Senior District Court Judge, Bernard A. Friedman, for the United States District Court for the Eastern District of Michigan Southern Division, held that Social Security benefits can be considered in deciding whether a Chapter 7 can be dismissed for “abuse” under 11 U.S.C. § 707(b)(3)(B) “totality of circumstances”. On August 18, 2020, in the case of In re Meehean[1], Judge Friedman upheld the dismissal of the Chapter 7 case of Debtors, Wayne and Reeda Meehean. The Court held that based on the Debtors’ monthly income from Social Security, they were not “needy” and “do not deserve a fresh start”. Id.
In Meehean the Debtors bankruptcy schedules listed $5,842 in monthly income ($4,007 in Social Security benefits and $1,835 in pension income) and $4,446 in monthly expenses, leaving the Debtors $1,396.00 per month in disposable income. The Debtors had approximately $43,000 in unsecured debt, mostly from credit cards. The U.S. Trustee moved to dismiss the case for “abuse” under 11 U.S.C. § 707(b)(3)(B). The U.S. Trustee argued that the Debtors’ Social Security benefits should be considered as a factor in assessing the Debtors’ need for bankruptcy relief. The U.S. Trustee further stated that “[t]he Debtors’ attempt to obtain relief under Chapter 7 when they have the ability to pay their creditors with little or no adjustment to their expenses constitutes an abuse of the provisions of Chapter 7.” Id. The Debtors had $1,396 per month in disposable income, drove two expensive and newly leased vehicles, and owned a home and boat.
The Debtors resisted the motion to dismiss, arguing that their Chapter 7 was not abusive because Social Security income may not be considered in assessing the “totality of the circumstances” of the debtor’s financial situation under § 707(b)(3)(B). The Debtors relied on 42 U.S.C. § 407(a), which states that Social Security benefits are not “subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.” According to the Debtors, this means that their Social Security benefits must be disregarded in determining whether they have the ability to pay their debts. Bankruptcy Court Judge Thomas J. Tucker granted the motion to dismiss but offered the Debtors the option to convert to Chapter 13. The Debtors declined the offer to convert and the case was dismissed. The Debtors appealed the Bankruptcy Court’s dismissal to the District Court.
District Court Judge Friedman in his review noted that courts are divided on whether Social Security benefits can be considered in determining “abuse” under § 707(b)(3)(B). However, he upheld the Bankruptcy Court’s decision to dismiss the Debtors’ Chapter 7. Judge Friedman held that Social Security benefits may, among other relevant factors, properly be considered in making a determination of abuse under the “totality of circumstances” of the debtor’s financial situation. Judge Friedman reasoned that Congress directed the Bankruptcy Court to evaluate abuse under §707(b)(3) based on the “totality” of the debtor’s financial situation with no limitations. In contrast, Congress excluded Social Security benefits from the calculation of “current monthly income” when determining “abuse” under § 707(b)(2). Social Security is excluded from the definition of “current monthly income” under §101(10A)(B)(ii)(I ). If Congress wanted to excluded Social Security Benefits from 707(b)(3)(B) “totality of circumstances”, it would have expressly stated the exclusion.
Judge Friedman looked to In re Krohn, 886 F.2d 123, 126 (6th Cir. 1989) for direction, which is the leading Sixth Circuit case addressing § 707(b)(3)(B). The Court in In re Krohn focused on whether the debtors were “needy” in the sense that their financial situation warranted a discharge of their debt. Judge Friedman found that the Debtors were not “needy” because their income exceeded their expenses by over $1,200 and that based on the Debtors’ disposable income, they could pay off all of their $43,000 in unsecured debt in approximately 41 months. In addressing the Debtor’s argument that 42 U.S.C. § 407 barred Social Security from garnishment and attachment, Judge Friedman held that taking Social Security benefits into consideration in the abuse test, does not subject them to attachment or garnishment. Including Social Security benefits in this assessment does nothing more than assist the Court in determining whether the Debtors have the ability to pay and if it would be an abuse under Chapter 7 provisions.
It should be noted that the Bankruptcy Court offered the Debtors the option to convert to Chapter 13. Had the Debtors converted, it would have been completely voluntary, and they would have been consenting to paying some of their Social Security benefits through a Chapter 13 Plan. This too wouldn’t have been a violation of 42 U.S.C. § 407, which prevents Social Security from the legal process of garnishment and attachment.
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[1] Meehean v. Vara (In re Meehean), 19-46085 (E.D. Mich. Aug. 18, 2020).
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