Opinion
Case No. 01-18541, Adversary Case No. 02-1042
April 2, 2003
MEMORANDUM OF DECISION
This is an action to determine the dischargeability of marital debt. The Plaintiff, Malcolm J. Spencer, and the Defendant, Alicia A. Spencer, were divorced on October 12, 2001. The divorce decree obligated the Defendant to pay four joint debts and hold the Plaintiff harmless on the same. On November 15, 2001, the Defendant filed a Chapter 7 petition. By this action, the Plaintiff seeks a determination that the foregoing obligations are nondischargeable pursuant to 11 U.S.C. § 523(a)(15).
Section 523(a)(15) renders non-support, marital debt nondischargeable unless the debtor proves: (1) that he or she is unable to pay the debt; or (2) that the benefit to the debtor from discharging the debt would outweigh the detrimental consequence to the creditor. See 11 U.S.C. § 523(a)(15); Hart v. Molino (In re Molino), 225 B.R. 904, 907 (B.A.P. 6th Cir. 1998).
Section 523(a)(15) provides:
A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt —
. . . .
(15) not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, a determination made in accordance with State or territorial law by a governmental unit unless —
(A) the debtor does not have the ability to pay such debt from income or property of the debtor not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor and, if the debtor is engaged in a business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business; or
(B) discharging such debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse, or child of the debtor.
The Sixth Circuit Bankruptcy Appellate Panel has identified the burden of proof under § 523(a)(15) as follows:
The objecting creditor bears the burden of proof to establish that the debt is of a type excepted from discharge under § 523(a)(15). Once the creditor has met this burden, the burden shifts to the debtor to prove either of the exceptions to nondischargeability contained in subsections (A) or (B).
Molino, 225 B.R. at 907. At trial, the Defendant acknowledged that the Plaintiff satisfied his burden and that she now bears the burden of proof under subsections (A) and (B).
BALANCING TEST
The Bankruptcy Appellate Panel has articulated the legal standard under § 523(a)(15)(B) as follows:
"[T]he best way to apply the 11 U.S.C. § 523(a)(15)(B) balancing test is to review the financial status of the debtor and the creditor and compare their relative standards of living to determine the true benefit of the debtor's possible discharge against any hardship the spouse, former spouse and/or children would suffer as a result of the debtor's discharge. If, after making this analysis, the debtor's standard of living will be greater than or approximately equal to the creditor's if the debt is not discharged, then the debt should be nondischargeable under the 523(a)(15)(B) test. However, if the debtor's standard of living will fall materially below the creditor's standard of living if the debt is not discharged, then the debt should be discharged under 11 U.S.C. § 523(a)(15)(B)."
Molino, 225 B.R. at 908-09 (quoting In re Smither, 194 B.R. 102, 111 (Bankr.W.D.Ky. 1996)). To assist with this determination, the following eleven non-exclusive factors are utilized:
(1) The amount of debt involved, including all payment terms;
(2) The current income of the debtor, objecting creditor and their respective spouses;
(3) The current expenses of the debtor, objecting creditor and their respective spouses;
(4) The current assets, including exempt assets of the debtor, objecting creditor and their respective spouses;
(5) The current liabilities, excluding those discharged by the debtor's bankruptcy, of the debtor, objecting creditor and their respective spouses;
(6) The health, job skills, training, age and education of the debtor, objecting creditor and their respective spouses;
(7) The dependents of the debtor, objecting creditor and their respective spouses, their ages and any special needs which they may have;
(8) Any changes in the financial conditions of the debtor and the objecting creditor which may have occurred since the entry of the divorce decree;
(9) The amount of debt which has been or will be discharged in the debtor's bankruptcy;
(10) Whether the objecting creditor is eligible for relief under the Bankruptcy Code; and
(11) Whether the parties have acted in good faith in the filing of the bankruptcy and the litigation of the 11 U.S.C. § 523(a)(15) issues.
See Molino, 225 B.R. at 908-09.
1. The Plaintiff
The Plaintiff is forty-four years old with no dependents. He has a high school education. In February of 2000, he was laid off from his position as jewelry manager with Service Merchandise. In November of 2001, the Plaintiff started his own business selling insurance. He currently earns monthly gross wages of $2,916.66. Other than jewelry worth approximately $4,000-$5,000, the Plaintiff does not possess notable equity in any assets. The Plaintiff has over $54,000 in debt that he is attempting to pay through a debt management program.
