#2296 signed 1-24-97
MARK S. SEXTON,
RHONDA L. SEXTON
CASE NO. 96-40216-7
This case is before the Court sua sponte following a hearing on January 23, 1997, on the United States Trustee's motion to dismiss. The Trustee appeared by counsel Richard A. Wieland. The debtors appeared by counsel Mark W. Works. During the hearing, the Court had ruled and directed Mr. Wieland to prepare an order, but the Court has since realized its ruling was incorrect. Consequently, the Court is issuing this order and Mr. Wieland need not submit one incorporating the prior ruling.
On January 31, 1996, the debtors commenced this case under chapter 7 of the Bankruptcy Code. The Trustee filed a motion to dismiss the case pursuant to §707(b) for substantial abuse, initially for failure to provide information and later, after the information was provided, because the debtors appeared to have sufficient disposable income to make substantial payments to their creditors. The debtors opposed the motion at first, but when it was amended, they chose to convert their case to chapter 13.
The debtors proposed to fund a chapter 13 plan with $600 per month. The chapter 13 trustee moved to dismiss the case because: (1) the debtors' plan (a) did not state the amounts owed to creditors proposed to be paid through the plan, (b) did not indicate who was to be paid through the plan, and (c) improperly classified two creditors; (2) the debtors failed to amend their schedules to show their current income and expenses and otherwise to supply requested information; and (3) the trustee believed the debtors were not disclosing all their income and were not proposing to pay all their disposable income into their plan. At a hearing a short time later, following its ordinary procedure, the Court indicated the case should be converted to chapter 7 or dismissed. Had the Court realized at the time that the debtors had previously converted their case to chapter 13 to avoid a ruling on a motion to dismiss for substantial abuse, the Court would probably have dismissed the case rather than giving the debtors the option of converting it back to chapter 7. Certainly if the Court had decided the U.S. Trustee's initial motion and ordered the case dismissed unless the debtors converted it to chapter 13, the Court would not have allowed them to convert the case back to chapter 7, despite the apparently unrestrained right to convert stated in §1307(a), unless they could have shown a material, adverse change in their circumstances.
The day after the hearing on the chapter 13 trustee's motion to dismiss, the debtors filed a notice of conversion along with amended schedules of their income and expenses. Two days later, they amended their schedule of expenses again. Six weeks later, they amended their expenses again, and another month later, yet again. Each time, they added to their expenses, finally showing expenses that exceeded their reported monthly net income by over $400.
Then, the U.S. Trustee filed a new motion to dismiss for substantial abuse under §707(b), suggesting that the debtors' net monthly income was about $150 more than they had reported and pointing out that $657 worth of their reported monthly expenses were payments on debts that would be discharged in chapter 7. Adjustments for these matters would leave the debtors nearly $400 per month in disposable income, enough to pay over 60% of their $22,263 in debts, all unsecured, if devoted to a three-year plan in chapter 13. The Trustee added that many of the debtors' reported monthly expenses could probably be reduced, thus increasing their disposable income. The debtors responded by generally denying all these assertions, and declaring, "[T]he United States Trustee has failed to include the lease payment for the debtors' vehicle and several other debts." Since the Trustee had simply pointed out that the debtors would no longer owe $657 of the monthly expenses they had reported if they received a chapter 7 discharge, the quoted attack could make sense only if the debtors themselves failed to report some of their expenses. In effect, the debtors are complaining that the Trustee failed to consider expenses they failed to report, hardly a legitimate defense. At the hearing on the motion to dismiss, the Trustee produced a copy of a paystub the debtors had provided, which demonstrated their income was what the Trustee claimed.
During that hearing, the Court discovered that creditors had been given no notice of the debtors' conversion of the case from chapter 13 to chapter 7, and ruled that the conversion would therefore be set aside, directing Mr. Wieland to prepare an order to that effect. Afterwards, the Court reviewed §1307(a) and §706(a), and realized a debtor has a seemingly absolute right to convert a chapter 13 case to chapter 7 without regard to any previous conversions, while a chapter 7 debtor has an absolute right to convert only once to another chapter. As indicated above, the Court believes a previous conversion to chapter 13 to avoid a §707(b) dismissal should preclude reconversion to chapter 7, absent changed circumstances. However, lack of notice of the reconversion does not. The ruling made at the hearing was improperly based on the chapter 7 limitation and cannot stand.
Instead, the Court must consider the merits of the Trustee's motion. The income the debtors have been shown to have and their own reported expense figures show they have nearly $400 per month in disposable income, once monthly payments on debts that would be discharged in chapter 7 are deducted from their expenses. The Court is also inclined to agree with the Trustee that some of the debtors' claimed expenses are higher than they should be. Clearly, the debtors have sufficient income to pay a significant portion of their debts through a chapter 13 plan. Of course, the debtors do not wish to do so, as they have shown by refusing to cooperate with the chapter 13 trustee after they converted their case to chapter 13. Under the circumstances, granting the debtors a discharge of their debts would be a substantial abuse of the provisions of chapter 7. The Trustee's motion is granted, and this case is hereby dismissed.
IT IS SO ORDERED.
Dated at Topeka, Kansas, this 24th day of January, 1997.
JAMES A. PUSATERI
CHIEF BANKRUPTCY JUDGE