In Re McGillis
OPINION RE: CHAPTER 13 TRUSTEE’S SECTIONS 1325(a)(3), 1325(b), AND MEANS TEST CALCULATION OBJECTIONS
Mark and Donna McGillis (“Debtors”) have requested the court to confirm their plan over the Chapter 13 Trustee’s objection. The Chapter 13 Trustee objects because Debtors allegedly are not committing to their unsecured creditors all of their disposable income as required by Section 1325(b) of the Bankruptcy Code. 1 The Chapter 13 Trustee also asserts that Debtors’ plan is not proposed in good faith. 2
Debtors filed their petition for relief on June 28, 2006, which is after the effective date of BAPCPA. 3 Debtors’ plan proposes to distribute an estimated $8,430.00 to all of their unsecured, non-priority creditors. 4 Debtors’ arrived at this figure by multiplying what they have calculated to be their disposable income under Section 1325(b)(2) by the required “applicable commitment period” under Section 1325(b)(4).
The Chapter 13 Trustee contends that Debtors’ plan is objectionable under Section 1325(b) because it proposes payments into the plan of only $140.00 per month when Debtors can in fact afford to pay more. She argues that the Section 1325(b) distribution Debtors have calculated is not accurate because it is based both upon an understatement of their monthly income and upon an overstatement of their monthly expenses. She also contends that their plan does not comply with Section 1325(b) because it contemplates making all of the required distributions within 37 months, which is well short of the 60 month applicable commitment period imposed by Section 1325(b)(4).
DISCUSSION
I. Section 1325(b) Objection.
A. Projected Disposable Income.
Calculating a debtor’s “projected disposable income” for purposes of Chapter 13 plan confirmation pre-dates BAPCPA. It was first introduced into the process in 1984 when Congress added Section 1325(b). Subsection (1) of that addition provided that a Chapter 13 plan could not be confirmed over a trustee’s or unsecured claimant’s objection unless—
(A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or
(B) the plan provides that all of the debtor’s projected disposable income to be received in the three-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan.
Courts typically looked to the debtor’s Schedules I and J
5
whenever a pre-BAPC-PA
Prior to the passage of BAPCPA, in order to arrive at a disposable income figure for any Chapter 13 debtor, one would subtract monthly expenses reported on Schedule J from monthly income reported on Schedule I. The court had discretion regarding whether the listed expenses were reasonably necessary for the support of the debtor and any dependents.
In re Alexander,
However, BAPCPA significantly changed
(10A) The term “current monthly income”—
(A) means the average monthly income from all sources that the debtor receives (or in a joint case the debtor and the debtor’s spouse receive) without regard to whether such income is taxable income, derived during the 6-month period ending on—
******
Second, the expense component of the calculation is subject to further restriction under certain circumstances. In many instances, the expenses that the debtor may subtract from his current monthly income to arrive at his disposable income for purposes of
Third, the time frame within which the debtor’s disposable income is to be measured has been changed from a static three years to an “applicable commitment period” that varies depending upon the debt- or’s income. If the debtor’s current monthly income places him below the standard set in
Finally, the focus of the
The parties agree that Debtors’ current monthly income is greater than the median family income for a similar Michigan household. Therefore, calculation of Debtors’ disposable income requires consideration of the Section 707(b)(2)(A) and (B) criteria and the “applicable commitment period” in this instance is five years.
Debtors’ proposed plan distribution to unsecured creditors of $8,430.00 reflects this figure, for it is slightly in excess of $140.00 times their applicable commitment period of 60 months. Debtors therefore contend that they have complied with
Neither Debtors nor the Chapter 13 Trustee have given much attention to the income component of the disposable income calculation. They have instead focused on what deductions may be taken from this amount to arrive at the disposable income figure. Nonetheless, it is fair to say that Debtors favor a strict interpretation of what constitutes current monthly income for purposes of
The courts that have addressed this specific issue are split.
In re Hanks,
After considering these cases as well as others,
9
I conclude that
Hanks, Alexander
and
Guzman
are the better reasoned decisions. Therefore, only that which has been accurately set forth as the debtor’s current monthly income in line 14 of the debtor’s Form B22C is relevant for purposes of determining the income component of the
Hanks
is especially compelling because it involved a circumstance where it was to the trustee’s advantage as opposed to debtor’s advantage to advocate a narrow interpretation of
It is certainly regrettable that a literal interpretation of
Ultimately, it is not in this Court’s power nor is it this Court’s role to change Congress’ intentional policy choices or to save it from its inadvertent drafting errors. The language of the statute is plain, and the conflicting policies at work in the Bankruptcy Code as amended by the BAPCPA do not provide a useful guide for interpreting the phrase “projected disposable income” in§ 1325(b)(1)(B) in a different manner. Although the Court certainly appreciates the logic and desire of returning to a chapter 13 practice that more closely resembles pre-BAPCPA practice, a harsh or even illogical result is not the same thing as an absurd result, and this Court must therefore interpret the statute according to its own terms.