2. The Defendant
The Defendant is forty-one years old with no dependents. She also has a high school education. She is currently employed by W.R. Grace Co. as a logistic export coordinator, earning monthly gross wages of $3,231.95. Other than $4,000 in retirement savings from a prior job, the Defendant does not possess notable equity in any assets. Excluding the marital debt at issue, the Defendant has discharged approximately $16,000 in debt through her Chapter 7 case. The only postpetition debt she has is her bankruptcy attorney's fees of approximately $4,000.
3. The Molino Factors
Of the eleven Molino factors, the Court believes that three merit particular discussion.
A. Current Liabilities of the Parties (Factor #5)
Excluding the debt at issue, the Defendant has approximately $4,000 of post-bankruptcy debt. The Plaintiff, on the other hand, has over $54,000 of debt to deal with. All other financial factors (e.g., income, expenses, assets, health, education, age, dependents, etc.) being relatively equal, this appears to represent the most significant difference between the parties.
The parties do have different expenses. The Plaintiff's Schedule J reflects monthly expenses of $6,697.82. Although this factor might appear to weigh in favor of the Plaintiff, $2499 of these expenses are related to debt maintenance and $1,155 represent business expenses. The Plaintiff also spends $350 per month on charitable contributions and $88 per month on life insurance — which is a bit curious given he has no dependents. Consequently, his day to day living expenses, totaling $2,606, do not significantly differ from those of the Defendant.
B. Plaintiff's Eligibility for Bankruptcy Relief (Factor #10)
The debt disparity between the parties begs the question of whether the Plaintiff could file his own bankruptcy petition to discharge his debts. There is nothing in the record to suggest that the Plaintiff is ineligible for bankruptcy or that any of his debts would be nondischargeable. Notwithstanding, the Plaintiff testified that he does not consider bankruptcy to be an option. The primary reason given by the Plaintiff was that bankruptcy would put him out of business. He testified that creditworthiness is very important in the insurance business as related to commissions and opportunities for promotion.
There are two types of commission in the insurance industry: "advanced" and "as earned." The former has greater income potential. If the agent is compensated on an advanced basis, the agent is paid a front-loaded commission based upon six, eight or ten months of the annual premium. If an agent is compensated on an "as earned" basis, the agent does not receive a front-loaded commission but receives commissions on a monthly basis only. Because agents must be able to repay advanced commissions if the account that generated the commission is terminated, insurance companies will not compensate an agent with advanced commissions unless the agent is creditworthy.
As to opportunities for promotion, the Plaintiff testified that his goal is to operate a managing general agency in five years. As a managing general agent, the Plaintiff would be responsible for promoting and building an agency on behalf of the insurance companies. However, the insurance companies will not permit an agent to do this unless the agent is reputable and creditworthy.
Lest anyone think that the Plaintiff's testimony is less than credible regarding his aversion to filing bankruptcy, the Defendant herself testified on direct examination that the Plaintiff was adamantly opposed to bankruptcy even when they were married — prior to his insurance business.
C. Good Faith (Factor #11)
The allocation of the parties' joint debt is embodied in a worksheet attached as an exhibit to the divorce decree. See Joint Exhibit XVIII. The worksheet is captioned "Alicia's Suggested Separation of Bills." The Defendant does not dispute that she suggested that she assume responsibility for the debts that she now seeks to discharge. Notwithstanding her suggestion/agreement to pay these debts, she made few, if any, payments on these debts thereafter. The divorce decree was entered on October 12, 2001. The Defendant didn't make any payments on the Mitsubishi lease or the Home Depot account after September or October of 2001. She made only one payment on the Fifth Third Visa, which was sometime before October of 2001. She never made any payments on the MBNA account. The Statement of Financial Affairs filed with her Chapter 7 petition reflects that the Defendant made her first payment to her bankruptcy attorney on November 1, 2001, only twenty days after the entry of the divorce decree. She filed her bankruptcy petition two weeks later. Based upon the foregoing, it appears that it did not take the Defendant long to determine that she could not, or would not, fulfill her obligation to pay the joint debts.
The Defendant testified that she fully intended to pay the joint debts. However, intervening dental problems made it impossible to do so. Once she realized the extent of her dental liabilities, she viewed bankruptcy as the only alternative.
