In re Blake, 16 B 22368

565 B.R. 871

IN RE: Denise L. BLAKE, Latoya Dillon, and LaJunise Jonie Mcneal, Debtors.

No. 16 B 22368

No. 16 B 25607

No. 16 B 29604

United States Bankruptcy Court, N.D. Illinois, Eastern Div. .

Signed March 16, 2017

Jamie F. Reisman, Legal Assistance Foundation, Chicago, IL, for Debtor 1.

MEMORANDUM OPINION

Deborah L. Thorne, United States Bankruptcy Judge

These matters come before the court in three chapter 13 cases in which the chapter 13 trustee, Marilyn O. Marshall (the "Trustee") has objected to confirmation of the plans because the debtors have not provided for the turnover of their entire tax refunds, all of which are largely comprised of earned income tax credits ("EIC") or child tax credits ("CTC"). Denise L. Blake, Latoya Dillon, and LaJunise Jonie Mcneal (collectively, the "Debtors") request that each be allowed to retain a portion of their tax refund to cover basic living expenses.¹ The Trustee's objections will be overruled. Each Debtor may offset their annual refund payment with expenses that they will incur throughout the year so long as they are reasonably required to support themselves and their dependents.

JURISDICTION AND VENUE

The court has subject matter jurisdiction over these cases pursuant to 28 U.S.C. § 1334(a) and the Northern District of Illinois' Internal Operating Procedure 15(a). These matters are core proceedings under 28 U.S.C. § 157(b)(2)(A), (E), & (L). Venue in this district is proper pursuant to 28 U.S.C. §§ 1408 –09(a).

BACKGROUND

Commonly in this district, debtors propose plans which do not consider all the commonly incurred expenses during the applicable commitment period. The budgets proposed by the Debtors are extremely tight. Once debtors receive their tax refund—be it based on tax credits or over-withholding—debtors often seek to modify their plans to use the tax refund for necessary expenses. The court notes that in some instances the debtors have incurred extraordinary expenses, such as costly car or home repairs, but frequently the expenses are ordinary and necessary. This approach causes additional burden on the Trustee and debtors' counsel through the need to consider many requests to modify plans. The additional burden placed on the Trustee, debtors' counsel and the court could otherwise be avoided if the debtors calculated projected disposable income and ultimately projected expenses correctly.²

A. Latoya Dillon

Latoya Dillon ("Ms. Dillon") is a single mother with two dependent children. She filed a chapter 13 bankruptcy petition on August 9, 2016 (Dillon Dkt. No. 1). Ms. Dillon's Form 122C provides that her Current Monthly Income ("CMI") totals $2,759.25 and is below the median income level in Illinois (Dillon Dkt. No. 4).³ Her modified plan includes a monthly income of $2,580.43 and total expenses of $2,030.00—providing a monthly plan payment of $550.43 (Dillon Dkt. No. 18, p. 1).

Ms. Dillon received a tax refund for 2015 in the amount of $8,081, of which $4,903.00 was attributable to EIC and $2,000.00 to CTC. The remaining $1,178.00 was attributable to over-withholding. In calculating her proposed plan payments, Ms. Dillon utilized her income from Schedule I of her bankruptcy petition (Dillon Dkt. No. 1, p. 36). The Trustee is objecting to confirmation of Ms. Dillon's plan because she has not provided for a turnover each year of the portion of her tax refund attributable to EIC and CTC. Ms. Dillon believes that she should retain her EIC and CTC because Illinois law considers the credits exempt (Dillon Dkt. No. 30, p. 2).

B. LaJunise Jonie Mcneal

LaJunise Jonie Mcneal ("Ms. Mcneal") is a single mother with one dependent child. She filed a chapter 13 petition on September 16, 2016 (Mcneal Dkt. No. 1). Ms. Mcneal's Form 122C provides that her CMI totals $2,660.96 and falls below the median income level in Illinois⁴ (Mcneal Dkt. No. 6, p. 2.). Ms. Mcneal's proposed chapter 13 plan includes a monthly income of $2,101.27 and expenses of $1,897.00 (Mcneal Dkt. No. 7, p. 1). Her proposed monthly plan payments come to a total of $204.27.

Ms. Mcneal received a tax refund for 2015 in the amount of $5,622.00 of which $3,359.00 was attributable to EIC, $1,000.00 was attributable to CTC and $600.00 was attributable to American Opportunity Credit ("AOC"). She also received $663.00 which was attributable to over-withholding. The Trustee is objecting to confirmation of Ms. Mcneal's plan, because it did not include a provision providing for the turnover of her tax refund during the pendency of her chapter 13 case. Ms. Mcneal does not believe that she is required to turn over the entire "tax refund," because the tax credits are not considered income.

