## Facts

- Kevin Francis James filed a Chapter 7 petition in March 2006.
- James worked as a terminal manager and earned hourly wages with significant overtime (often over 50 hours weekly).
- In September 2005, James received a one-time longevity bonus of $20,000 gross (about $11,910 net) and later received a $2,500 year-end bonus.
- James deposited the net longevity bonus, withdrew $7,500 in cash, and spent substantial amounts on discretionary items and entertainment, as well as some legal and living expenses.
- At the time of the bonus and spending, James faced serious financial pressure, including a judgment and wage garnishment, and had consulted counsel about bankruptcy before filing.
- James did not use the bonus proceeds to pay down existing debts.
- James’s spouse did not file bankruptcy and had limited, intermittent income and health problems; the couple had no children.
- The U.S. Trustee moved to dismiss the case for abuse under 11 U.S.C. § 707(b)(3), and the court held an evidentiary hearing.

## Issues

1. Whether the Chapter 7 petition should be dismissed for abuse under 11 U.S.C. § 707(b)(3)(A) because it was filed in bad faith, given the debtor’s prepetition use of a substantial bonus while bankruptcy was foreseeable.
2. Whether, under 11 U.S.C. § 707(b)(3)(B), the totality of the circumstances of the debtor’s financial situation—including income stability, expenses, and dissipation of a nonrecurring bonus—demonstrated abuse, including an ability to repay a meaningful portion of unsecured debt.

## Decision

- The court granted the U.S. Trustee’s motion and dismissed the Chapter 7 case as an abuse under 11 U.S.C. § 707(b)(3).
- The court treated pre-BAPCPA “substantial abuse” case law as informative in applying the amended “abuse” standard.
- The court found the debtor’s prepetition conduct surrounding the bonus—spending on nonessential items while contemplating bankruptcy—supported dismissal.
- The court also found that, under the totality of the circumstances, the debtor had sufficient income stability and capacity to repay a meaningful portion of unsecured debt over time.

## Legal Principles

- Under 11 U.S.C. § 707(b), a court may dismiss a consumer Chapter 7 case if granting relief would be an abuse of Chapter 7.
- When the means test does not mandate dismissal, § 707(b)(3) directs courts to consider (A) bad faith and (B) the totality of the circumstances of the debtor’s financial situation.
- Ability to pay remains a central factor under the totality-of-the-circumstances analysis, and may be considered alongside conduct bearing on fairness to creditors.
- Prefiling dissipation of a substantial, nonrecurring windfall on discretionary consumption—when bankruptcy is foreseeable—may support a finding of abuse under § 707(b)(3).

## Conclusion

The court dismissed the debtor’s Chapter 7 case as abusive under § 707(b)(3) because he spent a significant prepetition bonus on discretionary items while bankruptcy was contemplated and, considering his income and financial circumstances, he had the ability to repay a meaningful portion of his unsecured debts.


In re James, 345 B.R. 664 (Bankr. N.D. Iowa 2006)