Hanks,
2.
Calculation Of The Expense Component For
As already noted, Debtors and the Chapter 13 Trustee agree that the expense component of the
That Debtors take this position comes as no surprise given the significant impact such an approach can have upon what
The difference between these two figures can be explained in part because Debtors’ actual expenses as set forth in their Schedule J are less than the standard allowances permitted under Sections 707(b)(2)(A). The Section 707(b)(2) calculation also includes a deduction of $202.00 for Chapter 13 administrative expenses not included in Debtors’ Schedule J. However, over one-half of the difference between the expense figure Debtors advocate and their Schedule J expenses ($839.00) is attributable to monthly payments on two debts that Debtors do not intend to pay either inside or outside of their Chapter 13 plan. One of these payments ($214.00) is for a Florida timeshare that Debtors are surrendering and the other payment ($625.00) is for a second mortgage loan on their home that will not be made because Debtors intend to avoid the mortgage as part of their plan. 11
The Chapter 13 Trustee’s objection is directed at the propriety of allowing these two deductions. The Chapter 13 Trustee argues that there is simply no room in the
In
McPherson,
the debtors’ plan proposed to “strip down” a lien held by Best Buy Co., Inc.
13
Nonetheless, the debtors contended that they should be allowed to deduct what they had been paying to Best Buy under their contract for purposes of evaluating the Chapter 13 trustee’s
The debtors in
McPherson
never asserted that the $67.60 deduction they were claiming was actually a necessary expense for their maintenance or support. Indeed, it is fair to infer that the debtors would have been resigned to using the $1.82 figure advocated by the Chapter 13 trustee had the debtors’ income not been in excess of the
McPherson, in rejecting this argument, focused upon the phrases “reasonably necessary ... for support” and “to be expended.” With respect to the former, it said:
The phrase “reasonably necessary ... for support” indicates that the amounts, and the payment of the amounts, must be reasonably necessary for the support of the debtor and any dependent. Payments that a debtor does not propose to make during the pendency of the plan and that a debtor is not required to make under the plan cannot be said to be reasonably necessary for the support of that debtor. Thus any deductions from income based on the “amounts” in question must be payments that will be made pursuant to the confirmed plan of reorganization.
McPherson,
As for the latter:
“[T]o be expended”, also indicates that the amounts to be deducted are amounts that will be paid in the future. To “expend” means to “put out or lay out”. Am. Heritage Dictionary, 462 (1976). To expend amounts of money, then, means to pay out money. Money that is “to be expended” is money that is to be paid in the future. An amount, the payment of which is never contemplated, cannot bean amount that is to be paid in the future.
McPherson,
McPherson
then went on to explain why the phrase “contractually due” as used in Section 707(b)(2)(A)(iii) must mean only those payments to be paid secured creditors under a plan when that phrase is used in the context of a
Courts have no choice now but to use the debtor’s average historical earnings to calculate the income component of
Farrar-Johnson,
' in interpreting this additional limitation, perfunctorily concluded that “[t]hat section states plainly that disposable income ‘shall’ be determined under section 707(b)(2) using the IRS standards,”
Similarly,
Consequently, it is all well and good that Section 707(b)(2)(A)(iii) itself may permit Debtors in this instance the opportunity to deduct another $839.00 from their current monthly income on account of their second mortgage and their Florida timeshare even though they are above-median-income debtors. However,
In
In re Love,
It is certainly tempting to seize upon the debtor’s current circumstances, as manifested in his Schedules I and J, as the best data for predicting a debtor’s future performance. However, the fact that Schedules I and J in many instances offer a reasonable standard for predicting the future does not mean that they are always an appropriate measure, let alone the best. For example, a historical average would be better in those instances where the debtor has been steadily employed but his income has nonetheless fluctuated because of periodic overtime. Moreover, forecasting financial performance is an art, not a science. Consequently, prognostications are as much a function of the assumptions made as the existing data selected. Indeed, the assumptions made often dictate the data used.
Nor is it necessary that the projection contemplated by Congress in
B. Applicable Commitment Period.
As already discussed, the parties agree that 5 years is the Debtors’ “applicable commitment period” for purposes of evaluating the Chapter 13 Trustee’s
On the other hand, Debtors advocate what has been described as the monetary approach. It is Debtors’ position that the applicable commitment period is nothing more than another variable in the
The difference these two approaches can have upon a debtor’s plan is well illustrated in the instant case. Debtors argue that they need only commit 60 times the $140.00 they have calculated as their disposable income, or $8,400.00, to the repayment of their unsecured creditors. In contrast, the Chapter 13 Trustee argues that Debtors’ commitment to their plan must be in excess of $25,000.00 because they have the ability to pay that much over the duration of a five year plan. 18
The recent case of
In re Luton,
Although courts disagree on the proper interpretation of11 U.S.C. § 1325 as amended by BAPCPA, the majority view is that, as to treatment of unsecured creditors, the phrase “applicable commitment period” refers to a period of time and is not merely a multiplier used to determine the amount of distribution to unsecured creditors. Under this view, the debtor may not propose a plan provision to pay the plan off before the applicable commitment period has elapsed.
