Opinion
Case No. 09-12541.
9-18-2009
In re: John D. Rule and Ewa K. Hufford, Chapter 7, Debtor.
This matter is before the Court on the United States Trustee's ("UST") motion to dismiss pursuant to 11 U.S.C. §707(b)(3) (Doc. 23), and the Debtors' response and supporting affidavits (Doc. 35, 34, 33).
The court has jurisdiction over this matter pursuant to 28 U.S.C. §1334(b) and the general order of reference entered in this district. This is a core proceeding under 28 U.S.C. §152(b)(2)(A).
The issue before the Court is whether the case should be dismissed for abuse in view of the totality of the circumstances under 11 U.S.C. §707(b)(3)(B).
The Debtor husband is a network technician and the Debtor wife is teacher. The Debtors have three children, ages 4, 2 and 1. The Debtors' combined gross annual income is $112,963. The Debtors' initial Schedules show their monthly net income and expenses to be $6,641.97 and 6,635.44 respectively, resulting in a monthly net income of $6.53. After the instant motion to dismiss was filed, the Debtors filed amended Schedules showing monthly expenses of $7,570.44, resulting in a negative monthly income of $928.47.
The Debtors had no change in their actual expenses. Rather, they assert that their initial numbers were "overly optimistic." See Doc. 33, ¶ 9.
The Debtors' tax refund for the 2008 tax year was $8,295.
The Debtors value their home at $173,000 in their Schedule A and at $183,460 in their response. The house is encumbered by two mortgages totaling $208,273. There is no equity in the property. Their monthly mortgage payments total $1,769. The IRS Housing Standard is $1,098.
The Debtors own a timeshare at Disney's Boardwalk Villas in Orlando, Florida, which they value at $7,750. The secured claim on this property is $320.
The Debtors own a 2003 Saturn Vue and a 2007 Saturn Outlook. Their monthly car payment for the Outlook is $740. The IRS Standard is $489.
The Debtors have approximately $110,000 in retirement funds. The Debtor wife contributes $553 monthly into her STRS retirement plan. They have established "529" college savings plans for their children with balances of $3,129, $1,624, and $531.
The Debtors' unsecured debts total $136,873, consisting of one $27,292 "personal loan" from Bank of America and fifteen (15) credit card debts for "general merchandise and services rendered." The debt was incurred over an extended period from 1993 to 2007.
Section 707(b)(3) states that a court "shall consider — (A) whether the debtor filed the petition in bad faith; or (B) the totality of the circumstances . . . of the debtor's financial situation demonstrates abuse." Given the use of the conjunction "or," a showing of bad faith is not necessary for the UST to prevail under §707(b)(3). Under BAPCPA, Congress lowered the standard from requiring a showing of "substantial abuse" to a showing of "abuse." Nevertheless, the pre-BAPCPA cases are still be instructive, such as In re Behlke, 358 F.3d 429 (6th Cir. 2004), wherein the Sixth Circuit found substantial abuse where the debtor could pay 14 to 23% of his unsecured debt under a hypothetical 3 to 5 year Chapter 13 plan. In re Depelligrini, 365 B.R. 830 (Bankr. S.D. Ohio 2007)(Aug, J.). Other courts which have addressed BAPCPA's §707(b)(3) have concluded that the debtor's ability to pay a fairly modest percentage to the unsecured creditors may result in a finding of abuse. In re Mestemaker, 359 B.R. 849 (N.D. Ohio 2007)(10 to 15%); In re Hess, 2007 WL 3028422 (N.D. Ohio Oct. 15, 2007)(14%); In re Schubert, 384 B.R. 777 (Bankr. S.D. Ohio 2008)(14%)(Aug, J.).
The Sixth Circuit case of In re Krohn, 886 F.2d 123 (6th Cir. 1989) remains instructive as to the various factors to be considered when viewing the requisite "totality of the circumstances." Factors that may be relevant include the debtor's good faith and candor in filing his schedules, whether the debtor made any purchases on the eve of bankruptcy, whether the debtor was forced into bankruptcy by an unforeseen or catastrophic event, the debtors' ability to repay his debts out of future earnings with relative ease, whether the debtor enjoys a stable source of future income, whether the debtor is eligible for debt adjustment under chapter 13, the availability of state remedies, the availability of relief through private negotiations, and whether the debtor can significantly reduce his expenses without depriving himself of adequate necessities. Id. at 126-27.
