In re McKay

IN RE: JENNIFER DAWN MCKAY Debtor.

Case No. 18-31088

UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF ILLINOIS

July 22, 2019

In Proceedings Under Chapter 13

OPINION

The matter before the Court is the Chapter 13 Trustee's ("Trustee") Objection to Confirmation of Debtor's fourth amended plan filed on January 29, 2019. At the hearing on the Confirmation of the fourth amended plan, the Trustee indicated there were no questions of fact and the matter could be decided as a question of law. The Debtor did not raise any issues of fact. A briefing schedule was established, and the matter was taken under advisement. Based upon the review of filings prior to confirmation, the Trustee's Objection, Brief in Support of the Objection, and the Debtor's Brief in Opposition, the Court makes the following findings of fact and conclusions of law.

The facts are as follows. On July 26, 2018, the Debtor filed a Chapter 13 Petition, along with schedules and statements, official forms 122C-1 and 122C-2, and a proposed plan. On October 24, 2018, the Debtor filed a first amended plan and amended forms 122C-1 and 122C-2 correcting her household size. According to the calculations set forth in form 122C-1, the Debtor had above median income. The first amended plan was confirmed on November 15, 2018.¹ Eighteen days after confirmation, the Debtor filed the third amended plan on December 3, 2018. The Debtor filed the fourth amended plan on January 29, 2019, significantly decreasing disposable income and the pool to general unsecured creditors from the confirmed plan. The fourth amendedplan is based on a disposable income calculation using actual income and expenses from schedules I and J, rather than using the Internal Revenue Service standard expenses on form 122C-2 for debtors with above median income. The Trustee objects to confirmation of the fourth amended plan on the basis that it has not been proposed in good faith.²

The applicable sections of the Bankruptcy Code governing confirmation of a Chapter 13 plan and an amendment of a confirmed Chapter 13 plan are 11 U.S.C §§ 101(10A), 1325(a) and (b), 707(b), and 1329. Section 1325(a) and (b) set forth the standards governing confirmation of a Chapter 13 plan. Section 1325(a) provides in part as follows:

[T]he court shall confirm a plan if —

(1) The plan complies with the provisions of this chapter and with the other applicable provisions of this title; [and]

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

Section 1325(b)(1) provides in part as follows:

[T]he 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 . . . will be applied to make payments to unsecured creditors under the plan.

Section 1325(b)(2) defines the term "disposable income" as "current monthly income received by the debtor less amounts reasonably necessary to be expended for the maintenance or support of the debtor . . ."

"Current monthly income" is defined in Section 101(10A) as "the average monthly income from all sources that the debtor receives without regard to whether such income is taxable income,derived during the 6-month period ending on. . . the last day of the calendar month immediately preceding the date of the commencement of the case. . ."

Section 1325(b)(3) expands on the phrase "Amounts reasonably necessary to be expended" for debtors whose incomes are higher than the median incomes of similarly-sized households in their state. In cases where the debtor's income is above median, the "amounts necessary to be expended" for the maintenance or support of the debtor are calculated pursuant to Section 707(b)(2)(A) and (B). Section 707(b)(2)(A)(ii)(1) provides in part as follows:

The debtor's monthly expenses shall be the debtor's applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor's actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides, as in effect on the date of the order for relief, for the debtor [with certain adjustments not pertinent to this case]

Section 1325(b) requires a debtor to use his projected disposable income to repay creditors and defines the term "disposable income." The section establishes different standards for confirmation of a Chapter 13 plan based on whether a debtor's income is above or below the median income for people residing in the debtor's state. If a debtor is under median, disposable income is calculated based on "current monthly income," as defined by Section 101(10A), minus expenses on schedule J.

If a debtor has above median income, disposable income is calculated in a different manner. A debtor's income is "current monthly income" as determined by Section 101(10A). Expenses, however, are determined in accordance with Section 707(b), which sets expenses with certain adjustments, as those provided for under the National and Local Standards and a debtor's actual monthly expenses specified as Other Necessary Expenses issued by the Internal RevenueService for the area in which the debtor resides. The statement of a debtor's current monthly income and calculation of the commitment period is made on form 122C-2. In either the above median or below median income situation, disposable income is subject to change to reflect "projected income" at the time of confirmation. See Hamilton v. Lanning, 130 S. Ct. 2464 (2010).³

Section 1329 governs the post confirmation amendment of a Chapter 13 plan and provides in part as follows:

(a) At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to--

(1) increase or reduce the amount of payments on claims of a particular class provided for by the plan

. . .

(b)(1) Sections 1322(a), 1322(b), and 1323(c) of this title and the requirements of section 1325(a) of this title apply to any modification under subsection (a) of this section.

Section 1329 permits a debtor to amend a confirmed Chapter 13 plan to increase or reduce the amount of payments on claims of a particular class provided for by the plan and provides that an amended Chapter 13 plan must comply with confirmation standards set forth in Section 1325(a). A confirmed plan modified post confirmation under Section 1329 must be proposed in good faith as contemplated by section 1325(a)(3). A debtor bears the burden of proving the amended plan complies with the good faith requirement. In re Shelton, 592 B.R. 193, 200-01 (Bankr. N.D. Ill. 2018). When making a good faith determination, the court should look at whether a debtor's plan constitutes an attempt to unfairly manipulate the Bankruptcy Code. In re Delp, 2009 WL322227, at *3 (Bankr. S.D. Ill. Feb 9, 2009) (quoting Matter of Smith, 848 F.2d 813, 820n. 8 (7^th Cir. 1988), quoting Education Assistance Corp V. Zeller, 827 F.2d 1222, 1227 (8^th Cir. 1987)).

In the instant case, the Debtor's Chapter 13 plan was confirmed on November 15, 2018. According to the confirmed plan, schedules, and official form 122C filed in this case, the confirmed plan was based on the Debtor having above median income with gross monthly income of $7,451.27 and a net monthly income of $5,210.76. Because the Debtor's income was above median, disposable income was calculated using official form 122C-2, which applies Section 707(b)(2), resulting in disposable income of $1,758.68 per month. The confirmed plan was funded to pay a $105,520.80 pool to allowed general unsecured claims.

On December 3, 2018, eighteen days after confirmation, the Debtor filed the third amended plan and amended schedules I and J. On January 29, 2019, the Debtor filed the fourth amended plan and amended schedules I and J. The fourth amended plan reduces the amount paid on unsecured claims from $105,520.80 to $0.00. Amended schedule I lists gross monthly income of $6,900.83 and net monthly income of $5,053.48, and amended schedule J lists monthly expenses totaling $4,552.52. The Debtor's calculation of disposable income is based on subtracting actual monthly expenses on Schedule J from the debtor's current monthly income, rather than using the calculation described in Section 707(b)(2) for above median debtors, resulting in a new disposable monthly income of $500.96.

The Trustee objects to the fourth amended plan on the basis that it has not been proposed in good faith.⁴ Specifically, the Trustee argues that the timing in filing the amended plan andschedules is an unfair manipulation of the Bankruptcy Code that results in a fundamental unfairness to general unsecured creditors. As support, the Trustee notes that the pool to unsecured creditors was reduced from $105,520.80 to $0.00 by asserting a $157.28 per month decrease in net income, in conjunction with a $469.00 increase in expenses that was known prior to confirmation. The Debtor asserts that her disposable income has been reduced due to a reduction in income arising from the loss of an annual bonus and an increase in expenses due to an additional car expense. She...