A variety of reasons support the majority view. See, e.g., In re Slusher,359 B.R. 290 , 301 (Bankr.D.Nev.2007) (stating that the applicable commitment period stands for the appropriate amount of time during which the debtor has agreed to make payments); In re Cushman,350 B.R. 207 , 212-13 (Bankr.D.S.C.2006) (concluding that Code never refers to applicable commitment period as a multiplier; the legislative history supports this view in that the caption of Section 318 of the Act is “Chapter 13 plan to have five year duration in certain cases”; plain language of statute compels this result); In re Girodes,350 B.R. 31 , 35(Bankr.M.D.N.C.2006) (finding the term “period” imposes temporal rather than monetary requirement); In re Davis, 348 B.R. 449 , 455-57 (Bankr.E.D.Mich.2006) (recognizing the word “period” means a chronological division; if Congress had intended a multiplier it could have clearly described it as such; if applicable commitment period is only used as a multiplier, 1325(b)(4)(B) would have no meaning; monetary approach represents a gross departure from pre-BAPCPA practice not justified by the language of the statute; terms “commitment” and “period” contemplate action over a period of time and do not on their face connote a formula to arrive at an amount; legislative history supports this view; this construction would permit debtors to cash out of Chapter 13 to the detriment of creditors); In re Gress,344 B.R. 919 , 923 (Bankr.W.D.Mo.2006) (ruling that applicable commitment period is a temporal rather than monetary requirement); In re Dew,344 B.R. at 661 (finding Section 1322 sets maximum periods of plan length;Section 1325(b)(4)(A) sets minimum plan length); In re Schanuth,342 B.R. 601 , 607-608 (Bankr.W.D.Mo.2006) (ruling the word “period” denotes a chronological division; 1325(b)(4)(B) provides the only method to shorten the applicable commitment period; if the phrase is a multiplier it renders 1325(b)(4)(B) awkward if not meaningless; if the term is used as a multiplier it would represent a gross departure from pre-BAPCPA practice not justified by the language of the statute); In re McGuire,342 B.R. 608 , 615 (Bankr.W.D.Mo.2006) (reasoning that 1325(b)(4)(B) provides the only way to shorten the applicable commitment period; this interpretation does not change pre-BAPCPA practice); In re Crittendon, No. 06-10322C-136,2006 WL 2547102 (Bankr.M.D.N.C. Sept.l, 2006) (stating that applicable commitment period refers to plan duration and is not a multiplier) (citations omitted).
Opposing the view expressed by the majority is the case of In re Fuger,347 B.R. 94 (Bankr.D.Utah 2006), as well as some well-respected authorities. See 5 Keith M. Lundin, Chapter 13 Bankruptcy §§ 493 & 500 (3d ed. 2000 & Supp. 2006); Henry E. Hildebrand, Unintended Consequences: BAPCPA and the New Disposable Income Test, Am. Bankr.Inst. J., March 2006, at 14, 54. See also In re Brady,361 B.R. 765 , 776 (Bankr.D.N.J.2007) (stating that the applicable commitment period is a requirement that only applies if the debtor has projected disposable income to pay to unsecured creditors under the plan); In re Lawson,361 B.R. 215 , 220 (Bankr.D.Utah2007) (finding that the applicable commitment period is fundamentally irrelevant in context of above-median debtors with negative monthly disposable income); In re Alexander,344 B.R. 742 , 750-51 (Bankr.E.D.N.C.2006) (recognizing that applicable commitment period is temporal rather than monetary, but ruling that a debtor without projected disposable income may propose a plan for a shorter period than the applicable commitment period); In re Kagenveama, No. 05-28079, 2006 Bankr.Lexis 259, at *9 (Bankr.D.Ariz. July 10, 2006) (stating that the applicable commitment period fixes the amount to be paid and the time over which the payment must be made; however, if no payments are' required to be paid to unsecureds because the debtor has no projected disposable income, the plan duration will be determined by other types of payments under the plan, such as those to secured creditors).
