"Totality of Circumstances" - Ch. 7 Dismissal

[clijohns3998]

Hello-

My wife filed for Ch. 7 in November 2020 (hired a lawyer). She filed separately (I'm not listed as a debtor in this case). I lost my job in March 2020 due to Covid and was unemployed until the end of November. This event (loss of job) is what led her to file for bankruptcy. Without my income, we were unable to maintain payments on her unsecured debt and medical bills. She passed the "means test" using my unemployment income (CARE ACT) in the schedules and proceeded with the filing.

Finally, after 5 months, we received a motion to dismiss her case based on 707(b)(3), "totality of circumstances." After talking with her attorney, the UST came to that conclusion based on my income (non filing spose) changing (after the filing) because I found a new job.

Has anyone encountered this? Does this seem like something that would be worth fighting?

Thanks in advance for your help.

[despritfreya]

She filed in November and you began work in November. Did you know you had the job before your wife filed?

Des.

[clijohns3998]

No, I did not know I had the job. My first day was not until 2 weeks after she filed.

[justbroke]

The United States Trustee (UST) is usually not too interested in dismissing this type of case. Even though I write that, the UST will be interested in cases where the tax returns may show that your household could have supported a Chapter 13 had you not lost your job. That gets you on the radar, but again it means nothing if you don't have a job.

But, it does happen.So my question is, were you asked if you found work while being questioned at the 341 Meeting? If so, that could have been what piqued the UST's curiosity further. I think that is what would get the UST to go after a totality of circumstances exception.

I don't know what took so long, but the UST usually has only until 60-days following the 341 Meeting (the "bar" date) to file a complaint or seek dismissal. If you filed November 10, then the 341-Meeting was likely December 10. Sixty days form then would be February 10, 2021 (based on November 10, 2020 filing date). These are all just approximates. So, did the UST file a motion to dismiss back before February 10th or otherwise seek to extend the deadline to determine dischargeability?

If not, I don't know if there is anything to fight. I would lean on my attorney as to whether you can overcome this dismissal, but I don't clearly see any way. The totality of circumstances exception is used when the debtor's circumstances changes right after filing (or there are extenuating circumstances in general).

I hope that everything is better for you now that you are working.

[clijohns3998]

I'm not sure if they asked my wife if I had found a job during her 341. I will ask her to see if she remembers. You are correct on the timing of her 341 meeting being in the first couple of weeks of December.

After that, we did receive notice from UST that case was dismissed based on 707(b)2 on 1/25/21. After reviewing, her attorney determined that the UST essentially had bad math and the UST needed more time to review. As a result, the UST filed a motion to extend until 4/1/21.

On 4/1/21, received notice from UST to dismiss based on 707(b)3.

On 5/14/21, received notice that original motion to dismiss based on 707(b)2 was withdrawn.

Her attorney believes that the UST is just jerking us around because they are trying to buy more time. He feels strongly that if this was taken before a judge, we would win based on the evidence we have to support her filing..

He is trying to avoid the motion for trial because it will only cost us more $$. After several attempts to reach the UST, her attorney was able to talk to the UST. And get this...the UST told her attorney "Why don't you just have her try Ch. 13 and if that doesn't work, you guys can re-file for Ch. 7 and I'll let it go through." Unbelievable.

So here we are...the attorney is making one last attempt at trying to reach the UST to get them to drop the dismissal. If that doesn't work, it looks like we're going to see the judge.

This has been a horrible experience for our family over the last 7-8 months. Our attorney is saying that he's seen some cases last as long as 2 years. Not sure we handle that long.

[justbroke]

I'm glad to read that your attorney is trying to handle this and get a good result for your family. It's tough, but the UST is much different that your Chapter 7 Trustee. The Chapter 7 Trustee is technically hired by the UST to handle these Chapter 7 cases. The UST provides the oversight of the bankruptcy program. Personally I think of the UST as the entity representing the federal government and the bankruptcy program.

It may be surprising that the UST said to just convert to Chapter 13 and refile if it doesn't work out. However, the entire purpose of denying Chapter 7s is to implement Congress' intent: send more debtors into Chapter 13.

