In re McKay

557 B.R. 810

In re: Terry McKay and Darby McKay, Debtors.

Case No. 15-13766-JDL

United States Bankruptcy Court, W.D. Oklahoma.

Signed September 13, 2016

Gary D. Hammond, Oklahoma City, OK, for Debtors.

MEMORANDUM OPINION AND ORDER DISMISSING CASE

Janice D. Loyd, U.S. Bankruptcy Judge

Before the Court is the Second Motion of the United States Trustee to Dismiss Case Based on the Presumption of Abuse and the Totality of Circumstances Pursuant to 11 U.S.C. § 707(b) filed on May 18, 2016 (“the Motion ”) [Doc. 58] and Debtors' Response to Second Motion of the United States Trustee to Dismiss filed on June 7, 2016 (“the Response ”) [Doc. 60]. The Motion of the United States Trustee (“the UST”) is premised upon both the presumption of abuse under § 707(b)(2) and the “totality of the circumstances” under § 707(b)(3). First, the UST asserts that Debtors' income exceeds the applicable state median family income and that they fail the “Means Test” as their Schedules I and J demonstrate an ability to pay funds to their unsecured creditors. Secondly, the UST asserts that under § 707(b)(3) the “totality of the circumstances” demonstrates abuse. The Court held the trial on the issues on August 3 and 18, 2016. After carefully considering the evidence and arguments, in accordance with Fed. R. Bankr. P. 7052, the Court sets forth the following findings of fact and conclusions of law in support of its order on the UST's Motion .

Factual Background

Debtors filed for bankruptcy relief under Chapter 7 on September 30, 2015. At that time Debtors filed their Statement of Your Current Monthly Income (Official Form 22 A-1) which reflected a total current monthly income of $7,599.56 and an annual income of $91,194.72. [Doc. 1, pg 63, ll.12 b]. Since this annual income was in excess of the median family income of $53,855.00 for the State of Oklahoma, there existed a “presumption of abuse” which required Debtors to complete a Chapter 7 Means Test Calculation to determine the amount of disposable income that would be available to pay unsecured creditors in a Chapter 13 proceeding (Official Form 22A-2) [Doc. 1, pgs. 65-73]. In Part 3 of the Means Test the Debtors monthly disposable income was calculated to be $1,321.10 which results in the Debtors ability to repay their non-priority unsecured creditors in a Chapter 13 the total sum of $79,266.00 over the course of five years (Official Form 22A-2)[Doc.1, pg. 72].

Based on Debtors' Schedules I and J, the Statement of Your Current Monthly Income and the Means Test Calculation, on December 10, 2015, the UST filed a Motion to Dismiss Case Based on the Presumption of Abuse and the Totality of Circumstances Pursuant to Eleven U.S.C. § 707(b) . [Doc. 18]. On January 21, 2016, the Court entered an Agreed Order Converting Case to One Under Chapter 13 . [Doc. 30]. On February 5, 2016, Debtors filed both their Chapter 13 Plan [Doc. 39] and their Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period (“Means Test”). [Doc. 40]. Under this Means Test, Debtors calculated their monthly disposable income for purposes of the Chapter 13 Plan payment to be $550.19. [Doc. 40, pg. 11].

On March 10, 2016, the standing Chapter 13 Trustee filed an objection to the proposed Chapter 13 Plan to which Debtors responded by filing a motion to reconvert their case back to one under Chapter 7. [Doc. 50]. The stated reason for the motion to reconvert was that since the case had been converted to a Chapter 13, Debtors “have incurred significant medical expenses ... they will have significant ongoing medical expenses as a result of Mrs. McKay's various health issues ... and believe these expenses will be above and beyond the $500 per month listed on Schedule J”. On May 5, 2016, the Court entered its Order Granting Debtors' Motion to Convert Case to a Chapter 7 . [Doc. 52].

This brings us to the present consideration of the UST's second Motion and Debtors' Response concerning dismissal of this now reconverted Chapter 7 case for abuse and upon which the Court conducted an evidentiary hearing on August 3 and 18, 2016.