The record does reflect a series of dental procedures beginning November 9, 2001. However, it also reflects other purchases during these months that would lead one to question the Defendant's sincerity with her creditors. For example, the Defendant purchased a three-year gym membership in December 2001, for $831. She also purchased a treadmill in January 2002, for $763. The Defendant noted that these items were purchased with money she received as a Christmas gift. Nevertheless, it represents discretionary funds that she chose to spend in a manner other than toward payment of her substantial indebtedness. Over the same two month period, she also spent $683 on clothing.
4. Balancing Molino Factors
Balancing the foregoing considerations, the Court concludes that the benefit to the Defendant from discharging the debt would not outweigh the detrimental consequence to the Plaintiff. The financial status of the parties is roughly the same, with the exception of the Plaintiff's $54,000 debt load. After observing the credibility and demeanor of the parties, the Court believes that the Plaintiff has been sincere with the Defendant and his creditors at all times. The Court cannot say the same about the Defendant. In one year, she was able to allocate approximately $10,000 toward the payment of dental work and luxury expenditures. At the same time, she failed to make any payments on the joint debts and sought the services of a bankruptcy attorney within days of the entry of her divorce decree. In essence, the Plaintiff impressed the Court as an individual who is doing his best to pay his creditors while the Defendant impressed the Court as someone who has no qualms about passing her losses to her creditors.
ABILITY TO PAY
To determine a debtor's ability to pay, courts compare the debtor's disposable income — as defined by 11 U.S.C. § 1325(b)(2) — with the debt in question. See Dunn v. Dunn (In re Dunn), 225 B.R. 393, 399-402 (Bankr.S.D.Ohio 1998); see also Hammermeister v. Hammermeister (In re Hammermeister), 270 B.R. 863, 877-79 (Bankr.S.D.Ohio 2001). The debt will be discharged under subsection (A) only if payment of the debt would reduce the debtor's income below that which is reasonably necessary for the maintenance or support of the debtor or a dependent of the debtor. Id.
The outstanding balance on the four debts at issue is $12,405.75. Consequently, the Court must examine the Defendant's budget to determine whether she possesses disposable income sufficient to pay this debt.
This figure represents the sum of the last known balances on each debt. Joint Exhibit XIV reflects a November 25, 2002 balance on the Fifth Third Visa account of $5,707.47. Joint Exhibit XV reflects an October 3, 2002 balance on the MBNA account of $3,686.27. Joint Exhibit XVI reflects a May 7, 2002 balance on the Mitsubishi lease of $2,269.01. The Plaintiff testified that the Home Depot account has an outstanding balance of $743.00.
Following the trial, the Defendant filed amended schedules I and J. The amended schedules reflect net monthly take home pay of $2,119.70 and total monthly expenses of $2,435.00. Therefore, taken at face value, the Defendant's budget reflects no disposable income available to pay the debt. However, courts must carefully examine the debtor's schedules to determine if they accurately depict disposable income. See Hammermeister, 270 B.R. at 878-79. In this case, the amended schedules do not.
Amended Schedule J reflects total monthly expenses of $2,435.00. Four of these expenses merit discussion: rent, auto payments, attorney's fees and grooming.
1. Rent
The Defendant is currently living with a boyfriend and paying him $250 per month for rent. She testified that she wants to rent a place of her own within the next six to eight months. She stated that her goal is to rent for $700 per month. Her testimony is consistent with the Schedule J that she filed with the petition, where she disclosed a $250 expense for rent and an additional $450 expense for "projected rent." Notwithstanding the Defendant's clear intention to allocate $700 per month for rent, her amended Schedule J reflects a $50 increase in this category without any explanation. Given that the amendment was filed less than two weeks from the day that the Defendant testified that she needed $700 per month for rent, the Court finds the amendment to be disingenuous. As such, the Defendant's monthly expense for rent will be reduced by $50 to better reflect prior testimony. See Hammermeister, 270 B.R. at 878-79 (reducing expenses where no explanation was given for increase in certain budget items and court was "left to speculate whether the Schedules I and J prepared for trial were artificially inflated by the Debtor in order to produce a monthly deficit").
Amended Schedule J reflects a $250 expense for rent and a $500 expense for "projected rent."