In re Luton,
I concede that
Luton
offers a number of reasonable arguments as to why “applicable commitment period” should be given a temporal meaning. However, I am persuaded that the term must ultimately be afforded the monetary meaning Debtors advocate for the simple reason that any other meaning would undermine what I have already determined to be the proper interpretation of “disposable income” within the same section. It is important to recognize in this instance that the Chapter 13 Trustee is in fact advocating a position that goes beyond the mere issue of plan length Again, Debtors agree that five years is the applicable commitment period for purposes of evaluating the Chapter 13 Trustee’s
However, such an approach is nothing more than a backdoor attempt to reintroduce a debtor’s current ability to pay into the
I recognize, of course, that another alternative is to accept the reasoning in
Lu-ton
and the cases cited therein and to instead reconsider my conclusion as to how disposable income is to be calculated. However, I am satisfied that the language selected by Congress for
For example,
Schanuth
and
Davis
both observe that “applicable commitment period” itself suggests a temporal interpretation because the word “period” denotes a division of time. However, these courts are reading too much into this word as well as other words and phrases contained
Schanuth
and
Davis
also note that Congress was perfectly capable of using the word “multiply” had it in fact intended the applicable commitment period to serve only as a multiplier in some formula. Indeed, they observe that Congress used “multiplied” in
$ ‡ ‡ ‡ ‡ ‡
(B) may be less than 3 or 5 years, whichever is applicable under subpara-graph (A), but only if the plan provides for payment in full of all allowed unsecured claims over a shorter period.
The argument is that a monetary interpretation of
These new reporting duties certainly serve a purpose in all of these other instances, for the reports generated will permit the Chapter 13 trustee and other eligible parties to make informed decisions as to whether post-confirmation modifications to the debtor’s plan are appropriate. Moreover, I do not agree with the insinuation that a debtor who is able to accelerate the payment of his plan is cheating the system. Granted, accelerated payments do reduce the window of opportunity for a Chapter 13 trustee, for example, to modify a debtor’s plan to reflect a favorable change in the debtor’s post-confirmation fortunes. On the other hand, accelerating payment also means that the debtor’s creditors will not only benefit from the interest differential realized from receiving payment earlier but also will avoid the risk of the debtor suffering an adverse change in circumstances over the extended interval.
The final reason that has been given to justify the temporal approach is deference to pre-BAPCPA practice. Davis described that practice as follows:
In 1984, Congress amended the Bankruptcy Code by the Bankruptcy Amendments and Federal Judgeship Act of 1984. That act added§ 1325(b) to the Code. This new section addressed the minimal length of the plan issue in part, by providing that if the trustee or an unsecured creditor objected to a plan, the plan could not be confirmed unless one of two circumstances occurred: either the plan distributed property having a value of not less than the full amount of the unsecured claims under§ 1325(b)(1)(A) , or the plan provided that all of the debtor’s projected disposable income to be received in the three years after the first payment was due would be applied to the plan. In short, if the debtor’s plan did not pay unsecured claims in full, then upon objection by an unsecured creditor or a trustee, the debtor would be required to continueto make plan payments in the future, out of the disposable income she projected to be received over the next three years. This became known as the “best efforts” test. Although not requiring a minimum length of a plan in all cases, it did require a debtor who was not paying unsecured claims in full to make her “best efforts” for three years, if the trustee or an unsecured creditor objected. If she did so, the debtor could still obtain a Chapter 13 discharge. The bargain was fair and it was easy to understand.
After that change was made in 1984, Bankruptcy Courts became accustomed to examining a debtor’s income and expenses to determine what expenses are reasonable and necessary for the maintenance and support of the debtor and her dependents in order to ascertain a debtor’s projected disposable income. The starting point, of course, was the debtor’s schedules I and J which set forth the debtor’s actual income and expenses on a monthly basis. This seemed to provide debtors, trustees, creditors and the courts with a workable framework for analysis to achieve a result consistent with the purposes of Chapter 13: to facilitate voluntary repayment of debt by individuals with regular income, provide them with a discharge of debts if they completed their plan, and deliver to creditors a recovery at least as great as they would receive in a Chapter 7 liquidation, all without a forced liquidation of the debtor’s assets.
In re Davis,
Davis then concluded -with this observation:
Whatever perceived value may exist in BAPCPA’s adoption of a rigid formula means test to determine eligibility for an individual to file Chapter 7, its partial importation into Chapter 13 fits about as well as a square peg in a round hole. It will undoubtedly effectuate changes, some unintended, in Chapter 13 practice and in the requirements for confirmation of a Chapter 13 plan. However, the Court is not persuaded that one of these changes is the elimination of a minimum length of plan payments for a debtor who does not pay unsecured creditors in full. In this Court’s view, a debtor’s applicable commitment period, as determined by§ 1325(b)(4) , does impose a minimum length of plan, rather than a calculation of a minimum amount, by application of§ 1325(b)(1)(B) to debtors whose Chapter 13 plans do not pay unsecured creditors in full and whose plans are the subject of an objection by a trustee or an unsecured creditor. For these reasons, the Trustee’s objection is sustained and confirmation of the Debt- or’s plan is denied.
Id. at 458 (emphasis added).
