In re Haroldson

In re: MICHAEL ALLAN HAROLDSON Debtor.

Case No. 14-26941 MER

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF COLORADO

May 19, 2016

The Honorable Michael E. Romero

Chapter 13

ORDER

Subsequent to the denial of confirmation of his Chapter 13 plan, the Debtor in this case seeks reevaluation of this Court's precedent regarding the treatment of non-filing spouses in Chapter 13 cases. Specifically, the Debtor's Corrected Amended Chapter 13 Plan and the objection thereto by the Chapter 13 Trustee ("Trustee") present the following issues: 1) whether a debtor may deduct mortgage or rent on Form I22C-1 when the house he lives in has no mortgage and is not owned by him; 2) the extent to which a debtor must provide financial information regarding a non-filing spouse; and 3) whether a debtor who is married and living with a spouse may claim a household size of one.

JURISDICTION

The Court has jurisdiction over this matter under 28 U.S.C. §§ 1334(a) and (b) and 157(a) and (b). This is a core proceeding under 28 U.S.C. §157(b)(2)(A) and (L) because it involves the administration of the estate and the confirmation of the Debtor's plan.

BACKGROUND FACTS

Michael Haroldson ("Debtor") and his spouse ("Mrs. Haroldson") testified their financial lives are separate, and they do not combine their income and expenses. They have no joint bank accounts, credit accounts, or debts. However, they split household expenses such as utilities and groceries, and file joint tax returns. The Debtor's only secured debt is a loan against his motorcycle, for which he also pays the taxes and upkeep expenses.

Mrs. Haroldson pays no portion of the Debtor's payments to the Trustee. According to the parties' stipulated facts, Mrs. Haroldson is retired, and receives a pension payment from PERA¹ every month, a dividend from ManuLife every quarter, and payments from an inherited IRA. Her gross monthly PERA payment is $5,286.57. After deducting state and federal taxes and monthlyinsurance deductions for herself and the Debtor, her monthly net PERA payment totals $3,458.14. Her inherited dividend from ManuLife in 2015 was $402.10 for a monthly amount of approximately $33.51. Her inherited IRA distribution is approximately $155.87 per month.

The Haroldsons live in a home with no mortgage. The home is titled in the name of Mrs. Haroldson only, and she pays the property taxes. The Debtor's Amended Form 122C-1 indicates a household size of one, and lists a deduction for mortgage expenses of $1,289.² Moreover, the Debtor's Amended Schedules I and J indicate Mrs. Haroldson has no income and no expenses, listing each line item for the non-filing spouse as zero.³

DISCUSSION

With respect to confirmation of a Chapter 13 plan, "[t]he controlling section of the Bankruptcy Code is [11 U.S.C § 1325.]."⁴ Section 1325(b)(1)(B) 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--

. . .

(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.⁵

A. The Debtor may not claim a housing deduction for a home he does not own and which has no mortgage lien.

The Debtor relies on a recent case from the Bankruptcy Court for the Central District of Illinois to argue he may claim a $1,289 mortgage deduction, even though his residence is owned free and clear by Mrs. Haroldson.⁶ JudgeMary Gorman of the Bankruptcy Court for the Central District of Illinois noted the IRS Local Standards for housing and utilities contain only one deduction including all housing related expenses, making no distinction between ownership costs and other expenses:

[W]hen a debtor has no mortgage payment, the portions of the form created to facilitate integrating the deduction of such a payment with the Local Standards is "irrelevant." The full Local Standard: Housing and Utilities is applicable to debtors who have housing expenses, and nothing in the development of the B22C or the 22C-2 supports a contrary conclusion.⁷

Judge Gorman distinguished the United States Supreme Court's opinion in Ransom v. FIA Card Services by noting the IRS local standards for transportation do not allow an individual to take a deduction for any vehicle ownership costs where no vehicle payments are made. Such a vehicle owner may only take a deduction for operating costs. However, the IRS housing and utilities standards are not divided into ownership expenses and operating costs. Therefore, Judge Gorman concluded the presence of any household expenses, such as utilities, entitles a debtor to the full IRS local standards deduction, just as if the home were encumbered.⁸ Moreover, Currie determined the division of the housing and utilities on Form I22C-1 into insurance and operating expenses versus mortgage or rent expenses was inapplicable.⁹ She concluded this demonstrated Congress's intent to limit judicial discretion to determine what expenses are reasonable and necessary by using the IRS national and local standards, and those standards do not have such a division.¹⁰

