In re Dunson

550 B.R. 537

In re: Stevie Nicole Dunson, Debtor.

Case No. 15–21340

United States Bankruptcy Court, D. Kansas.

Signed May 3, 2016

Chris W. Steffens, Mack & Associates, LLC, Topeka, KS, for Debtor.

MEMORANDUM OPINION AND ORDER OVERRULING THE CHAPTER 13 TRUSTEE'S OBJECTION TO CONFIRMATION UNDER 11 U.S.C. §§ 1325(a)(3) AND (a)(7) AND DENYING THE MOTION TO DISMISS OR CONVERT DEBTOR'S CASE TO CHAPTER 7

Robert D. Berger, U.S. Bankruptcy Judge

The Chapter 13 Trustee (the Trustee) objects to confirmation and moves to dismiss or convert Debtor's case to Chapter 7.¹ At issue is whether the Bankruptcy Code permits Debtor to file under Chapter 13 and propose confirmation of a plan that pays only the filing fee, the Debtor's attorney's fees, and the Trustee's commission.² The matters are submitted on the pleadings for this Court's consideration. Here, the Court finds the Debtor filed her case and Chapter 13 Plan in good faith, not by any means forbidden by law.

VENUE AND JURISDICTION

This Court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C. §§ 157(a) and 1334(a) and (b) and the Amended Standing Order of Reference of the United States District Court for the District of Kansas that exercised authority conferred by 28 U.S.C. § 157(a) to refer to the District's bankruptcy judges all matters under the Bankruptcy Code and all proceedings arising under the Code or arising in or related to a case under the Code, effective June 24, 2013.³ Furthermore, this Court may hear and finally adjudicate this matter because it is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(L). The parties do not object to venue or jurisdiction.

FINDINGS OF FACT

On June 24, 2015, Debtor Stevie Nicole Dunson (Stevie) filed her bankruptcy petition⁴ and Chapter 13 Plan (the Plan).⁵ On June 25, 2015, the Court granted Stevie's application to pay her filing fees in installments.

⁶ Stevie has no bankruptcy filings within the past eight years⁷ and certified she has completed pre-petition credit counseling.⁸ Stevie's income is below median⁹ and at the time of filing, she supported her one-year-old son and seven-year-old daughter.¹⁰ Stevie paid Envista Credit Union $1,125 within 90 days of her petition and paid her father $300 within one year of her petition.¹¹ Stevie's Plan proposes at least 36 monthly payments of $100.¹² The Plan indicates payments will be made through an employer pay order.¹³ Plan payments will pay $3,100 to attorney's fees,¹⁴ $310 to filing fees,¹⁵ and $0.00 to unsecured creditors.¹⁶

Stevie's employment income for 2013, 2014, and 2015 year to petition date was $6,000, $8,072, and $12,857, respectively.¹⁷ Stevie works at Kansas Gas Service as a customer service representative in Overland Park, Kansas.¹⁸ As of her petition date, Stevie had worked at Kansas Gas Service for six months.¹⁹ Stevie lists her current monthly gross income from wages as $3,627.²⁰ Stevie also lists monthly income of $1,200 in family support payments and $400 in roommate contributions.²¹ Stevie's Schedule I monthly net income is $4,551.01.²²

Stevie does not own any real property,²³ lists zero creditors holding secured claims,²⁴ and only lists the Internal Revenue Service (IRS) and Kansas Department of Revenue (KDOR) on Schedule E for noticing purposes.²⁵ Stevie lists $22,038 of personal property of which $21,838 is exempt.²⁶ Stevie's 2013 Kia Optima accounts for all but $2,200 of her personal property.²⁷ Stevie's nonexempt property is $45 cash and $155 across three Bank of America checking and savings accounts.²⁸ A Chapter 7 trustee would likely abandon Stevie's nonexempt assets in a Chapter 7 case as they are not worth liquidating. Stevie's exempt property is: (a) $750 deposit with her landlord and utilities; (b) $1,000 in miscellaneous household goods; (c) $20 in miscellaneous children's books and posters; (d) $200 in miscellaneous clothing; (e) $30 in miscellaneous jewelry; and (f) $19,838 in the 2013 Kia Optima with 48,000 miles.²⁹ Schedule F lists $71,143 in unsecured nonpriority claims consisting of $43,085, or over 60 percent, in healthcare debt, and $26,752, or over 37 percent, in student loan debt. Thus, $69,837, or 98 percent of Stevie's unsecured nonpriority debt is healthcare and student loan related. Only $1,306, or 2 percent in unsecured nonpriority claims relates to general consumer debts. Stevie's bankruptcy filing did not result from abusing credit for general consumer needs.

