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By Diane Davis
April 7 — The Chapter 7 bankruptcy filing of a couple who had the ability to pay their creditors, reaffirmed the debt on a camper, and purchased a newer vehicle on the eve of bankruptcy is an abuse of the bankruptcy process and should be dismissed, a bankruptcy court in Iowa held April 4.
Chief Judge Thad J. Collins of the U.S. Bankruptcy Court for the Northern District of Iowa agreed with the U.S. Trustee that the totality of the circumstances demonstrates abuse under Bankruptcy Code Section 707(b)(1), and the case should be dismissed unless the debtors file a motion to convert the case to one under Chapter 13 within 21 days.
In Chapter 7 bankruptcy, a debtor's nonexempt assets are liquidated and the proceeds are distributed to creditors. Chapter 13 bankruptcy allows individuals receiving regular income to obtain debt relief while retaining their property. To do so, the debtor must propose a plan that uses future income to repay a portion of his or her debts over a three to five year period.
The bankruptcy court looked to the totality of the circumstances and determined that debtors Jeffery and Susan Gourley had substantial ability to pay, lacked any “belt-tightening,” and the cause of their problem was overspending, not any unforeseen catastrophic event such as a sudden illness or unemployment.
The debtors' schedules stated that they had $5,714 in monthly expenses, and monthly income after deductions of $5,874, leaving monthly disposable income of $159.
The UST argued that with more belt-tightening, the debtors could find more disposable income to support meaningful repayment under a Chapter 13 plan. The debtors, however, contended that they had no disposable income due to ongoing unexpected expenses.
The UST argued that the debtor's reaffirmation of a debt for a camper was an unnecessary, luxury item, and the bankruptcy court agreed. Monthly payments on the camper of $266, plus $20 for insurance weren't a reasonable and necessary expense, the court said.
In addition to reaffirming the camper debt, the debtors upgraded their 2004 Chevy Silverado to a 2010 Silverado on the eve of their bankruptcy filing. The court found that the debtors' vehicle upgrade was evidence that they could pay creditors something without causing even a slight hardship.
The court also found that many of the items listed in the debtors' budget were duplicates and that their income was actually underreported. For example, the debtors set aside $225 a month for medical expenses and the debtors testified that their daughter's braces were paid for with disposable income. During cross-examination, however, Jeffery Gourley clarified that the debtors had been paying for the braces through his flexible spending account. The debtors also anticipated that their son's braces would be paid for in the same manner. The expenses for braces are covered by the flexible spending account deduction from the debtor's paycheck and don't reduce the debtors' available disposable income, the court said.
After analyzing the debtors' $500 monthly transportation expenses, the court found that there was $300 extra per month for vehicle repairs and, thus, vehicle repair costs aren't additional or unexpected and don't reduce the debtors' disposable income. The debtors also budgeted well over three times the cost of gasoline in budgeting their fuel costs, the court said.
The court found that $350 per month for recreation, clubs, and entertainment expenses was excessive.
According to the court, the debtors' monthly expenses properly totaled $7,046, with monthly income of $7,685, resulting in a $638 monthly disposable income. Adding the camper costs of $286 to that monthly amount, the court concluded that the debtor had $924 in disposable income per month to pay creditors. “The Court will not allow Debtors ‘to pass onto their creditors the costs incurred for the purchase of unnecessary goods and services,'” the court said. The debtors have a substantial ability to pay, the court said.
Robert J. Murphy represented debtors Jeff and Susan Gourley; Sheryl Schnittjer, Delhi, Iowa, represented the trustee; John Schmillen represented the United States Trustee Daniel M. McDermott, Cedar Rapids, Iowa.
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