In re Melvin

Page 715

411 B.R. 715

In re Jack Edsel MELVIN, Jr., Debtor.

No. 07-22352.

United States Bankruptcy Court, D. Kansas.

December 22, 2008.

COPYRIGHT MATERIAL OMITTED

Cynthia F. Grimes, Grimes Rebein, L.C., Lenexa, KS, for Debtor.

MEMORANDUM OPINION AND ORDER ON LEGAL QUESTION REGARDING CREDITOR'S OBJECTION TO CONFIRMATION

DALE L. SOMERS, Bankruptcy Judge.

The matter under advisement is the legal question of the methodology for determining the amount that must be committed to a Chapter 13 plan by an above median income debtor to satisfy 11 U.S.C. § 1325(b)(1)(B), where the proposed plan, to which a creditor objects, relies upon income and expenses reported on Schedules I and J rather than Form B22C. Debtor Jack Edsel Melvin, Jr. appears by Cynthia F. Grimes, of Grimes & Rebein, L.C. Objecting unsecured creditor, eCAST Settlement Corporation (hereafter "eCAST") appears by Larry A. Pittman, II, of Schmitt Manz Swanson & Mulhern P.C. There are no other appearances. The Court has jurisdiction.¹

BACKGROUND FACTS.

Debtor filed a voluntary petition under Chapter 13 on October 18, 2007, after the effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (hereafter BAPCPA).² He is an above median income debtor and proposes a 60 month plan³ that provides $500 per month, his "monthly net income" as shown on Schedules I and J, for payment to general unsecured creditors. Debtor's Form B22C reports monthly disposable income of $1,661.93.

eCAST, the holder of approximately 52% of Debtor's scheduled unsecured, nonpriority debt, objects to confirmation because it claims the plan does not apply all of Debtor's projected disposable income to payment to unsecured creditors as required by § 1325(b)(1)(B).⁴ The Chapter 13 Trustee also objects to confirmation for several reasons, including the assertion that the "plan does not propose to pay the GU Pool resulting from the means test of $96,941.80."⁵

The Court approved the parties' planning conference report that provided for the parties to "submit to the Court the legal issue raised by eCAST: Whether the formula for determining disposable income to be paid into the plan under § 1325 should be based on Schedule I income minus Form B22C expenses/deductions."⁶ After briefs on this legal question were filed by eCAST and the Debtor, the Court took the issue under advisement.

NATURE OF THE CONTROVERSY.

BAPCPA did not alter the central requirement of confirmation that the debtor pay all projected disposable income into the plan. Both before⁷ and after BAPCPA, § 1325(b)(1) provides that if the trustee or the holder of an allowed unsecured claim objects to confirmation, the court may not approve the plan unless, as of the effective date of the plan, the plan provides for payment of such claim in full or "the plan provides that all of the debtor's projected disposable income to be received [during the term of the plan] will be applied to make payments to unsecured creditors under the plan."⁸ This confirmation standard is referred to as the means test.

"Projected disposable income" is not defined. However, prior to BAPCPA, § 1325(b)(1) defined "disposable income" to mean "income received by the debtor and which is not reasonably necessary to be expended" for the maintenance or support of the debtor or a dependent of the debtor, for certain charitable contributions, and for certain business expenses.⁹ Based upon this requirement, the projected disposable income available to a debtor for repayment of unsecured debts was typically determined by subtracting the expenses reported on Schedule J from the income reported on Schedule I and then multiplying by the length of the plan.¹⁰ "However, if the bankruptcy court had reason to believe that those schedules did not accurately predict a debtor's actual ability to pay, other evidence was also considered."¹¹

BAPCPA amended § 1325(b)(2)¹² by adding the adjectives "current monthly" to the word "income," excluding some child support related income, and allowing deductions of expenses for certain domestic support obligations. Nevertheless, the basic structure of § 1325(b)(2) did not change. However, the change from "income," which was not defined by the Code, to "current monthly income" is not as inconsequential as it may appear because BAPCPA also added a definition of "current monthly income" in § 101(10A). "Current monthly income" is now a historical figure based upon debtor's actual income, from all sources, except social security and certain victim payments, received during the six months prior to filing.¹³