However, after looking more closely at
Therefore, I suggest that Congress placed “projected” before “disposable income” when it originally enacted
That Congress contemplated all along a simple, one-time comparison or “snapshot,” if you will, of what the debtor was proposing to pay creditors under his plan with an objective, mathematical standard is reinforced by the direction in both pre- and post-BAPCPA
I am also satisfied that Congress’ recent amendment of
In fairness, it was easy to assume prior to BAPCPA that all plans required a minimum three year length because
Ironically, it is BAPCPA itself that has brought to the forefront the spectre of accelerated plans. For example, changing the income component for the
However, the perceived injustice wrought by this change in definition does not give the courts a license to jettison what Congress has intended all along to be a formula for objectively testing plans proposed by Chapter 13 debtors. It is certainly possible that Congress did not foresee some of the outcomes, desirable or not, that have resulted from its decision to now use a historical average as the income component for the
II. Good Faith
The Chapter 13 Trustee’s alternative objection is that Debtors have not proposed their plan in good faith because they are able to pay their creditors significantly more than what they in fact are proposing.
BAPCPA’s amendment of
Several courts have rejected this alternative argument, holding instead that a debtor’s ability to pay continues to be relevant only as permitted by
This court agrees with the opinion rendered by the Bankruptcy Court for the Middle District of North Carolina that the debtor’s disposable income must be determined under§ 1325(B) and not as an element of good faith under§ 1325(a)(3) . In re Barr,341 B.R. 181 , 186 (Bankr.M.D.N.C.2006); see also Marianne B. Culhane & Michaela M. White, Catching Can-Pay Debtors: Is the Means Test the Only Way?, 13 Am. Bankr.Inst. L.Rev. 665, 681 (2005)( “[T]he very specific language ofsection 1325(b)(2) displaces any such use of chapter 13 ‘good faith,’ even assuming that phrase has any relevance to minimum payments after the 1984 amendments. Once again, Congress demonstrated a determination to replace judicial discretion under generalstandards with precise rnles-based calculations. One can understand why-bankruptcy judges would chafe at such restrictions, but that does not mean that Congress did not mean what it said.”)- So long as the debtor calculates the projected disposable income with specific reference to the new definition of disposable income and commits that projected disposable income to pay unsecured creditors for the applicable commitment period, she is in good faith compliance with the Code. § 1325(b)(1)(B) .
Alexander,
However,
Barr
and like-minded courts have offered little independent analysis to justify the safe harbor they have found in
The Sixth Circuit, though, has not joined in what
Barr
suggests is a unanimous pre-BAPCPA interpretation of the interplay between these two sections. In
Metro Employees Credit Union v. Okoreeh-Baah (In re Okoreeh-Baah),
However,
Okoreeh-Baah
rejected this interpretation as too rigid. It concluded instead that
The Sixth Circuit thereafter refined its interpretation of
Caldwell I
remanded the appeal to the district court with directions to give a more explicit explanation as to why it had vacated the confirmation order.
Caldwell II
was prompted by debtor’s appeal of the district court’s subsequent determination that the bankruptcy court should not have confirmed the debtor’s Chapter 13 plan because it had not been proposed in good faith as required by
The Sixth Circuit was no more concerned in
Caldwell I
or
Caldwell II
about
The party who seeks a discharge under Chapter 13 bears the burden of proving good faith. Girdaukas,92 B.R. at 376 . Best efforts under11 U.S.C. § 1325(b) , without more, are not enough. Id. at 377.
Caldwell II,
The Sixth Circuit also cited with approval the following passage from Okoreeh-Baah:
Good faith is an amorphous notion, largely defined by factual inquiry. In a good faith analysis, the infinite variety of factors facing any particular debtor must be weighed carefully. We cannot here promulgate any precise formulae or measurements to be deployed in a mechanical good faith equation. The bankruptcy court must ultimately determine whether the debtor’s plan, given his or her individual circumstances, satisfies the purposes undergirding Chapter 13: a sincerely-intended repayment of pre-petition debt consistent with the debt- or’s available resources. The decision should be left simply to the bankruptcy court’s common sense and judgment.
Caldwell I,
Finally,
Caldwell I
cited a new list of factors to consider for purposes of determining
However, even if one accepts, for the sake of argument, that
Zellner,
and not
Caldwell I,
is to be the prevailing pre-BAPCPA interpretation of the
(3) In considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter in a case in which the presumption in subparagraph (A)(i) of such paragraph does not arise or is rebutted, the court shall consider—
(A) whether the debtor filed the petition in bad faith; or
(B) the totality of the circumstances (including whether the debtor seeks to reject a personal services contract and the financial need for such rejection as sought by the debtor) of the debtor’s financial situation demonstrates abuse.
Obviously, consideration under
A number of courts have already considered the interplay between
The academic support for this position derives from an article entitled
“Catching Can-Pay Debtors: Is the Means Test the Only Way?"
28
In this article, Professors Culhane and White argue that the
To say that judges are free undersection 707(b)(3) to substitute their own can-pay standards for Congress’ means test would render the means test superfluous. Yet the canons of statutory construction require just the opposite, and direct courts to construe the provisions within a statute to be consistent with each other, and to give meaning to all parts. The general abuse section has a role, but ..., it is a limited one that does not replace the means test’s many detailed rules with alternate tests of ability to pay.Section 707(b)(3) ’s “bad faith” and “totality of the circumstances” standards must give way to the more specific means test algorithm. “[I]t is a commonplace of statutory construction that the specific governs the general...”
