In re Barnes

528 B.R. 501

In re: Mark C. Barnes, Debtor

Case Number 14–11079

United States Bankruptcy Court, S.D. Georgia, Augusta Division.

Signed March 17, 2015

Zane P. Leiden, Leiden & Leiden, Augusta, GA, for Debtor.

ORDER

SUSAN D. BARRETT, CHIEF UNITED STATES BANKRUPTCY JUDGE

Before the Court is an Objection to Confirmation filed by the Chapter 13 Trustee (“Trustee”) arguing that the chapter 13 plan submitted by Mark C. Barnes (“Debtor”) does not satisfy 11 U.S.C. § 1325(b)(1) because it fails to propose to pay interest on Debtor's allowed general unsecured claims and Debtor is not committing all of his disposable income into the plan. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(L) and the Court has jurisdiction under 28 U.S.C. § 1334. For the following reasons, the Trustee's objection to confirmation is sustained.

FINDINGS OF FACT

Debtor filed his chapter 13 bankruptcy petition on June 18, 2014. Debtor's chapter 13 plan proposes to pay $1,125.00 for 60 months and “a 100% dividend or a pro-rata share of $7,500.00, whichever is greater.” Dckt. No. 4. According to Debtor's means test calculation, Debtor is an above median debtor with the applicable commitment period of 5 years and a monthly disposable income of $930.77. Dckt. No. 2. However, according to Debtor's schedule J, his current monthly net income is $2,102.87, well above his proposed monthly plan payment. Dckt. No. 1. Schedule I also includes a pro rated tax refund in the amount of $935.33 per month.

This matter involves two issues. The first issue is whether Debtor is proposing to contribute all of his projected disposable income into the plan. The second issue is whether Debtor must pay interest to his unsecured creditors when his plan proposes to pay a 100% dividend to his unsecured creditors over five years, but he fails to contribute all of his projected disposable income into the plan.

CONCLUSIONS OF LAW

Section 1325(b)(1) provides:

(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 debtor'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.

11 U.S.C. § 1325(b)(1). The section is in the disjunctive requiring a debtor to comply with either § 1325(b)(1)(A) or § 1325(b)(1)(B) to overcome an objection by the Trustee or an unsecured creditor. Hamilton v. Lanning, 560 U.S. 505, 508–09, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010) (“If an unsecured creditor or the bankruptcy trustee objects to confirmation, § 1325(b)(1) requires the debtor either to pay unsecured creditors in full or to pay all ‘projected disposable income’ to be received by the debtor over the duration of the plan.”)(emphasis added); In re Sampson–Pack, 2014 WL 1320371, at *2 (Bankr.D. Md. March 31, 2014) (same); In re Bailey, 2013 WL 6145819, at *1 (Bankr.E.D.Ky. Nov. 21, 2013) (same) (quoting In re Jones, 374 B.R. 469, 469 (Bankr.D.N.H.2007) ); In re Winn, 469 B.R. 628, 630 (Bankr.W.D.N.C.2012) (“Only one of the prongs [of § 1325(b)(1) ] need be met, not both.”).

The Trustee contends Debtor's plan does not satisfy 11 U.S.C. § 1325(b)(1)(A) because the language “as of the effective date of the plan-the value of the property to be distributed” requires a present value determination which requires Debtor to pay interest on allowed unsecured claims. See In re Hight–Goodspeed, 486 B.R. 462, 464 (Bankr.N.D.Ind.2012). The Trustee also argues Debtor's plan fails to satisfy subsection (B) because the Debtor is not proposing to pay all of his projected disposable income into his plan for the applicable commitment period.¹

Conversely, Debtor contends he has satisfied both prongs of § 1325(b)(1). First, he claims he has satisfied § 1325(b)(1)(B) because his projected tax refund should not be included in the Trustee's calculation of his projected disposable income. With the tax refund properly excluded, Debtor argues he is devoting all of his disposable income to the plan and therefore his proposal satisfies § 1325(b)(1)(B). Second, Debtor argues § 1325 (b)(1)(A) does not require him to pay interest therefore his plan is confirmable under § 1325(b)(1)(A).

11 U.S.C. § 1325 (b)(1)(B).

The Bankruptcy Code defines the term “disposable income” to mean:

current monthly income received by the debtor (other than child support payments, foster care payments, or disability payments for a dependent child made in accordance with applicable nonbankruptcy law to the extent reasonably necessary to be expended for such child) less amounts reasonably necessary to be expended—

(A)(i) for the maintenance or support of the debtor or a dependent of the debtor, or for a domestic support obligation, that first becomes payable after the date the petition is filed; and(ii) for charitable contributions (that meet the definition of “charitable contribution” under section 548(d)(3)) to a qualified religious or charitable entity or organization (as defined in section 548(d)(4)) in an amount not to exceed 15 percent of gross income of the debtor for the year in which the contributions are made; and

(B) if the debtor is engaged in business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business.

