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February 8, 2009

More on 707(b)(3) - Totality of the Circumstances

In re Baeza, ---- B.R. ---, 2008 WL 5411118  (Bkrcy, E.D. Cal. Dec. 2008, Lee. J.)

Issue:   Where the debtor intends to surrender collateral which will result in substantial “net disposable income,” can that be the basis for dismissal of the case under 707(b)(3)?            

Holding:      Yes.   

These chapter 7 debtors have $436,000 of secured debt and about $54,000 of unsecured.  Based on their Statement of Intentions, they intend “to surrender the collateral for almost all of their secured debt, approximately $433,876, including their home, one vehicle, an ATV, and a travel trailer.”  Their CMI is $10,348.  The means test net is minus $1110.  The UST moved to dismiss the case as an abuse both under 707(b)(2) and (3).  As to (b)(2), the argument was that payments for secured debt for property which is going to be surrendered should not be included.  As to (b)(3), the court should look to the totality of the circumstances and once the collateral is surrendered, the debtors will have significant net disposable income to pay to creditors as part of a plan. 

Judge Richard Lee in Fresno granted the motion and dismissed the case.  He said first that he did not need to consider the (b)(2) arguments if (b)(3) applies.  He said next that ability to pay is part of the totality of the circumstances.  “It would be counterintuitive to construe this same phrase [totality of the circumstances], as used in BAPCPA, to exclude a consideration of the debtor's ability to pay.” 

“Turning now to the facts of this case, it appears that at least two of the Price factors, the first and second, are relevant. The Debtors have enjoyed an annual income that is substantially more than the applicable median family income in California.  While their income may have recently decreased, they also are no longer burdened with oppressive payments to secured creditors which consumed a large percentage of their income.  There is no showing that the Debtors filed this joint petition as a result of illness, disability, unemployment, or calamity.  The Debtors' own schedules show that the Debtors have the ability to repay a substantial portion of their unsecured debts based on their current financial situation.” 

The debtors argued that in a chapter 13 there would be no payments to unsecured creditors under the facts here.  “The Debtors' argument mischaracterizes the issue and misstates the law. The question before the court is not whether the Debtors would be required to pay anything to their unsecured creditors in a chapter 13, but rather, whether they have the ability to pay something substantial to their unsecured creditors.  The answer to that question is unequivocally yes.”  He said that this is not a chapter 13 case and therefore that is not an issue.  He concluded, “Based on the foregoing, the court finds and concludes, based on the totality of the circumstances, that the Debtors have the ability to pay a substantial portion of the debts for which they seek a discharge and that the granting of a discharge in this case would be an abuse of chapter 7.”

February 8, 2009 in 9th Circuit Briefs | Permalink


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