In re Skvorecz, 2007 Bankr. LEXIS 1572

The debtor's case was not dismissed even though the absence of a deduction or other adjustment to current monthly income for 401(k) contributions or 401(k) loan repayments led to a presumption of abuse. Under the circumstances of the case, dismissal would have led to an absurd result.

The debtor scheduled a monthly contribution to his 401(k) plan and a 401(k) loan repayment. In a Chapter 13 bankruptcy, the debtor would be allowed to deduct the loan payments and contributions from the calculation of his current monthly income, and he would have no disposable income, which would result in a zero dollar distribution to unsecured creditors. Nonetheless, the trustee assigned to the case argued that, once the presumption of abuse arises and no purpose is served by the debtor converting to another Chapter of the Code, the intent of Congress was to deny bankruptcy relief altogether.

The bankruptcy court concluded that dismissal was not a necessary conclusion even though the presumption of abuse applied. The language of Sec. 707(b)(1) is permissive, providing that a court may dismiss or convert a case. If the court dismissed the debtor's case or he filed under Chapter 13, unsecured creditors would be paid nothing. The intent of Congress in tying Chapter 7 relief to a means test was to require a debtor to repay his creditors if he was able to. According to the court, “it would be nonsensical that the very payments or expenses which tip the calculation so as to create the presumption of abuse, an indication of an ability to repay, are the same payments or expenses that are excepted from disposable income in a Chapter 13.”


Date of decision: 5/8/07