In the Lanza case, the debtor’s were below their state’s median income for their household size. Because they were below median income they argued that their Chapter 7 case could not be dismissed as abusive.
The United States Trustee, however, argued that even if the debtors were below median income and not subject to the means test under 11 U.S.C. Section 707(b)(2), the case could still be dismissed pursuant to 11 U.S.C. 707(b)(3) because the court was required to “consider whether the debtor filed his petition in bad faith or whether the totality of circumstances of the debtor’s financial situation demonstrates abuse.”
In this case the debtor’s had listed as their expenses payment of student loan and tuition for their 21 year old daughter which totaled more than $1,000.00 per month, payment of $255.00 per for a time share which they did not intend to keep, as well as payment on a mortgage for a home they were not living in. The facts showed they had not made any payments on the mortgage or time share after they filed their case.
The United States Trustee argued that is was an abuse for the debtors to expend $1,110.00 per month in student loan payments and tuition payments for their 21 year old daughter because those funds could be used to pay the debtors’ unsecured creditors. In fact the court stated that the courts had clearly established that expenditures for the benefit of persons whom the debtor has no duty to support are not reasonable and necessary expenses and that college tuition and other expenses in support of an adult child are not reasonable in the context of the disposable income calculation.
On a side note, however, the court indicated that pursuant to In Re Mitchell, 2010 WL 5375954, 8 (Bankr. E.D.N.C.) that young adults studying for undergraduate degrees are considered debtors’ dependents.
Because the debtors listed non-existent expenses for their time share and mortgage payments on the home they were not living in and because they were not obligated to pay for their child’s college expenses the court ruled that the debtors had approximately $2,500.00 per monthly of disposable income and could file a Chapter 13 case.
The lesson to be learned is that the court will still be able to look at the expenses listed in your schedules to make a determination of whether your case was filed in good faith or is abusive in the totality of your financial circumstances.