§ 707(b)(1) and (3) - Where Income in Schedule I and
Expenses in Schedule J Differ from that
Stated in Executed and Filed Reaffirmation Agreement

In re Carney, Case No. 07-31690 (December 5, 2007) (J. Whipple). In examining the veracity of the debtors’ statements in Schedules I and J as to their current monthly income and expenses, the Court found the most telling factor to be demonstrated by the reaffirmation agreement that they had filed prior to the hearing on the motion to dismiss under 11 U.S.C. § 707(b)(1) and (3) filed by the United States Trustee. In support of their reaffirmation agreement, the debtors had stated that, after their actual monthly expenses, they were still left with $700 per month with which to make the monthly payment of $342 on a 2007 camper, a leisure vehicle that the Court found unnecessary in any way for their maintenance or support or that of their dependents. Accordingly, in light of the debtors’ post-petition statements and their otherwise inexplicable willingness to reaffirm recently incurred secured debt of $35,896.56 for the unnecessary luxury item -- the 2007 camper, the Court found that the expenses reported on Schedule J were more likely than not substantially inflated.

The debtors did not testify at the hearing as to the differences between their representations in the reaffirmation agreement and the information presented in their Schedules I and J, however, their counsel argued that the Court should disregard the statement in support of their reaffirmation agreement because, unlike the schedules, it was not signed under oath. The Court drew an obvious implication from this argument that the debtors had felt free to misrepresent facts to the Court when the statement was not required to be signed under oath, and the Court found that the representations made in their statement in support of their reaffirmation agreement were probative of the debtors’ perception of their actual financial situation and affairs since the facts shown on the statement in support of the reaffirmation agreement have independent legal significance under 11 U.S.C. § 524(k)(6)(A) and (M) and are intended to induce court action or inaction. Therefore, the Court found that the debtors’ own representations on the record demonstrated that they could make a meaningful repayment of their unsecured debt out of stable future income to their unsecured creditors. Accordingly, the Court allowed the debtors 30 days from the date of the Court’s decision to file a motion to convert to a Chapter 13 case, otherwise, the UST’s motion to dismiss would be granted.

COMMENT: This case demonstrates the importance of a reaffirmation agreement in a § 707(b) context. Practitioners need to be aware that reaffirming "unnecessary" items such as boats and campers could lead to a trustee's argument that the money asserted as being available to make payments on these items is money available to repay creditors. Debtors should be informed of this possibility before filing when such a reaffirmation agreement is contemplated.

Aaron Ridenbaugh