In addition, the BAPCPA made material changes to § 1325 for high income debtors. The amendment at issue in this case is the addition of § 1325(b)(3), which defines "amounts reasonably necessary to be expended" for above median income debtors.¹⁴ The test for being such a debtor is whether the debtor's "current monthly income," when multiplied by 12, is greater than the median income levels provided by the United States Census Bureau for individuals living in the debtor's locality for debtor's family size. New § 1325(b)(3) provides that if the debtor is an above median income debtor based upon this comparison, then "amounts reasonably necessary to be expended" for the purpose of § 1325(b)(2) are determined by §§ 707(b)(2)(A) and (B), also enacted by BAPCPA.¹⁵ Most expenses allowed by § 707(b)(2)(A) fall into three groups. First, § 707(b)(2)(A)(ii)(I) provides monthly expenses shall be those allowed under the National Standards and the Local Standards of the Internal Revenue Service (IRS) for the area in which the debtor resides, as in effect on the date of the order for relief (which are determined independent of a debtor's actual expenses), and debtors' actual monthly expenses for the categories specified as Other Necessary Expenses used by the IRS for the area in which the debtor resides (see Form B22C, Part IV, Subpart A). Second, §§ 707(b)(2)(A)(ii)(I)-(V) provide a debtor's monthly expenses may include, if applicable, enumerated specific items of additional actual expense (see Form B22C, Part IV, Subpart B). These include, if reasonable and necessary, health insurance, disability insurance, and health savings account expenses; costs for protection against family violence; excess home energy costs; actual expenses for care and support of household members with critical needs; expenses for a child's elementary and secondary education; an allowance for housing and utilities in excess of those specified by the local standard; an additional allowance for food and clothing of up to 5% of the national standard; and continued charitable contributions. Third, pursuant to § 707(b)(2)(A)(iii), allowed expenses include the amount contractually due to secured creditors in each month for 60 months following the date of the petition (see Form B22C, Part IV, Subpart C). In addition, Chapter 13 administrative expenses and payments on priority claims are allowed by § 707(b)(2)(A)(ii)(III) and § 707(b)(2)(A)(iv), respectively. Section 707(b)(2)(B) allows inclusion of expenses satisfying the special circumstances test for rebutting the presumption of abuse.

As referenced above, Form B22C has been developed to assist in the calculation of income and expenses as defined by the Code. It is used to calculate "current monthly income," to determine whether that income is above or below the applicable median income, and, if so, to calculate disposable income as defined by § 1325(b)(3).

The result is that after BAPCPA, many of an above median income debtor's major expenses, such as housing, utilities, food, and transportation, are based upon the IRS standards, not the debtor's actual expenses, either historical or projected. This is in contrast to Schedule J, on which the expenses are all related to the debtor's actual experience or projected future actual expenses. The result is that for above median income debtors disposable income calculated in accord with the BAPCPA amendments may materially deviate (either above or below) from the disposable income calculated as the difference between income on Schedule I and expenses on Schedule J. However, Schedules I and J remain relevant, as they provide evidence of feasibility.

In this case, Debtor has above median income, so § 1325(b)(3) applies. The issue is whether as a condition of confirmation under § 1325(b)(1), the calculation of Debtor's "projected disposable income" must strictly conform with the amounts reported on Form B22C. Debtor, when calculating projected disposable income, uses income from Schedule I, which is less than that on Form B22C, and expenses from Schedule J, which are higher than Form B22C. Debtor argues that although it makes sense to stringently apply § 707(b) for the purpose of directing more debtors into Chapter 13, "it is fundamentally inconsistent with the long stated purposes of chapter 13 and bankruptcy relief to construe these provisions so that an otherwise good faith debtor ... cannot qualify for chapter 7 but cannot feasibly perform a chapter 13, and so by trick of artificial standards of income and expense is denied any bankruptcy relief whatsoever!"¹⁶ Although Creditor does not object to Debtor's use of income slightly less than that on Form B22C, if that income is ultimately supported by evidence offered by Debtor, eCAST does contend that the expenses must be those reported on Form B22C, as § 1325(b)(3) uses the word "shall" when incorporating § 707(b)(2) for the purpose of determining "amounts reasonably necessary to be expended."

To put this controversy in perspective, the income and expenses as reported on Debtor's schedules and Form B22C and the parties' positions are summarized as follows:

Schedules I & J Form B22C Debtor eCAST
Income    $5,406.8817        $8,533.0018    $5,406.88    $8,449.5019
Expenses  $4,906.7520        $6,871.0721    $4,906.75    $6,871.07
Net         $ 500.13              $1,661.93
Projected disposable monthly

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