C. Denise L. Blake

Denise L. Blake ("Ms. Blake") is a single mother with three dependent children. She filed a chapter 13 bankruptcy petition on July 12, 2016 (Blake Dkt. No. 1). According to her Form 122C, her CMI totals $2,512.00, (Blake Dkt. No. 12, p. 2), which falls well below the median income in Illinois for a household of four, Id. at 3.⁵ Ms. Blake's proposed chapter 13 plan lists a "total household monthly income" of $1,542.50 based on her Schedules I and J (Blake Dkt. No. 29, p. 1). In her amended Schedules I and J, she lists a gross monthly income of $1,768.00 (Blake Dkt. No. 48, p. 1).

Unlike the other debtors described in this opinion, Ms. Blake included in her income a monthly pro-rata calculation of her EIC of $168.50. Id. She also deducted $394.00 from her gross income reflecting payroll deductions. Id. With the deduction of $394.00 and the inclusion of the EIC, Ms. Blake's net income totaled $1,542.50. Id. She provides that monthly expenses total $1,467.75, which leaves her with $74.75 available for monthly plan payments (Blake Dkt. No. 29, p. 1) (using her calculated monthly income from her amended schedules I and J (Blake Dkt. Nos. 28 & 48, both p. 2)). She asks that the court confirm her plan and allow her to retain her EIC, a portion of her tax refund because the EIC is exempt under Illinois law (Blake Dkt. No. 56, p. 4). She also argues that an EIC cannot be included as income under a CMI calculation because it is not defined as income. Id. at 5.

The Trustee objected to Ms. Blake's retention of her EIC on an annual basis stating the EIC is included in the definition of "Disposable Income" under section 522 of the Bankruptcy Code. The Trustee also takes the position that even, as Ms. Blake has pointed out, EIC is exempt under Illinois law, and this does not exempt it from funds which should be included in "Disposable Income."

DISCUSSION

Aside from a plan that pays creditors in full, a court cannot confirm a plan over a trustee's objection unless "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)(B).

In each of these cases, the Trustee informed the Debtors that she would not recommend their proposed plans if they did not turn over their entire tax refund, including those portions attributable to EIC, CTC, or AOC. The Trustee maintains that any tax refund should be included as disposable income, no matter the source, and turned over to the Trustee shortly after receipt. As discussed below, the court finds that the Debtors can retain a portion of their tax refund, whether it is derived from tax credits or from over-withholding, if they correctly calculate their disposable income and offset that by prorated expenses incurred over a 12–month period.⁶

A. Disposable Income

The Code defines disposable income as

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....

11 U.S.C. § 1325(b)(2). CMI, in turn, is defined in section 101(10A) and includes all income and benefits received by the debtor, on average, during the six months prior to filing. 11 U.S.C. § 101(10A). The Code does not provide a definition for income.

What encompasses CMI under section 101(10A) is broad sweeping and only allows for several exceptions. Id. (social security benefits and payments to victims of war crimes, crimes against humanity, or terrorism in the CMI calculation). When determining CMI, it is important to note that Schedule I does not reflect a debtor's CMI. In re Forbish , 414 B.R. 400, 402 (Bankr. N.D. Ill. 2009) (Goldgar, J.) (explaining that the interaction between Schedules I and J still serves an important purpose to help the court determine the feasibility of a proposed plan). For one, Schedule I includes social security benefits as gross income, while the definition of CMI expressly excludes it. In re Morales , 563 B.R. 867, 869–70 (Bankr. N.D. Ill. 2017) (Doyle, J.). Secondly, it does not reflect an average of the debtor's gross income during the preceding six months before their bankruptcy petition date. Id.

After calculating CMI, a debtor deducts all reasonable expenses to reach their disposable income. 11 U.S.C. § 1325(b) ; see Morales , 563 B.R. at 872–73 (explaining that the difference between Schedules I and J does not reflect a debtor's disposable income). Unlike an above-median debtor, if the debtor's CMI is below the state median, "no formal limits are prescribed; reasonably necessary expenses are evaluated on a case-by-case basis." Morales , 563 B.R. at 871 (citing In re Brooks , 784 F.3d 380, 384 n.3 (7th Cir. 2015) ).

The Code does not require a debtor to commit their actual disposable income to the plan, but to commit their proje...