11 U.S.C. § 1325(b)(2). Current monthly income:

(A) means the average monthly income from all sources that the debtor receives ... without regard to whether such income is taxable income ... and

.

.

.

(B) includes any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor's spouse), on a regular basis for the household expenses of the debtor or the debtor's dependents (and in a joint case the debtor's spouse if not otherwise a dependent), but excludes benefits received under the Social Security Act, payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes, and payments to victims of international terrorism (as defined in section 2331 of title 18) or domestic terrorism (as defined in section 2331 of title 18) on account of their status as victims of such terrorism.

11 U.S.C. § 101(10A) (emphasis added). The Bankruptcy Code expressly excludes specific items from the definition of current monthly income, and tax refunds are not among the excluded items. In addition, tax refunds are a product of a debtor's wages and are generally property of the bankruptcy estate included in a debtor's projected disposable income. See In re Cook, 2013 WL 5574978 (Bankr.N.D.Ala. Oct. 10, 2013) (full tax refund is disposable income that must be turned over to the trustee); In re Murchek, 479 B.R. 521 (Bankr.N.D.Iowa 2012) (future tax refunds are disposable income); In re Myles, 2006 WL 6591834 (Bankr.N.D.Ga. March 9, 2006) (same); In re Abner, 234 B.R. 825 (Bankr.M.D.Ala.1999) (same).

This refund money would unquestionably be included in Debtor's projected disposable income if Debtor did not voluntarily elect to overwithhold. See generally, In re Hale, 2007 WL 2990760, at *2 (Bankr.N.D.Ohio Oct. 10, 2007) (“income tax withholding is not the same as actual tax liability, and can be manipulated by taxpayers to produce excess withholding and a refund”); In re Rhein, 73 B.R. 285, 288 (Bankr.E.D.Mich.1987) (sustaining an objection to confirmation where debtor had not committed her tax refund into the plan but rather had created a “virtual savings account through the vehicle of overwithholding of income from her wages”); see also In re Lawson, 361 B.R. 215, 223, n. 24 (Bankr.D.Utah 2007) (“The Internal Revenue Service would not allow taxpayers to effectively retain a savings account through overwithholding while accepting less than full payment on tax liabilities owed, nor will this Court permit debtors to manipulate their tax withholdings to understate their income.”). Given the nature of Debtor's tax refund, I find the refund is included within Debtor's projected disposable income and therefore Debtor's plan fails to satisfy § 1325(b)(1)(B). See Hamilton v. Lannin g , 560 U.S. at 524, 130 S.Ct. 2464 (“the court may account for changes in the debtor's income or expenses that are known or virtually certain at the time of confirmation.”).

11 U.S.C. § 1325 (b)(1)(A).

Next, Debtor argues § 1325(b)(1)(A) does not require interest to be paid in 100% dividend cases where debtors propose to devote less than all of their projected disposable income into the plan. By paying less than all of his projected disposable income into the plan each month, Debtor proposes to extend the length of his chapter 13 plan to the fullest term allowed by the Bankruptcy Code, 5 years.

There is a split of authority among bankruptcy courts and treatises as to whether interest is required in these circumstances. Compare In re Hight–Goodspeed, 486 B.R. at 465 (requiring the payment of interest); In re McKenzie, 516 B.R. 661 (Bankr.M.D.Ga.2014) (interest required); In re Sampson–Pack, 2014 WL 1320371, at *3–4 (Bankr.D.Md. March 31, 2014) (interest required); In re Rhein, 73 B.R. 285, 287 (Bankr.E.D.Mich.1987) (interest required); 7 Norton Bankr.L. & Prac. § 151:19 (3d ed.2015) (interest required); Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, § 168.1, at ¶ 6, (4th ed.), Sec. Rev. June 7, 2004, www.Ch13online.com (interest required); with In re Richall, 470 B.R. 245, 249 (Bankr.D.N.H.2012) (interest is not required); In re Stewart–Harrel, 443 B.R. 219, 222–24 (Bankr.N.D.Ga.2011) (interest is not required); In re Ross, 375 B.R. 437, 444 (Bankr.N.D.Ill.2007) (same); In re Eaton , 130 B.R. 74, 77–78 (Bankr.S.D.Iowa 1991) (same); 8 Alan N. Resnick and Henry J. Sommer Collier on Bankruptcy, ¶ (13...