In re Melander
506 B.R. 855
Bankr. D. Minn.2014Background
- Debtors Steven (70) and Debra Melander (60) filed a voluntary Chapter 13 petition on August 5, 2013; plan proposes $130/month for 60 months (≈2.5% to unsecureds). TCF National Bank holds an unsecured claim (second mortgage became unsecured after senior foreclosure).
- Debtors listed two adult daughters as dependents and claimed virtually all assets exempt under federal exemptions (homestead and multiple vehicles, recreational items, lawn tractor, dock).
- Debra is employed and earns $6,768/month (with agreed payroll deductions totaling $2,418), plus discretionary payroll deductions (long-term care insurance $440, voluntary retirement $216, HSA $92, life insurance $132). Steven receives a pension ($2,085) and Social Security ($1,334); he voluntarily proposes to contribute $575 of Social Security to the plan.
- TCF objected to confirmation on grounds of bad faith, failure of the best-interest (§1325(a)(4)) test, improper exemptions, and failure to commit all projected disposable income (PDI) to unsecured creditors. TCF separately objected to many specific claimed exemption values.
- At trial the court resolved valuation disputes largely in the Debtors’ favor (crediting debtor testimony about vehicle and property conditions) but found some §522(d)(5) exemptions exceeded; the court sustained TCF’s objections in part.
Issues
| Issue | TCF's Argument | Debtors' Argument | Held |
|---|---|---|---|
| Inclusion of Social Security in PDI / good faith | Debtors cannot exclude Social Security they voluntarily contribute; retention indicates bad faith or must be included | Social Security is excluded from current monthly income and generally may be retained; voluntary contribution does not force inclusion | Court: Social Security generally excluded under Carpenter and Thompson; voluntary retention alone is not bad faith; portion voluntarily contributed may be accepted unless other bad-faith indicia exist |
| Valuation of exempt property | Homestead and various vehicles undervalued; exemptions therefore improper | Debtors’ valuations supported by testimony and county/online data; condition of items reduces value | Court: TCF failed to rebut Debtors’ valuations for homestead and most vehicles/items; some §522(d)(5) exemptions exceeded and sustained in part |
| Allowable budget deductions (means test / Other Necessary Expenses) | Several expenses excessive or not allowable (food, transportation, home maintenance, personal allowance, taxes, and Debra’s payroll deductions) | Debtors defended expenses as actual and reasonable under IRS National/Local Standards and Other Necessary Expenses (e.g., life insurance, HSA, voluntary retirement) | Court: Most expenses (food, transportation, life insurance, HSA, voluntary retirement) allowed; $400/month additional taxes disallowed for lack of evidence; long-term care premium ($440) not documented as reasonably necessary and must be contributed to PDI |
| Confirmation / Best-interest test (§1325(a)(4)) | Plan does not pay unsecureds at least what they’d receive in Chapter 7 given challenged exemptions and PDI | Plan is good faith and exemptions/expenses are proper; limited payment due to income allocation | Court: Plan fails §1325(b) because Debtors did not commit all PDI (long-term care premium disallowed) and plan is not filed in good faith under totality; confirmation denied |
Key Cases Cited
- Carpenter v. Ries, 614 F.3d 930 (8th Cir. 2010) (Social Security benefits are excluded from the bankruptcy estate and cannot be forced into the estate)
- Fink v. Thompson (In re Thompson), 439 B.R. 140 (8th Cir. BAP 2010) (exclusion of Social Security from income means retention alone is not per se bad faith; may be considered under totality of circumstances)
- Baud v. Carroll, 634 F.3d 327 (6th Cir. 2011) (discusses means test and what constitutes reasonably necessary expenses for above-median debtors)
- Hamilton v. Lanning, 560 U.S. 505 (2010) (projected disposable income framework and effect of changes in income/expenses on PDI)
- In re Seafort, 669 F.3d 662 (6th Cir. 2012) (post-petition voluntary retirement contributions may be treated as available for PDI depending on circumstances)