13 Am. Bankr.Inst. L.Rev. at 682 (footnotes omitted).
However, the courts have not been persuaded by this argument. For example,
In re Mestemaker,
The debtors argued that consideration of their Schedules I and J was irrelevant because their ability to pay had already been tested under
In light of the fact that Congress specifically addressed the situation where a debtor has greater expenses and/or lower income than what is accounted for under the means test calculation, it is unreasonable to interpret§ 707(b) as not providing for circumstances where a debtor has fewer expenses and/or higher income than what is set forth under the means test. The plain language of§ 707(b)(3) provides for a court to consider that very circumstance. Specifically, in determining whether granting relief would be an abuse of the provisions of Chapter 7 in a case in which the presumption “does not arise or is rebutted,” a court is required to consider whether “the totality of the circumstances ... of the debtor’s financial situation demonstrates abuse.”11 U.S.C. § 707(b)(3)(B) . The plain meaning of the phrase “debtor’s financial situation” must include a debtor’s actual income and expenses, since such information is the starting point for any analysis of an individual’s financial situation. There is no provision in§ 707(b) stating that the means test is the only method through which a court may determine whether there is abuse based on a debtor’s ability to pay. Rather, the plain language of§ 707(b)(3) , read in conjunction with§ 707(b)(1) and (2), is clear and compels a conclusion that a court must consider a debtor’s actual debt-paying ability in ruling on a motion to dismiss based on abuse where the presumption does not arise or is rebutted.
Id. at 854-855 (emphasis added).
The court then granted the motion.
See also, In re Henebury,
In re Nockerts,
Under the pre-BAPCPA totality of the circumstances test, proof of more than just an ability to fund a chapter 13 plan was needed to demonstrate “substantial abuse.” Green, 934 F.2d at 572 . Stated another way, while ability to pay is a factor in the totality of circumstances test, and may even be the primary factor to be considered, if it is the only indicia of abuse, the case should not be dismissed under that test. Given the detailed nature of the means test in§ 707(b)(2) , this Court holds that similar to the old totality of the circumstances test, more than an ability to pay (as shown on the debtor’s Schedule I and J) must be shown to demonstrate abuse under§ 707(b)(3)(B) .
Nockerts at 507. 30
To summarize, the developing body of case law recognizes a relationship between
Provisions within Chapter 13 itself also lend support to the inclusion of ability to pay as a good faith factor under
What if, though, the debtor later changes his mind? For example, may a debtor a year or two after confirmation reduce his planned distribution to unsecured creditors in order to purchase on credit a bass boat? Section 1329(a)(1) certainly would allow for such a plan modification, subject, of course, to approval by the court under Section 1329(b). However, Section 1329(b) includes no equivalent to
One would certainly assume that
On the other hand, treating the Section 1825(b) objection at confirmation as simply an objective “snapshot” to complement the subjective good faith standard of
[his] plan, given his or her individual circumstances, satisfies the purposes un-dergirding Chapter 13: a sincerely-intended repayment of pre-petition debt consistent with the debtor’s available resources.
Okoreehr-Baah,
Moreover, while the debtor may no longer be subject to the objective
BAPCPA’s addition of a second good faith requirement to the
[T]he court shall confirm a plan if—
* *fc * * * *
(3) the plan has been proposed in good faith ..., [and]
* * * * * #
(7) the action of the debtor in filing the petition was in good faith;
Caldwell I,
in affirming ability to pay as a central component of
EAC further argues that the plan was not proposed in good faith as required by11 U.S.C. § 1325(a)(3) (1982). This court has not given a comprehensive definition to “good faith” as used in Chapter 13. See In re Terry,630 F.2d 634 (8th Cir.1980). In Estus, supra, however, the court listed a number of factors it considered relevant to the good faith analysis. The Code has since been amended to include11 U.S.C. § 1325(b) . This section’s “ability to pay” criteria subsumes most of the Es-tus factors and allows the court to confirm a plan in which the debtor uses all of his disposable income for three years to make payments to his creditors. Thus, our inquiry into whether the plan “constitutes an abuse of the provisions, purpose or spirit of Chapter 13,” Estus,695 F.2d at 316 , has a more narrow focus. The bankruptcy court must look at factors such as whether the debtor has stated his debts and expenses accurately; whether he has made any fraudulent misrepresentation to mislead the bankruptcy court; or whether he has unfairly manipulated the Bankruptcy Code.
Zellner,
Zellner’s
rationale, though, for eliminating the
Estus
ability to pay factors from
This, of course, is not to say that the debtor’s ability to pay is the only factor the court is to consider for purposes of
As Judge Kaplan observed in
LaSota,
good faith is a tool used by courts to hew “rough justice.”