At times the UST's office may seem to be very slow. As you can see, they wait until the last day to do things, and that's what drives me, and everyone else, absolutely crazy. In some cases the debtor's attorney can "poke" and prod the UST to make a decision, but the saying goes... don't poke the bear. As you alluded, you could just file a motion to force this to a hearing. That would certainly cost $$$ and the UST could still somewhat drag their feet. It reads as though your attorney wants to just wait until the UST figures out that this is not worth fighting and have the UST withdraw their motion.

Seems like it's a game of attrition at this point.

[flashoflight]

Depending on your district and the judge, the date of the hearing on the 707(b)(3) might be when the snapshot is taken for totality of the circumstances, not the filing date. Even if the snapshot is at the 341 meeting, you'd lose. When did you know you had a job offer? Starting two weeks after the filing is very short already. I'm sure they will try to pin you to the date of your offer letter. If the date of the offer was pre-petition, you lose because there was a false statement in schedule I concerning future income changes. It's not enough to start a new job post-petition.

I'm guessing your wife was asked about your job situation at the 341, which is likely one of the standard questions asked at the 341.

You could eventually concede defeat and have her go to a 13 if the hearing will proceed and cut your losses. That will save you in legal fees.

Not that I would suggest anything dishonest to anyone in the future, but I'd try to not get an offer of employment until the day after the 341 meeting if it will change the pass/fail on the means test. To be really safe, don't get an offer of employment until the chapter 7 case is closed.

[justbroke]

Not that I would suggest anything dishonest to anyone in the future, but I'd try to not get an offer of employment until the day after the 341 meeting if it will change the pass/fail on the means test. To be really safe, don't get an offer of employment until the chapter 7 case is closed.

I'd go one step further. An offer of employment is not a job. I would say that one should probably not start a new job between filing and the 341 Meeting of Creditors. That is if the income is a factor for the Chapter 7.

Accepting and starting a new job right after filing, and before the 341 Meeting, isn't always fatal. In some cases, the UST never shows up and the Chapter 7 panel trustee gives the debtor a hearty "congratulations" and moves on. I think the issue may be in cases where the debtor (or debtor's non-filing spouse) has or had significant income prior to filing. Even with the loss of the income just before filing, the UST becomes skeptical. There are debtors that have timed job seeking so as not to start a new job until after the 341 Meeting.

It's a fine line. I think it's more difficult for a debtor (or household) with significant income to not be scrutinized. I was scrutinized over a non-working spouse and a 23-year old college student living at home.

[flashoflight]

My 341 meeting included two questions: "Who is your employer? What is the address of the employer?" even though she had my paystubs. I think that question is normally meant to trip debtors up to reveal a second job. This line of questioning would be fatal if the debtor started the job. The trustee could ask about the job hunt and then the need to perjure yourself would come up if there is an accepted offer.

Also, the high income cases for 7 tend to be ALWAYS scrutinized so it is very, very risky to lie. The ch7 trustee is almost always going to have someone else go through the case (and all of the other high income ch7) as if he is a detective and look for hidden income, hidden assets, fraudulent transfers, Lexis-Nexis searches, etc. Trustee might leave the case open to do more fishing. UST probably wants a look as well.

But if you're minimum wage unemployed and suddenly get a job after filing that is minimum wage, nobody is going to care. Congrats on being the 98% who have simple no asset 7 cases that will slide through easily. Don't want to scare the vast majority here.

[clijohns3998]

Hey all- thanks for your input. I just wanted to provide an update on this case so that others who may be going through something similar can reference.

My wife has an evidentiary hearing scheduled in October. As expected, the UST wants to dismiss due to my (non-filing spouse) income increasing with a new job after she filed for Ch. 7. In addition, they are contesting that our "allowable housing expenses" per the IRS standards is excessive (by $2900+). Not sure how we control that - our mortgage has been the same for years and consistent/reasonable with the area that we reside. They are also arguing that our living and transportation expenses are excessive and unreasonable. We're a family of 4 (2 children ages 10 and 14). Our utilities, food and clothing is definitely not excessive in our opinion. We still have to provide for our children and maintain a reasonable way of life. The transportation expenses (gas) are completely legit. I travel almost 70 miles round-trip for my job. In addition, there are toll charges to get to and from work. All of those expenses are necessary so I'm not sure what angle they're trying to take. With their calculations (using the IRS standards), they state there is disposable income to move to Ch. 13. I can attest that there isn't much left at the end of the paychecks.

