work which includes out of state travel, and his spouse requires a separate vehicle for care of their adult disabled son.

The trustee also objected to a $50 increase in the transportation expenses since filing asserting it is not supported, as well as a $125/mo expense for palm tree trimming, which trimming is required by the homeowners association.

The conditions set in the code for dismissal of chapter 7 include §707(b)(1) for debtors whose debts are primarily consumer debts if granting of relief would be an abuse of the provisions of chapter 7; and §707(b)(3) requiring an determination whether the totality of the circumstances of the debtor’s financial condition demonstrates abuse. The trustee bears the burden of proof to show such abuse where the presumption under §707(b)(2) does not arise.¹

   While a debtor’s ability to pay is a primary factor in the analysis, it is not conclusive.²  Rather, other circumstances must be considered along with the ability to pay.  These circumstances include 1) whether unforeseen or catastrophic events such as sudden illness, disability, or unemployment propelled the debtor into bankruptcy; 2) whether the debtor’s standard of living has substantially improved as a result of the bankruptcy filing; 3) the debtor’s age, health, dependents, and other family responsibilities, 4) the debtor’s eligibility for chapter 13 relief and whether creditors would receive a meaningful distribution in chapter 13, 5) the age of the debts for which discharge is sought, and the period of time over which they were incurred; 6) whether the debtor incurred cash advances and made consumer purchases far in excess of the ability to repay; 7) whether the debtor made any payments toward the debts or attempted to negotiate with creditors; and 8) the accuracy of the debtor’s schedules and statement of current income and expenses.³

As to the ability to pay, the court agreed that the draw to pay for cancer treatments was properly categorized as a special circumstance, again noting the requirement that the debtor’s company, GMI, is obligated to repay the loan that funded the draws.  As to the expenses, the court rejected the trustee’s argument that car expenses should be excluded due to the planned surrender of the vehicle, agreeing with the debtor that he will need a vehicle for work as well as a separate vehicle for his spouse to care for the disabled son, and found that the estimated car expenses in the budget were reasonable.

The expense for palm tree trimming was also found to be reasonable given that it is a requirement of the homeowners association, and that the debtor had attempted to mitigate the cost.  The court also found that the $50/month increased transportation expense was allowed based on the well documented news of increased cost of gasoline and groceries.  Thus the court agreed with the debtor’s computation of income and expenses rather than the trustees.

The court also found that the totality of circumstances test would have favored the debtor.  The instigating factor in filing was a deficiency judgment from a foreclosure.  There is no evidence of an improvement is debtor’s standard of living given the surrender of a truck and motorcycle.  The debtor’s health is an ongoing concern due to a diagnosis nd treatment of skin cancer post-petition.  While he testified that he is currently cancer-free he indicated he is not out of the woods, and is still being closely followed by his physician.  Debtor also is responsible for supporting his adult disabled son.  Finally, the court found there would not be a meaningful distribution to unsecured creditors in chapter 13 given the size of the unsecured creditor pool.

1 In re Norwood-Hill, 403 B.R. 905, 912 (Bankr. M.D. Fla. 2009); In re Walker, 383 B.R. 830, 836 (Bankr. N.D. Ga. 2008).^↩

2 In re Hernandez, No. 3:21-bk-624-JAF, 2022 Bankr. LEXIS 98, 2022 WL 150846 at *3 (Bankr. M.D. Fla. Jan 14, 2022).; In re Degross, 272 B.R. 309, 313 (Bankr. M.D. Fla. 2001). ^↩

3 In re Norwood-Hill, 403 B.R. at 912.^↩