LaSota,
I find nothing within either the Bankruptcy Code as now enacted or in the controlling case law interpreting either the current or previous expressions of the bankruptcy laws that rejects this belief. Therefore, I conclude that proposing a plan in good faith today under
Finally, consistent with
Okoreeh-Baah,
I reaffirm that
Granted, terms like “fair allocation” and the like may raise concerns of pre-BAPC-PA recidivism. However, like
There remains, though, the lingering question of what plan length should be used in applying the
CONCLUSION
BAPCPA has created a new world for the courts and practitioners alike. Substantial changes have been made as to how both Chapter 7 and Chapter 13 consumer bankruptcies are to be administered. These changes, though, have not been made in a vacuum. Rather, they have been incorporated into a legislative framework that has been shaped and refined by both judicial interpretation and local custom for more than 25 years. The number of decisions and articles written on
With this in mind, then, I make the following determinations with regards to the
Second, I conclude that
Finally, I conclude that a debtor’s ability to fund a Chapter 13 plan based upon his current earnings and expenses remains an important consideration for purposes of determining whether the debtor’s plan is proposed in good faith under
As for the specifics of Debtors’ plan in this instance, Debtors propose, over the Chapter 13 Trustee’s
Therefore, Debtors’ current plan cannot be confirmed for this reason alone. However, I will not deny Debtors another opportunity to prepare a plan that will adequately address any
It is distinctly possible that the amended plan could be confirmed at the adjourned hearing, especially if the Chapter 13 Trustee has replaced her objections with a recommendation for confirmation. Indeed, the Chapter 13 Trustee and Debtors may negotiate a resolution whereby the dividend to be paid unsecured creditors falls short of what is required by
It is also possible that no evidentiary hearing will be necessary because Debtors simply cannot now propose a plan that can be confirmed over the Chapter 13 Trustee’s continuing objections. If so, then it is likely that whatever plan Debtors have on file at the time of the adjournment will be rejected as unconfirmable and that Debtors’ Chapter 13 proceeding will be dismissed without further hearing.
The court will prepare an order consistent with this opinion.
Notes
. The Bankruptcy Code is contained in
. The Chapter 13 Trustee also objected to the language Debtors have in their plan concerning the effect of future administrative expenses and other priority claims upon the amount to be paid to unsecured, non-priority creditors. I sustained that objection in a separate bench opinion given on February 16, 2007. The objectionable language, though, can be corrected through a simple plan amendment.
. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. No. 109-8, § 1501(B)(1), 119 Stat. 23.
. Debtors’ proposed distribution to unsecured, non-priority creditors is an approximation because it will be paid only after all administrative expenses and other priority claims are paid in full. The $8,430.00 estimate is based upon Debtors' current calculation of the administrative expenses and other priority claims that will be allowed. However, the actual distribution may be less if additional administrative expenses such as Debtors’ attorney fees are later incurred.
. A debtor must file a statement concerning his financial affairs together with accompanying schedules at the outset of his bankruptcy case.
. The “applicable commitment period” is actually three or five years only if the distribution to unsecured creditors under the plan is less than 100%. The applicable commitment period may be for a shorter period of time if the plan provides for payment in full.
. Interim
.
. At this point in time, there are over 30 published opinions concerning the interpretation of
.
. Debtors claimed these payments as deductions in preparing their Form B22C because
"[t]he total of all amounts scheduled as contractually due to secured creditors in each of the 60 months following the date of the petition.”
Although Debtors do not intend to continue making payments on either the timeshare or the second mortgage, they nonetheless contend that they remain technically obligated with respect to both until their discharge is entered at the end of their plan. Therefore, Debtors reason that all payments owing on these two obligations during the 60-month period are still "contractually due.”
.
But see, In re Oliver,
. "Stripping down liens” is bankruptcy parlance for the practice of reducing the secured portion of a creditor’s claim against the debt- or by valuing the collateral securing the claim and then proposing to repay as secured only the amount equal to that value. The excess amount is in turn treated as an unsecured, non-priority claim and, as a consequence, is often repaid at only a fraction of its allowed amount. Although BAPCPA has limited the opportunities when a debtor may take advantage of this tool, it apparently was an option for the debtors in McPherson with respect to Best Buy's secured claim.
. Webster's Ninth New Collegiate Dictionary (1989).
.
. I do recognize that Interim
. (4) For purposes of this subsection [
(A) subject to subparagraph (B), shall be—
(i) 3 years; or (ii) not less than 5 years, if the current monthly income of the debtor and the debtor’s spouse combined, when multiplied by 12, is not less than—
(I) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner;
(II) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals; or
(B) may be less than 3 or 5 years, whichever is applicable under subparagraph (A), but only if the plan provides for payment in full of all allowed unsecured claims over a shorter period.