My question is this, how can the UST argue that my (non-filing spouse) expenses are excessive? How can they regulate what "I" spend my money on as it relates to my kids, utilities, etc...? Also, will the judge issue a final decision after the evidentiary hearing or will there be another court hearing?

Thanks in advance for your help!

[flashoflight]

I think your car expenses are legit since they are your personal expenses including the gas, insurance, and toll charges. Everything else is household expenses and fair game for the trustee. If you were in a joint case, I don't think you'd get anything extra for your car expenses. 70 miles round trip isn't all that unusual these days unfortunately.

Food, housekeeping, laundry, personal care, and clothing you should never exceed IRS standards without a doctor's note. For recreation, don't exceed what is accepted locally by the trustees in your district.

Everything else you can exceed if you have receipts and a reasonable explanation. In a chapter 13 case in my district, the receipts for a couple of months' worth of controversial expenses are provided proactively by your attorney.

The mortgage amount being abusive is the UST's weakest argument IMHO. He should be focusing on how much the PITI is compared to combined gross income rather than the IRS standard for the county. Secured debts and their arrears have priority treatment in bankruptcy so you would probably pay the mortgage in a 13 rather than move to an apartment. It's perfectly fine to pay into home equity rather than the credit cards. If your PITI is greater than 36% DTI, then the UST has a better argument that the mortgage is abusive. If the PITI is above 45% DTI, I would favor the UST winning on this.

[justbroke]

Hey all- thanks for your input. I just wanted to provide an update on this case so that others who may be going through something similar can reference.

I'm sure everyone, including myself, thanks you for the update.

My wife has an evidentiary hearing scheduled in October. As expected, the UST wants to dismiss due to my (non-filing spouse) income increasing with a new job after she filed for Ch. 7.

This makes sense, to me, for a totality of circumstances objection to discharge. For those that don't know, the totality of circumstances (TOC) is one of the two reasons other than not passing the means test. A party in interest or the United States Trustee (UST) can move to dismiss a case for bad faith or TOC.

In addition, they are contesting that our "allowable housing expenses" per the IRS standards is excessive (by $2900+). Not sure how we control that - our mortgage has been the same for years and consistent/reasonable with the area that we reside. They are also arguing that our living and transportation expenses are excessive and unreasonable.

The UST, in this case, can attack your transportation costs as excessive and unreasonable. They look to the IRS Collection Financial Standards (CFS) as not just the baseline, but the bright line as to what is considered excessive. I can see where a debtor should be able to overcome the mortgage expense, but the non-mortgage expenses (electricity, upkeep, water, sewer, etc) would make a more difficult argument. I have also seen the UST look to what is normal for a debtor in a particular financial condition. A debtor making $200K a year is probably okay to have a $600K home despite the IRS CFS for that area.

So one could argue the home itself if the monthly payments all-in (PITIA -- principal, interest, tax, insurance and association dues) is less than 33% of the debtor's gross household income. For someone making $16,500/month ($200K/year), a $4,000/month payment on a $600K home is not usually an issue at all even if it exceeds the local standard.

But remember this, it's the "totality" of circumstances so this is just one factor combined with others.

We're a family of 4 (2 children ages 10 and 14). Our utilities, food and clothing is definitely not excessive in our opinion.

The definition of excessive is quite easy. Simply look to the IRS CFS. If your numbers exceed that number for your household size in your State, then it is excessive by definition. If the children have specific medical issues which require specific food and clothing, then the "standard" amount in the IRS CFS is rebuttable. If not, then there is no way to rebut the cost of food, clothing and other allowance.

(Generally speaking, rebutting the energy costs is also difficult without a really good explanation.

But remember this, it's the "totality" of circumstances so this is just one factor combined with others.

We still have to provide for our children and maintain a reasonable way of life.

And herein may lie the rub. The IRS CFS neither provides nor guarantees a "reasonable" lifestyle for a debtor. The CFS is about the minimum necessary to survive. The numbers to meet a lifestyle is not the point of the IRS CFS. The point is to provide a minimum livable situation while repaying debt. It is not particularly about supporting a "reasonable" way of life. The standard of what is reasonable is a moving target if it is subjective so the CFS is objective.

