In re: Riggs Offers Guidance for Borderline Chapter 7 Bankruptcy Cases

In In re: Riggs, the U.S. Bankruptcy Court for the Western District of Virginia ordered that Social Security disability payments counted toward a debtor’s income which placed the debtors squarely in the category of abusing the intent and purposes of a Chapter 7 bankruptcy under the 707(b)3 totality of the circumstances test.

In this case, the debtors had accumulated substantial consumer debt but gave no evidence of having arrived at that financial situation as a result of any sudden untoward event. The court concluded that it was appropriate to consider the debtor husband’s Social Security income when assessing the debtors’ financial situation.

The court also took into account that for several months the debtors paid $350 a month to a debt management company for their unsecured creditors while still taking care of their ordinary living expenses. The court concluded that the debtors’ financial situation did provide them the ability to make a meaningful settlement with their unsecured creditors without sacrificing their standard of living or exhausting the Social Security benefit to do so. It also concluded that not to require that of them in order to obtain a discharge of their remaining legal liability to their creditors, when their financial predicament was the predictable result of their continued excessive spending rather than one caused by some unforeseen external event or calamity, would constitute an abuse of the provisions of Chapter 7.

In summary, the debtors through their actions immediately before filing a Chapter 7 case essentially showed the Court that they could make a payment in a Chapter 13 plan.


The case is instructive in that a borderline Chapter 7 case filed with similarity to the following circumstances, your case may be found to be “abusive” under 707(b)3:

1) Participation in a Debt Repayment program immediately preceding filing a Chapter 7 case;

2) Running up credit card and other unsecured debt immediately preceding filing a Chapter 7 case;

3) A projected increase in available funds in the debtor’s monthly expenses/budget due to debt on secured property being paid off soon;

4) Sales of items not disclosed on the Statement of Financial Affairs;

5) Bonus income not reported on Schedule I;

6) Not filing bankruptcy due to a result of a sudden illness, calamity, disability or unemployment;

7) Monthly expenses that border on the extravagant;

8) Over-purchase of life insurance;

9) No justification of excessive transportation expenses;

10) The existence of pension income;

11) Social security disability income which is deposited into same account from which living expenses and debt payments are made.

The factors listed above not only provide guidance to the lawyer, but also provide factual circumstances for the prospective Chapter 7 debtor to avoid before filing the Chapter 7 petition with the U.S. Bankruptcy Court.

The Winslow & McCurry bankruptcy team was recently successful in defeating a 707(b)3 claim through contrast of specific case facts with those highlighted in the In re: Riggs case above.  If you or your family need to discuss your financial circumstances and you think that bankruptcy may be a possible solution, please call us at (804) 423-1382.