. Of course, the $8,400,00 Debtors have calculated is premised upon the allowance of the Florida timeshare and second mortgage payments ($839.00) as
. Of course, this interpretation of
. (b)(1) If the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan—
(A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or
(B) the plan provides that all of the debt- or’s projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan.
II U.S.C.
.
See also, In re Alexander,
To veterans of Chapter 13 practice, it runs afoul of basic principles to suggest that a debtor with no disposable income can nonetheless propose a confirmable plan. Yet BAPCPA permits precisely that. Because the pre-BAPCPA definition of "disposable income" calculated a real number rather than a statutory artifact, it largely mirrored
.
But see, In re Edmunds,
. (a) the amount of income of the debtor and the debtor’s spouse from all sources;
(b) the regular and recurring living expenses for the debtor and his dependants;
(c) the amount of the attorney's fees to be awarded in the case and paid by the debtor;
(d) the probable or expected duration of the Chapter 13 plan;
(e) the motivations of the debtor and his sincerity in seeking relief under the provisions of Chapter 13;
(f) the ability of the debtor to earn and the likelihood of future increase or diminution of earnings;
(g) special situations such as inordinate medical expense, or unusual care required for any member of the debtor's family;
(h) the frequency with which the debtor has sought relief under any section or title of the Bankruptcy Reform Act or its predecessor's statutes;
(i) the circumstances under which the debt- or has contracted his debts and his demonstrated bona fides, or lack of same, in dealing with his creditors;
(j) whether the amount or percentage of payment offered by the particular debtor would operate or be a mockery of honest, hard-working, well-intended debtors who pay a higher percentage of their claims consistent with the purpose and spirit of Chapter 13;
(k) the burden which the administration of the plan would place on the trustee; and
(l) the salutary rehabilitative provisions of the Bankruptcy Reform Act of 1978 which are to be construed liberally in favor of the debtor.
.
Caldwell II
indicates that the bankruptcy court decided the issue of good faith in the context of the debtor's preceding effort to reopen his prior Chapter 7 case and then convert that case to a Chapter 13 proceeding. However, it appears that the panel in the
Caldwell II
was mistaken. In any event, this discrepancy between the two
Caldwells
is not material to either panel’s discussion regarding
. (1) the amount of the proposed payments and the amount of the debtor’s surplus;
(2) the debtor’s employment history, ability to earn and likelihood of future increases in income;
(3) the probable or expected duration of the plan;
(4) the accuracy of the plan's statements of the debts, expenses and percentage repay
(5) the extent of preferential treatment between classes of creditors;
(6) the extent to which secured claims are modified;
(7) the type of debt sought to be discharged and whether any such debt is nondischargeable in Chapter 7;
(8) the existence of special circumstances such as inordinate medical expenses;
(9) the frequency with which the debtor has sought relief under the Bankruptcy Reform Act;
(10) the motivation and sincerity of the debtor in seeking Chapter 13 relief; and
(11) the burden which the plan’s administration would place upon the trustee.
Caldwell I,
Caldwell I then added four more factors for good measure.
. Other circuits have also continued to view good faith under
. Dismissal under
. Marianne Culhane and Michaela White, 13 Am. Bankr.Inst. L.Rev. 665 (2005).
.
Mestemaker
and
Henebury
both involved above-median-income debtors. There is a second line of decisions involving so-called ‘'below-median-income” debtors where the courts have likewise held that the debtor’s ability to pay may be considered in conjunction with the court’s overall assessment of the debtor’s financial condition under
. I, like the courts in
Henebury
and
Pfeifer,
respectfully disagree with
Nockerts
' determination that a debtor’s ability to pay cannot alone warrant dismissal of a Chapter 7 proceeding unless the
Indeed, it would appear that non-financial factors could also still be relevant, for
Consequently, I do not interpret the addition of
However, I find no justification for
Noc-kerts
' further conclusion that something more than mere ability to pay must always be shown to warrant
I also disagree with Nockerts' conclusion that a separate consideration of the debtor’s ability to pay under the subjective standard of
. Section 1329(b) states that
. The Chapter 13 trustees in this district have continued the pre-BAPCPA practice of requiring debtors to include within their plans an agreement to commit to the performance of their plans all of their projected disposable income over whatever is the required period.
. It is well to remember that while consideration of a debtor's plan under
The custom in this district is for the Chapter 13 trustee to appear at the confirmation hearing and either recommend the proposed plan for confirmation or oppose its confirmation. If the Chapter 13 trustee recommends a Chapter 13 plan for confirmation, the Chapter 13 trustee is affirmatively representing that the plan, in her opinion, conforms with the confirmation standards of
However, the Chapter 13 trustee’s recommendation is only evidentiary. It is the debt- or's duty to file a Chapter 13 plan,
. The question does arise as to whether income that is specifically excluded from the definition of “current monthly income” under
A more difficult question arises with respect to payments by the debtor on account of a so-called 401(k) loan, for