589 B.R. 794
Bankr. N.D. Ill.2018Background
- Debtors Robert and Donna Plichta filed a joint Chapter 7 petition; their residence (valued at $600,000) is encumbered by a first mortgage to Shellpoint (~$1.35M) and a second mortgage/judgment to Consumers Credit Union (~$240,893).
- Debtors' 6‑month current monthly income was listed at $10,416 ($124,992/yr), above Illinois median for a family of three; Form 122A‑2 originally produced a negative means‑test result but used incorrect local IRS standards and included a $4,015/month deduction for Credit Union payments.
- Debtors have not paid the Credit Union since 2013; Credit Union obtained judgment in 2016; Debtors do not intend to pay the Credit Union postpetition but intend to keep and pay the first mortgage to Shellpoint.
- Credit Union moved to dismiss the Chapter 7 case under 11 U.S.C. § 707(b) arguing (1) means‑test presumption of abuse, (2) incorrect deductions (use of Lake County IRS standards, improper secured‑debt deduction for CU), and (3) abuse under totality/bad faith.
- Court trial testimony (Debtor Donna) established significant medical issues, ongoing mold remediation, and monthly service‑animal expenses ($600); Trustee resolved estate claims for $23,028 and opposed dismissal/conversion.
Issues
| Issue | Consumers Credit Union (Plaintiff) Argument | Debtors (Defendant) Argument | Held |
|---|---|---|---|
| 1) Whether contractually scheduled payments to a secured creditor may be deducted under §707(b)(2)(A)(iii) even if debtor does not intend to make payments | Deduction improper if debtor will not make payments; deducting creates "phantom expenses" | Statute’s formula requires deducting amounts "scheduled as contractually due" over 60 months regardless of intent | Court: §707(b)(2)(A)(iii) is a mechanical formula; intent to pay is irrelevant—deduction may be claimed per the statute’s plain text |
| 2) Whether CU’s judgment is a "secured debt" for means‑test deduction | CU’s mortgage should be treated as secured for means test so payments deducted | CU’s second lien is wholly unsecured under §506(a) (property worth less than senior lien); thus payments to CU are not deductible as to a "secured creditor" | Court: Apply §506(a); CU is effectively unsecured and its contractually scheduled payments cannot be deducted; Shellpoint (partially secured) payments may be deducted |
| 3) Whether Debtors misapplied IRS Local Standards and other calculation errors make means test trigger presumption of abuse | Correcting county standards and removing CU deduction produces positive disposable income > statutory threshold; presumption arises | Debtors admit county error and seek to rebut presumption via special circumstances (medical/service animals, daughter) | Court: With CU deduction removed but before considering special circumstances, corrected IRS standards produce disposable income triggering the presumption; however Debtors rebut by establishing special circumstances (medical conditions and $600/month service‑animal expense), so presumption is rebutted |
| 4) Whether dismissal is appropriate under §707(b)(3) based on bad faith or totality of circumstances | Debtors have excessive secured debt, live in over‑encumbered home, and spent on repairs instead of repaying CU; bad faith or totality shows abuse | Debtors say debts incurred long ago, expenditures were necessary (health/mold), schedules accurate, and Chapter 13 would not yield more to creditors; Trustee opposes dismissal | Court: Movant failed to prove bad faith or that totality demonstrates abuse; dismissal denied |
Key Cases Cited
- Ransom v. FIA Card Servs., N.A., 562 U.S. 61 (2011) (interpreting IRS standards applicability in means‑test context)
- Hamilton v. Lanning, 560 U.S. 505 (2010) (addressing forward‑looking projection vs. mechanical calculation in Chapter 13 disposable‑income analysis)
- Nobelman v. Am. Sav. Bank, 508 U.S. 324 (1993) (protecting rights of holders of secured claims in residence; used analogously re: rights of secured creditors)
- Dewsnup v. Timm, 502 U.S. 410 (1992) (principles regarding treatment of secured claims and lien rights)
- Bank of Am. v. Caulkett, 135 S. Ct. 1995 (2015) (discussion of secured claim definitions and statutory interpretation)
- In re Day, 747 F.2d 405 (7th Cir. 1984) (Seventh Circuit rule that Section 506(a) bifurcation governs "secured debt" definitions)
- In re Turner, 574 F.3d 349 (7th Cir. 2009) (Chapter 13 projected disposable income; limited to Chapter 13 context)
- In re Schwartz, 799 F.3d 760 (7th Cir. 2015) (characterizing Section 707(b) inquiry: ability to repay while maintaining reasonable living standard)