The Court has reviewed both Currie and Ransom. The Court respectfully disagrees with the Currie interpretation of Ransom, and finds Ransom prohibits the Debtor's claimed deduction. In Ransom, the Supreme Court stated:

Because Congress intended the means test to approximate the debtor's reasonable expenditures on essential items, a debtor should be required to qualify for a deduction by actually incurring an expense in the relevant category. If a debtor will not have a particular kind of expense during his plan, an allowance to cover thatcost is not "reasonably necessary" within the meaning of the statute.¹¹

On October 5, 2015, this Court entered an order denying confirmation in In re Herlein. Similar to the instant case, Herlein involved a debtor whose spouse owned the home in which the couple resided, free from a mortgage. The Chapter 13 Trustee in Herlein argued, inter alia, the debtor was not contributing all her monthly disposable income to the plan because she deducted the IRS local standard amount for mortgage or rent expenses, despite the fact there was no mortgage on her residence.

Ms. Herlein argued because Bankruptcy Form 122C-1 required her to use local IRS standards to take a mortgage deduction, she was allowed to take the deduction even though no mortgage existed on the property. This Court rejected the argument, finding the debtor could not claim an expense she did not have, and pointing out the Ransom Court addressed the issue of what makes a deduction "applicable" in a case in which a debtor claimed an automobile loan or lease deduction although the debtor owned the vehicle outright:

A debtor may claim a deduction from a National or Local Standard table (like "[Car] Ownership Costs") if, but only if, that deduction is appropriate for him. And a deduction is so appropriate only if the debtor has costs corresponding to the category covered by the table—that is, only if the debtor will incur that kind of expense during the life of the plan.

. . .

If Congress had not wanted to separate in this way debtors who qualify for an allowance from those who do not, it could have omitted the term "applicable" altogether. Without that word, all debtors would be eligible to claim a deduction for each category listed in the Standards.¹²

The Court sees no reason to modify or change its earlier position on this issue.

B. The Debtor must correct Schedules I and J and Form B 122C-1, and must indicate his correct household size.

"Our interpretation of the Bankruptcy Code starts where all such inquiries must begin: with the language of the statute itself."¹³ "[W]hen the statute'slanguage is plain, the sole function of the courts—at least where the disposition required by the text is not absurd—is to enforce it according to its terms."¹⁴ When a word is not defined, the Court should apply its ordinary meaning.¹⁵ The term "household expenses" is not defined by the Bankruptcy Code. However, a household is ordinarily defined as "[a] family living together . . . . A group of people who dwell under the same roof."¹⁶ An expense is defined as "[a]n expenditure of money[.]"¹⁷

Under these guidelines, the Debtor's statements on his most recent Amended Schedules and Amended Form B 122C, that Mrs. Haroldson has no income are plainly inaccurate.¹⁸ Mrs. Haroldson has income and expenses, as shown in the Debtor's previous filings, and it is absurd now to assert her income and expenses are zero. Debtors are required to provide accurate information to the Court.¹⁹

The Debtor relies on a recent case from the Eastern District of Michigan in support of his position that the financial information Mrs. Haroldson provided is adequate, and no additional information should be required to confirm the Debtor's Amended Plan.²⁰ In Blackshear, the non-filing spouse's income was not listed on the debtor's Schedule I, but it appeared on the debtor's Form B22C.²¹ The Blackshear Court found the disclosure of the $600 monthly contribution to household expenses provided the bankruptcy court with all the information it needed to calculate the debtor's disposable income.²²

This Court disagrees. A debtor must provide information regarding a non-filing spouse's income and expenses on Schedules I and J and Form B 122C-1. As this Court previously explained: "Disclosure of [a non-filing spouse's]income is necessary, not only to show the Debtor is committing all of [his] disposable income to Plan payments, but also to show feasibility and good faith, two additional requirements for confirmation under 11 U.S.C. § 1325."²³ To obtain confirmation, the Debtor must file amended forms including Mrs. Haroldson's income and expenses, even though such information does not appear to affect the...