Stevie asserts she does not have the upfront assets to fund a Chapter 7 filing and may never be able to accumulate enough savings to do so.³⁰ Since 2010, Stevie has faced at least five garnishment cases in Shawnee County, Kansas, District Court that all involve healthcare creditors.³¹ The instant bankruptcy stayed three active garnishment orders and two active garnishment-related bench warrants.³²

On August 17, 2015, the Trustee objected to confirmation under §§ 1325(a)(3) and (a)(7)³³ and moved to dismiss or convert Stevie's case to Chapter 7.³⁴ The Trustee asserts that Stevie stated at the First Meeting of Creditors that she filed in Kansas City instead of Topeka because of Kansas City's lower Trustee fees.³⁵ The Trustee admits “the debtor appears to need relief” but asserts that “this is an attorney fee only case that does not demonstrate ‘special circumstances' to justify a Chapter 13”³⁶ The Trustee urges the Court to find that the “inability to pay attorneys fees for the filing of a Chapter 7, does not constitute ‘special circumstances' permitting the case to proceed as a Chapter 13.”³⁷ Thus, the Trustee requests the Court deny confirmation, dismiss the case, or convert the case to Chapter 7.³⁸

Of note, the Trustee did not specifically object to feasibility or challenge the reasonableness of the Debtor's attorney's fees of $3,100.

LAW

Chapter 13 contains two good faith requirements. Debtors must propose plans and file petitions in good faith. Section 1325(a)(3) and (a)(7) provide:

(a) ... [T]he court shall confirm a plan if—

...

(3) the plan has been proposed in good faith and not by any means forbidden by law; ...

(7) the action of the debtor in filing the petition was in good faith.³⁹

Congress did not define good faith in subsections (a)(3) and (a)(7).⁴⁰ The Tenth Circuit has developed several non- exhaustive factors to examine good faith challenges. Included among those factors are:

(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 repayment of unsecured debt and whether any inaccuracies are an attempt to mislead the court;

(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 non-dischargeable 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.⁴¹

The Trustee relies on In re Puffer⁴² to justify Stevie's need to show special circumstances. However, as discussed infra,⁴³ this is not required under the Code. The Tenth Circuit and at least one Kansas Bankruptcy Court “look[ ] to the totality of the circumstances surrounding each debtor's filing to determine whether ... [they] have filed their Chapter 13 bankruptcy plan in good faith, as required by 11 U.S.C. § 1325(a)(3).”⁴⁴ “No one factor is determinative, but it is the totality of the various factors and the facts of the particular case that are considered.”⁴⁵ Thus, Stevie need not show special circumstances justifying the filing of a Chapter 13 plan over a Chapter 7 liquidation. “Only if there has been a showing of serious debtor misconduct or abuse should a chapter 13 plan be found lacking in good faith.”⁴⁶

The Court examines §§ 1325(a)(3) and (a)(7) simultaneously because the good faith analysis under each subsection is the same—the totality of the circumstances.⁴⁷

ANALYSIS

A. Stevie Filed Her Chapter 13 Petition and Chapter 13 Plan in Good Faith.

“The principal purpose of the Bankruptcy Code is to grant a ‘fresh start’ to the ‘honest but unfortunate debtor.’ ”⁴⁸ However, the fresh start is not absolute. “The statutory provisions governing nondischargeability reflect a congressional decision to exclude from the general policy of discharge certain categories of debts—such as child support, alimony, and certain unpaid educational loans and taxes, as well as liabilities for fraud”⁴⁹ Whether Stevie qualifies for a fresh start is not at issue as the Trustee admits she needs relief.⁵⁰ Thus, the Court must decide whether Chapter 13 relief is appropriate under the Code.

Chapter 13, commonly referred to as the wage earner chapter, is conceptually a personal or individual reorganization. Individuals with regular income obtain a discharge of most pre-petition debt after successfully completing a court-approved payment plan.⁵¹ Debtors make plan payments from “future earnings or other future income.”⁵² Conversely, under Chapter 7, “the debtor's assets are immediately liquidated and the proceeds [are] distributed to creditors.”⁵³ Chapter 13 allows the honest but unfortunate debtor time to reorganize her financial matters, including curing pre-petition defaults on secured debt,⁵⁴ curing defaulted leases,⁵⁵ paying priority claims over three to five years,⁵⁶ and frequently—but not always—to provide a distribution to general unsecured claimants who ordinarily receive little or nothing under Chapter 7. An individual may not be forced into Chapter 13⁵⁷ and she is at liberty to seek dismissal of her case at any time.⁵⁸ From its inception, Congre...