In re Brooks

784 F.3d 380

In re Stephanie A. BROOKS, Debtor–Appellee.

Appeal of Michael D. Clark, Chapter 13, Trustee–Appellant.

No. 14–2856.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 21, 2015.

Decided April 23, 2015.

Spencer Lee Daniels, Peoria, IL, Debtor–Appellee.

Robert M. Ropp, Office of the United States Trustee, Peoria, IL, for Trustee–Appellant.

Before BAUER, FLAUM, and WILLIAMS, Circuit Judges.

Opinion

FLAUM, Circuit Judge.

Chapter 13 of the Bankruptcy Code permits certain debtors to emerge from bankruptcy by dedicating their projected disposable income to the repayment of creditors for a specified period of time. 11 U.S.C. § 1322. Section 1325(b)(2) of the Code allows a Chapter 13 debtor to exclude from the calculation of her disposable income—and thereby shield from her creditors—“child support payments ... reasonably necessary to be expended for such child.” 11 U.S.C. § 1325(b)(2). In this appeal, we consider whether this language permits the categorical exclusion from disposable income of the full amount of child support payments received by an above-median debtor.

The bankruptcy and district courts below concluded that any award of child support may be excluded from disposable income except in the rare case in which an award appears so excessive that its exclusion would entail abuse of the bankruptcy system. The bankruptcy trustee, by contrast, contends that a categorical exclusion of child support payments too often results in a duplicate deduction for the debtor because many of the expenses that child support typically covers (e.g., food and housing) are factored into the standardized living expense deductions permitted under other subsections of § 1325. Instead, the trustee would limit any exclusion to specifically documented expenses that are deemed reasonably necessary for the support of minor children and that are not otherwise deductible under § 1325. We agree with the reasoning of the courts below, and we therefore affirm.

I. Background

The Bankruptcy Code provides for distinct treatment of an “above-median” debtor, an individual whose monthly income exceeds the median income for a household of the same size as the debtor's in the debtor's state of residence. See 11 U.S.C. § 1325(b)(3). Above-median debtors must file for bankruptcy under Chapter 13 of the Code, as opposed to the more familiar Chapter 7, the most common form of bankruptcy in the United States. See 11 U.S.C. § 707(b)(1)-(2). The practical distinction between proceedings under the two chapters is that individuals who file for bankruptcy relief under Chapter 7 repay creditors by liquidating their nonexempt assets while those who file under Chapter 13 dedicate a portion of their future income toward the repayment of creditors, usually for a period of three to five years. Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 65 & n. 1, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011). This repayment is governed by the terms of a court-approved Chapter 13 plan.

Stephanie Brooks, an Illinois single mother with two minor children, is one such above-median debtor. Brooks's monthly income totals $6614.50, including $400.00 in child support, which she receives from her ex-husband.¹ On October 4, 2012, Brooks filed for Chapter 13 bankruptcy. Appellant Michael D. Clark was appointed trustee. Chapter 13 employs a statutory formula to calculate the appropriate monthly repayment amount for above-median debtors. This formula yields a debtor's total monthly disposable income, all of which must be devoted to reimbursing creditors. See 11 U.S.C. § 1325(b)(1)(B). To compute her disposable income, Brooks completed Official Form 22C, “Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income,” available at http:// www.uscourts.gov/uscourts/RulesAndPolicies/rules/BK_Forms_Current/B_22C.pdf (last visited Apr. 23, 2015).

Brooks completed Form 22C as follows: In Parts I through III, she calculated her “Current Monthly Income” (“CMI”), including both her monthly wages of $6214.50 (Line 2) and her $400.00 monthly child support payments (Line 7). In Part IV of the form, “Calculation of Deductions from Income,” she claimed applicable standardized deductions for living expenses for a household of three people. These adjustments included, among others, deductions for food, apparel and services, housekeeping supplies, and personal care (Line 24A); health care (Line 24B); and housing and utilities (Line 25). To determine her disposable income, see Form 22C, Part V, “Determination of Disposable Income Under § 1325(b)(2),” Brooks used her total CMI ($6614.50) as a baseline. From that CMI, she deducted her $400.00 monthly child support payments in response to an instruction directing her to “[e]nter the monthly average of any child support payments, foster care payments, or disability payments for a dependent child, reported in Part I, that you received in accordance with applicable nonbankruptcy law, to the extent reasonably necessary to be expended for such child. ” Line 54 (emphases added). She further subtracted the “[t]otal of all [standard] deductions,” Line 56, that she had taken under Part IV. After factoring in these deductions, Brooks's monthly disposable income was reduced to $111.46 (Line 59). From this total, Brooks deducted another $141.00 for day care as an “additional expense claim,” Line 60, which left her with negative disposable income.