Dismissal for Abuse Under § 707(b)

Section 707(b) was added to the Bankruptcy Code in 1984 as part of the Bankruptcy Amendments and Federal Judgeship Act and was amended extensively in 2005 under the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”). Post-BAPCPA, § 707(b) now provides that a Chapter 7 case may be dismissed, or converted to a Chapter 11 or 13 with consent of a debtor, to prevent abuse of the Chapter 7 provisions. Specifically, § 707(b)(1) provides, in part, as follows:

... the court, on its own motion or on a motion by the United States trustee, ... may dismiss a case filed by an individual debtor under this chapter [Chapter 7] whose debts are primarily consumer debts, or, with the debtor's consent, convert such a case to a case under chapter 11 or 13 of this title, if it finds that the granting of relief would be an abuse of the provisions of this chapter [Chapter7]. (Emphasis added).¹

Sections 707(b)(2) and (b)(3) provide two alternatives pursuant to which a court can find relief under Chapter 7 to be abusive. First, under § 707(b)(2), the Court can determine whether the presumption of abuse arises pursuant to the Means Test calculation of disposable income. Second, if the presumption does not arise or the presumption has been rebutted by the debtor establishing “special circumstances”, the Court can evaluate whether abuse exists under the “totality of circumstances” test pursuant to § 707(b)(3). The moving party bears the burden of proof to support a § 707(b) motion by a preponderance of the evidence. In re Palmer, 542 B.R. 289 (Bankr.D.Colo.2015).

Presumption of Abuse Under § 707(b)(2)

Pursuant to § 707(b)(2), a bankruptcy court “shall presume abuse exists if the debtor's current monthly income reduced by the amounts determined under [subsection (b)(2)(A) ]” is greater than the threshold amounts in subsections (b)(2)(A)(i)(I) or (b)(2)(A)(i)(ii). The statutory formula set forth in § 707(b)(2) is referred to as the “Means Test”. Essentially, the Means Test is used to determine whether a presumption of abuse arises in a debtor's bankruptcy case using a debtor's current monthly income and certain allowed deductions where the debtor's current monthly income exceeds the median family income for the applicable state and family size.

Section 707(b)(2) provides, in pertinent part:

In considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter, the court shall presume abuse exists if the debtor's current monthly income reduced by the amounts determined under clauses (ii), (iii) and (iv), and multiplied by 60 is not less than the lesser of—

(I) 25% of the debtor's nonpriority unsecured claims in the case, or $7,475, whichever is greater; or

(II) $12,475.

In practice, a debtor determines Means Test eligibility by filling out Official Form 22A-2.

For the purposes of this test, a debtor's current monthly income (“CMI”) is defined under § 101(10A), as:

(A) ... the average monthly income from all sources that the debtor receives (or in a joint case the debtor and the debtor's spouse receive) without regard to whether such income is taxable income, derived during the 6-month period ending on-

(i) the last day of the calendar month immediately preceding the date of the commencement of the case if the debtor files the schedule of current income required by section 521(a)(1)(B)(ii); or

(ii) the date on which current income is determined by the court for purposes of [Chapter 7] if the debtor does not file the schedule of current income required by section 521(a)(1)(B)(ii) ....

Once a debtor's current monthly income is determined, certain expenses are then subtracted. A debtor is entitled to deduct expense amounts specified under the National and Local Standards² , and, in some cases, a debtor may deduct actual expenses. Finally, a debtor is permitted to deduct average monthly payments for secured debts and priority claims.³

If a debtor's disposable income, as determined by the Means Test, exceeds the threshold described in the §§ 707(b)(2)(A)(i)(I) or (b)(2)(A)(i)(II), then the debtor's case is presumptively abusive and subject to dismissal under § 707(b)(1). If, after performing the calculations under the means test, the presumption of abuse arises, the Court has no discretion and must dismiss the chapter 7 case unless a debtor is able to rebut the presumption by demonstrating special circumstances pursuant to § 707(b)(2)(B).

According to Debtors' Schedule F, the nonpriority, unsecured claims totaled $68,690.74-25% of that amount is $17,172.68. Debtor's original Means Test filed with the Petition showed monthly disposable income of $1,321.10, which when multiplied by sixty months totaled $79,266.00. [Doc. 1, page 72]. These figures clearly indicated a presumption of abuse, as the disposable income would have resulted in a 100% payout to unsecured debt and necessitated the dismissal of the case or Debtors' conversion of the case to one under Chapter 13. Debtors elected the latter option and consented to the conversion to chapter 13. However, on May 5, 2016, the case was reconverted to a Chapter 7 pursuant to Motion by the Debtors.

After the case's re-conversion to Chapter 7, Debtors filed Amended Schedules I and J and Amended Means Test, [Doc. 61], which showed gross monthly income of $7,906.99 and net income of $5,260.44, not significantly different from the original Means Test and Schedules; however, Debtors' monthly expenses increased, primarily attributable to medical and dental expenses, so that their monthly net income was reduced to $98.83. [Doc. 61-1, pg. 6]. This discrepancy between Debtors' prior Means Test indicating a presumption of abuse and the ability to pay creditors and their post-conversion Means Test indicating no ability to pay forms one of the two issues before the Court (the other being the presumption of...