This court, as well as other courts, have also considered whether the debtors have shown a consistent pattern of living on credit or beyond their means. In re Schubert, 384 B.R. 777 (living beyond means for an extended period of time constitutes abuse); In re Dipellegrini, 365 B.R. 830 (debtor wished to give his two adult sons the same lifestyle they had before debtor's divorce); In re Frerick, Case No. 00-16936, (Bankr.S.D. Ohio July 31, 2001)(Aug, J.)("reduced income for an extended period of time requires a change in lifestyle"); In re Smith, 229 B.R. 895 (Bankr. S.D. Ga. 1997)(debtors attempted to "force their unsecured creditors to absorb the expenses of the lifestyle they have maintained but could no longer afford").
The UST has the burden of proof by a preponderance of the evidence. In re Summer, 255 B.R. 555, 563 (Bankr. S.D. Ohio 2000)(Caldwell, J.).
The UST contends that if the Debtors adjusted their withholding, they would receive an additional $691 in monthly income. The UST contends that if the Debtors spent the IRS allowance on their housing, they would have an additional $671 in monthly income. Lastly, the UST contends that if the Debtors were to spend the IRS allowance on their second vehicle, they would have an additional $251 in monthly income. If the Debtors made all the above adjustments, they would have an additional $1,613 in monthly income. If paid over a five year period, this would total $96,78 and provide the payment of a substantial percentage to their unsecured creditors.
The Debtors contend that they do not expect to receive another tax refund of this size, however, they offer no explanation why the 2008 refund was larger than usual nor do they offer any explanation why the tax refund for the 2009 tax year should be less than last years' refund. They contend that they could not find cheaper housing than their $183,000 home and that they could not find an acceptable family vehicle for less than $740 a month. We do not find this credible. The Debtors also contend that because they entered into a post-petition loan to redeem the Outlook that they now have no choice but to make this $740 payment. The Debtors entered into the redemption agreement at their own risk. Furthermore, even if the Debtors were to continue making this car payment, they could still afford a chapter 13 plan payment.
The Debtors apparently became obligated on the redemption loan on August 7, 2009. See Doc. 35, p. 10. We note that the UST's motion to dismiss was filed on July 23, 2009, before that date.
Focusing on the various factors that comprise the totality of circumstances, we observe that both Debtors have excellent jobs which should provide a stable source of future income. The Debtor wife has been a teacher in the Cincinnati school district for 13 years. Further, the Debtors' combined gross annual income of $112,963 is sizeable. We easily conclude that the Debtors have the ability to make a monthly payment in an amount that would result in a meaningful percentage to their unsecured creditors without depriving themselves or their children of adequate necessities. See In re Krohn, 886 F.2d 123. The source of funds could be an adjustment in their withholding and/or reduced spending on housing and/or vehicles and/or general daily belt-tightening.
This bankruptcy was not caused by an unforeseen or catastrophic event. The Debtors assert that "much" of their debt accumulated from medical bills after the Debtor wife sustained a spinal injury. See Doc. 35, p. 3. The Debtors later quantify the amount of their medical bills at $10,000. Id. This is less than 8% of their total unsecured debt and not a major contributing factor to their bankruptcy.
The Debtors also offer the following explanation of their financial situation:
"The vast majority of that debt was incurred for basic living expenses and to provide for necessities for our family. Our debt did not result from chronically living beyond our means and was not used to sustain an extravagant lifestyle. We believed we would be able to repay the debts in full at a later date when our incomes increased."
Doc. 33, ¶5. The Debtors' explanation supports our conclusion that the Debtors have "chronically" been living beyond their means for an extended period of time. If the Debtors have had to use credit cards since 1993 to support their lifestyle, then the Debtors have never been able to afford that lifestyle. If it can not be afforded, a $183,000 home, a Disney timeshare, and college savings plans are an extravagance.
The Debtors would like to be able to keep their expensive home, their timeshare, continue to contribute towards their retirement yet pay their creditors nothing. This is abuse under §707(b)(3).
Accordingly, the UST's motion to dismiss is hereby GRANTED.
IT IS SO ORDERED.