But remember this, it's the "totality" of circumstances so this is just one factor combined with others.

The transportation expenses (gas) are completely legit. I travel almost 70 miles round-trip for my job. In addition, there are toll charges to get to and from work.

You could be able to overcome, rebut, the presumption that you are spending too much for gas. Unless the job is providing substantial income for the household, the reasonable person standard, is what is in the monthly operating expense for a vehicle. I think the monthly allowance is from $224 to about $251/month in Georgia Miami is the highest at $379). If you spend significantly more than this the question becomes, why do you and to what extent are the creditors supporting this over being paid? (That's my question, not necessarily the point of the IRS CFS and the UST.)

But remember this, it's the "totality" of circumstances so this is just one factor combined with others.

All of those expenses are necessary so I'm not sure what angle they're trying to take. With their calculations (using the IRS standards), they state there is disposable income to move to Ch. 13. I can attest that there isn't much left at the end of the paychecks.

Well the IRS CFS is the standard. You must rebut and prove that the IRS CFS is wrong... not that you believe that it doesn't cover your particular expense. For example, some debtors have attacked the IRS CFS standard for non-mortgage/non-rent expense. Since that specific item includes heating/AC, many have added more money to energy costs and attempted to rebut by saying that they simply pay more. You actually have to show that the IRS made a mistake in allocating the money between the mortgage/rent and the non-mortgage/non-rent expense or made other error.

But remember this, it's the "totality" of circumstances so this is just one factor combined with others.

My question is this, how can the UST argue that my (non-filing spouse) expenses are excessive? How can they regulate what "I" spend my money on as it relates to my kids, utilities, etc...?

As I wrote above (I hope), when there is a non-filing spouse and the debtor is filing a Chapter 7 bankruptcy, a lot more scrutiny is placed upon the petition. This is especially true when the combined income of the household exceeds the median income in the debtor's State.

I keep saying "is just one factor," think of it as... if only it was the mortgage, the UST could let it go. However, in my most humble opinion, this is what the UST actually sees:

• both spouses are not filing
• household income exceeds the State's median income (purposefully ignore any marital adjustments)
• non-filing spouse is earning even more than when case was filed
• mortgage is higher than CFS
• non-mortgage expense claimed is higher than CFS
• food expense claimed is higher than CFS
• clothing expense claimed is higher than CFS
• vehicle ownership expense claimed is higher than CFS / ownership allowance

So while you see only one or two issues, the UST sees 8 or more issues. This is precisely why there is a "totality" of circumstances objection. Looking at each one individually, they really are insignificant. When you get to 4, 5, 6, or more insignificant items, they start to look significant in total.

Your only way to oppose the Motion to Dismiss (or Dischargeability Complaint) is to address each item. The answer can't be, despite how harsh it may seem, I need to maintain a lifestyle for my children. That will not travel well. While a judge is empathetic or maybe even sympathetic when it comes to the impact on children, a court cannot substitute a debtor's choice against not paying the creditors. It's probably the most difficult area for a judge to assess... just how much leeway for children's activities does the court allow and weigh against the rights of creditors to collect?

will the judge issue a final decision after the evidentiary hearing or will there be another court hearing?

There isn't always an order issued from the bench, but the court may make a ruling and have one of the parties draft a proposed order for the judge to sign. Usually an evidentiary hearing is part of the trial process and it could be a final evidentiary hearing, or it could be continued to a later date.

Sorry for the long response. I wanted to address each of the areas of your concern and look at it from a different perspective.

[clijohns3998]

I appreciate the input that you guys gave. I also failed to mention (regarding our living expenses - mainly food) that my wife has medical complications (severe Chron's) which requires her to eat a special diet. In addition, the medical bills associated with her disease have been astronomical as she is required to get an infusion every 6 weeks. Our attorney has tried to explain that to the UST to help them understand the "excessive" expenses.

[justbroke]

If and when this goes to an evidentiary hearing, then your attorney can present the necessity to increase the food costs. I wish her better as I have a couple of friends with severe IBS/IBD issues such as Chron's.

As I wrote, your attorney will need to justify each of the area where you exceed the IRS CFS. It sounds as though you have some of it covered. Let's see what your attorney can do.