1995 #44, Patton, 12-20-95

In re: MELVIN L. AND SYLVIA P. PATTON, Chapter 13; Bankr. No. 95-40169

Pursuant to the findings and conclusions entered on the record October 17, 1995, I told the parties and counsel that this case would be converted to a Chapter 7 unless Debtors demonstrated that they were farmers as provided by 11 U.S.C. §§ 1307(e), 101(20), and 101(21).

Under § 101(20), a person must have received at least 80 percent of their gross income from a farming operation in the year before they filed their bankruptcy petition. A farming operation includes "tillage of the soil, dairy farming, ranching, production or raising of crops, poultry, or livestock, and production of poultry or livestock products in an unmanufactured state." 11 U.S.C. § 101(21).

According to Debtors' Schedule I filed April 18, 1995, Debtors receive $11,800.00 annually from farming operations and $9,384.00 annually from Social Security. Absent evidence to the contrary, the Court presumes that Debtors' income on Schedule I is similar to the income they received in 1994 -- the year before their petition.

If Debtors' Social Security income is included in gross income, Debtors received 55% of their income from farming in 1994.[$11,800.00 divided by $21,184.00]. If the Social Security income is excluded, then Debtors received all their income from farming in 1994.

There is little case law guidance on this issue. The case cited by Debtor, Otoe County National Bank v. Easton (In re Easton), 883 F.2d 630 (8th Cir. 1989), does not address directly the issue presented. If anything, the Bankruptcy Court's decision in Easton indicates the debtors' Social Security income was included in the debtors' gross income. See In re Easton, 79 B.R. 836, 837 (Bankr. N.D. Iowa 1987).

More on point is In re Koenegstein, 130 B.R. 281 (Bankr. S.D. Ill. 1991), where the court held that Social Security disability payments should be included in gross income for determining a person's eligibility under Chapter 12. The court acknowledged that such benefits would not be included in the debtors' gross income for federal income tax purposes but reasoned the benefits nevertheless constitute real income for the debtors. Id. at 285. Consequently, the court adopted a common sense approach and included the Social Security benefits in the debtors' gross income when applying 11 U.S.C. §§ 101(18). Id.

The reasoning in Koenegstein is sound and will be adopted here. Debtors' Social Security income will be included in their gross income because it constitutes real income to them. The Bankruptcy Code and § 101(20) does not limit what is included in gross income. Consequently, Debtors' case may be converted to Chapter 7 because they are not farmers as defined by 101(20) because less than 80 percent of their income is derived from farming.

Finally, as discussed at the hearing, under Graven v. Fink (In re Graven), 936 F.2d 378, (8th Cir.), a reorganization case may be converted to a Chapter 7 although the debtor's prefer dismissal. Debtors did not present any argument at the hearing or in their brief that shows that the rationale in Easton should not apply here, especially where Debtors have not utilized other reorganization efforts in good faith and where a conversion to Chapter 7 appears to be a better option than dismissal for these Debtors.

An order will be entered converting the case to a Chapter 7.