Parents often times help a son or daughter who has just turned 18 buy a car by paying for the monthly payments of the car until the child is able to take over payments. However, the car payment of $400 a month may be seen as abusing bankruptcy law and cause dismissal of the bankruptcy petition under Section 707(b)(3). This provision states that the court may dismiss a bankruptcy case if “(A) whether the debtor filed the petition in bad faith; or (B) the totality of circumstances (including whether the debtor seeks to reject a personal services contract and the financial need for such rejections as sought by the debtor) of the debtor’s financial situation demonstrates abuse.” This is the catch all proviso of bad faith and totality of circumstances demonstrating abuse that may ensnare even debtors who have good intentions causing dismissal of their bankruptcy cases. To illustrate, it may be argued that a debtor paying $400 monthly for his son’s car is doing so at the expense of debtor’s creditors who should be paid at least $400 a month for 60 months, or $24,000. In other words, debtor has chosen to pay for his son’s car instead of paying his creditors which is a bad faith bankruptcy filing. This is exactly what happened in the case of In re Beckett.

In Beckett, the chapter 7 debtor was 58 years old. Although she was estranged from her husband, they still lived in the same house and shared the household expenses. You know the story. Spouses live together like roommates in the same house instead of living as husband and wife to save on expenses. . When Beckett filed for bankruptcy, she was employed as an economic advisor at a state university. Her husband was retired. She had an annual income of $49,484. Her husband received pension payments in an annual amount of $54,598. Debtor said her household had a net monthly income of $6,337 and that she was personally responsible for $3,395 in household expenses. She also said that she gave $400 a month to pay for her adult son’s car. Debtor sought the discharge of $201,083 in unsecured debt. The US Trustee asked the court to dismiss the debtor’s case pursuant to Section 707(b)(3). According to the Trustee, the debtor “was not needy” because she had $400 per month that she could use to pay unsecured creditors. The court agreed that this figure represented the least the debtor could afford to pay creditors. “The debtor, whether considered alone, or with her husband, enjoys an appreciable level of income, well in excess of the state median income,” the court said. “Even considering their lack of a true marital relationship, and taking the debtor’s husband out of the picture, the debtor’s yearly salary of $40,484 still exceeds the state median income for a single person with no dependents by a sum approaching $8,000. On its face, therefore, given the level of income enjoyed by the debtor, whether alone or with her husband, it is hard to accept an inability on the part of the debtor to repay at least a portion of her voluntarily incurred obligations.” The court rejected the debtor’s arguments that she could not afford to fund a chapter 13 plan because she was providing financial support to her husband and her son, and she needed to repay $120,000 of student loans. The court said that the debtor’s husband and son were able to support themselves, and restated its position that student loan repayment should be given preferential treatment.

《楊清泉律師專欄》PAYING ADULT SON’S CAR MAY BACKFIRE AND CAUSE DISMISSAL OF BK (Part II)