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Below-Median Income Debtor Case Dismissed as Abusive: Glavin

As a reminder that passing the means test does not end the possibility of a chapter 7 case being considered abusive, a debtor in Albany had just such a case dismissed in June. In re Glavin; Northern District of New York Bankruptcy #10-10094 Judge Littlefield; June 22, 2011).

This is also a reminder that Chapter 7 cases with high income are reviewed very closely by the bankruptcy system, and need to be reviewed by an experienced chapter 7 and Chapter 13 bankruptcy practitioner before being filed. For more information about chapter 7, see my bankruptcy website or contact me directly.

The debtor in the Glavin case filed chapter 7 than a year ago, January 15, 2010. According to his amended schedule of income and expenses, he was, at that time, single with no dependents and employed in marketing for three months.

Presumably the debtor had little income before becoming employed, because his 'means test' income for July thru December, 2009 was only $3,200 p/m, well below the median income of a single worker in New York State.  However, his actual, ongoing income as of the petition date (that is, his Schedule I income) was $7,200 p/m. The debtor had no retirement, no house, and few other assets. Although his bankruptcy was triggered by the failure of his consulting business, the unsecured debt was, apparently, primarily consumer debt (abuse motions do not apply in cases where a majority of the debt is non-consumer.)

With no house or dependents and no retirement deduction, the debtor's actual ongoing income exceeded expenses by $1,718 p/m, according to the debtor's own schedules. This would be more than enough to repay his creditors in full in a five year 100% repayment plan.

The court noted that the debtor was probably entitled to contribute some of his income to a retirement account.  Footnote #5 of the decision states "This court is unaware of any legal precept that would necessarily prevent the Debtor from claiming a reasonable Schedule J expense for a retirement contribution. That proposed line item and its effect on Chapter 13 plan repayment percentage would initially be in the hands of the unsecured creditor body and the discretion of the Chapter 13 Trustee." 

The court could find no legal or policy reason why the debtor should not be in Chapter 13, and repay his creditors. "He is single with no dependents, in apparent good health, with no extraordinary expenses, and no anticipated changes monetarily in the next year. He states that he is unsure of his future, but should circumstances arise that would make continued presence in a Chapter 13 improvident, ยง1307 [of the Bankruptcy Code] would allow the Debtor an escape hatch." The debtor was allowed 45 days to convert the case to Chapter 13.

The Section 1307 excape hatch reference was prescient. On July 1, 2011, the debtor's attorney filed a motion to reconsider, based on the fact that the debtor became unemployed in March, 2011. Apparently the Court had taken the original abuse motion "under advisement" on July 22, 2010, but not issued its written decision until eleven months later.

Surprisingly, at least to me, the Office of the United States Trustee, which brought the original dismissal motion, opposes the motion to reconsider, on the grounds that new evidence after an issue is taken under advisement by the court is not grounds for reconsideration of a decision, under Federal Rule of Civil Procedure 60.

As a legal matter this may be correct, but as a practical matter it seems silly and a big waste of time. Presumably this unemployed debtor could satisfy the conditions of the dismissal order by converting to chapter 13 (with a notice of this exciting development being sent to all creditors, who would be invited to file claims.) Once the debtor and attorney attend the chapter 13 trustee hearing and the trustee comes to the obvious conclusion that the debtor is not actually eligible for chapter 13, due to lack of income, the case would be converted back to 7 (another notice to creditors, another trustee hearing scheduled). Debtor, creditors, attorney and trustees (7 and 13) would all be seriously inconvenienced.

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