Based on these calculations, Brooks submitted an amended Chapter 13 plan, in which she proposed to pay the trustee $100.00 per month for 60 months. This proposal would have resulted in a 0% distribution to Brooks's unsecured creditors as substantially all payments would have gone to other arrearages, as well as trustee's and attorney's fees. The trustee objected to the proposed plan, arguing that Brooks had miscalculated her disposable income: he protested that Brooks improperly excluded her $400.00 monthly child support payments from the computation. According to the trustee, by excluding the full amount of her child support payments, Brooks essentially availed herself of a double deduction because most, if not all, of the expenses that child support typically covers (e.g., food and housing) are factored into the standardized deductions permitted elsewhere on Form 22C (e.g., at Lines 24 and 25).

Following an evidentiary hearing, the bankruptcy court concluded that Brooks's monthly child support payments were fully excludable from the calculation of her disposable income. It reached this determination largely by looking to the applicable state law governing child support awards. Under Illinois law, an appropriate child support award is that amount deemed “reasonable and necessary for the support of the child.” 750 Ill. Comp. Stat. 5/505(a). Because this “reasonable and necessary” standard mirrors the Bankruptcy Code's requirement that excludable child support be “reasonably necessary to be expended for such child,” 11 U.S.C. § 1325(b)(2), the bankruptcy court concluded that the child support awarded by the Illinois divorce court necessarily satisfied the requirements of § 1325(b)(2) and could therefore be excluded in its entirety. The court further noted that although, under its interpretation of § 1325, a double deduction would be theoretically possible, Congress's desire to preserve child support payments for their intended beneficiaries prevailed over any risk of duplicate exclusions from income. Finally, the court concluded that the “reasonably necessary” qualification would still function as an independent backstop—a “hedge against the risk of abuse”—to prevent the excessive reduction of disposable income in cases where the custodial parent is “so well off that child support payments amount to unneeded surplus funds.”In re Brooks, 498 B.R. 856, 863 (Bankr.C.D.Ill.2013). After making other unrelated amendments to Brooks's disposable income calculation, the bankruptcy court confirmed a Chapter 13 plan requiring Brooks to pay $459.00 per month for 60 months. The District Court for the Central District of Illinois, Peoria Division, affirmed the bankruptcy court's order.

II. Discussion

We apply the same standard of review to bankruptcy court decisions as does a district court, reviewing findings of fact for clear error and conclusions of law de novo. In re Midway Airlines, Inc., 383 F.3d 663, 668 (7th Cir.2004).

A Chapter 13 debtor's plan will be approved only if it provides that all of the debtor's projected disposable income during the repayment period will be applied to the reimbursement of unsecured creditors. 11 U.S.C. § 1325(b)(1)(B). Chapter 13 utilizes a multi-part equation, containing both an income component and an expense component, to calculate disposable income. On the income side of the equation, a debtor must first calculate her total current monthly income, of which child support payments are considered a part. See 11 U.S.C. § 101(10A)(B) (explaining that CMI includes any amount paid by third parties “on a regular basis for the household expenses of the debtor or the debtor's dependents”); see also In re Wise, No. 10–32441, 2011 WL 2133843, at *3 (Bankr.S.D.Ill. May 27, 2011). Based on this total, the debtor may next exclude certain income from her CMI, pursuant to the specifications set forth in 11 U.S.C. § 1325(b)(2), which describes the income component of 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 ).” § 1325(b)(2) (emphases added).

The expense component of the equation then allows for a deduction of “amounts reasonably necessary to be expended ... for the maintenance or support of the debtor or a dependent of the debtor,” and for certain charitable contributions and necessary business expenditures. § 1325(b)(2)(A)-(B). For...