2. Installment Auto Payment
At the time that the Defendant filed her Chapter 7 petition, her schedules reflect that she was leasing a 1999 Mitsubishi Galante for $277 per month. Pursuant to an agreed entry granting relief from the automatic stay, the vehicle was repossessed. The Defendant currently drives a 1993 Chevrolet station wagon that she purchased for $100 in cash. The Plaintiff argues that this change in circumstances yields an additional $277 in disposable income to pay the debt in question.
The Defendant testified that her immediate goal, before locating an apartment of her own, is to obtain a more dependable vehicle. She stated that she would like to allocate $350 per month toward such a vehicle. Consistent with her testimony, the Defendant's amended Schedule J reflects a "projected auto payment" of $350 per month.
Prohibiting the Defendant from obtaining a more dependable vehicle might only diminish her ability to pay the marital debt. First, her monthly expenses for vehicle maintenance and fuel would likely be higher. Second, she might experience a reduction in income if she were to miss work because of an unreliable car. However, the Court does not believe that the Defendant needs to spend $350 per month to obtain a dependable vehicle. A monthly payment of $300 should be more than sufficient to enable the Defendant to obtain a reliable, late-model (if not new) vehicle. Accordingly, the Defendant's monthly expense for auto payments will be reduced by $50.
Notwithstanding the reduction, the Defendant will still be spending more than the Plaintiff on auto payments. He budgets $292 for monthly auto payments. Moreover, the Defendant's allowed monthly expense of $300 for a car payment represents an 8% increase in her monthly car payment since the time of the bankruptcy filing.
3. Attorney's Fees
The Defendant testified that she currently owes $2,000 in post-bankruptcy attorney's fees and, by the time her case is closed, expects to owe an additional $2,000. Accordingly, amended Schedule J reflects a $333 monthly expense for attorney's fees. Although this is clearly an expense to the Defendant, the question is whether the expense is reasonably necessary for the Defendant's maintenance and support.
By scheduling this expense, the Defendant is making the following argument by implication: "I can't afford to pay $333 of my monthly income toward the marital debt because that money is needed to pay the attorney I hired to avoid paying that debt." If this practice were condoned, it could encourage debtors to adopt the unhealthy attitude that: "I'd rather pay money to an attorney than to my former spouse pursuant to a court ordered property settlement." Therefore, this Court joins those holding that bankruptcy attorney's fees, although legitimate expenses, are not reasonably necessary for the debtor's maintenance and support under the § 523(a)(15)(A) analysis. See Sparagna v. Metzger (In re Metzger), 232 B.R. 658, 664 (Bankr.E.D.Va. 1999); Fitzsimonds v. Haines (In re Haines), 210 B.R. 586, 592 (Bankr.S.D.Cal. 1997).
4. Grooming
The Defendant budgets $100 per month for "Grooming, etc." When asked to explain what expenses fall within this category, the Defendant testified that it included "mostly . . . haircuts" and a "monthly maintenance fee." The Defendant did not further define the expenses covered by the "monthly maintenance fee."
Given the lack of substantiation, the Court finds $100 per month to be more than reasonably necessary for the Defendant's maintenance and support. The Court concludes that $40 per month should provide the Defendant with ample funds for "haircuts." Anything beyond this amount is simply unnecessary for maintenance and support. Accordingly, the Defendant's "grooming" expenses will be reduced by $60 per month.
5. Reasonably Necessary Monthly Expenses
Based upon the foregoing, the Court will reduce the Defendant's monthly expenses by $493. As such, the Defendant has $1,942 in monthly expenses that are reasonably necessary for her maintenance and support.
6. Monthly Disposable Income Compared to Total Debt
Given the Defendant's net monthly take home pay of $2,119.70 and her reasonably necessary monthly expenses of $1,942, she is left with monthly disposable income of $177.70. Applying this amount to the total marital debt of $12,405.75, it would take the Defendant less than six years to repay all four of the joint debts. Under these circumstances, the Court concludes that the Defendant has the ability to pay the debt. See Sacher v. Gengler (In re Gengler), 278 B.R. 146, 152 (Bankr.N.D.Ohio 2002) (debtor possessed ability to pay under § 523(a)(15)(A) where monthly disposable income permitted payment of debt in less than six years); Cox v. Brodeur (In re Brodeur), 276 B.R. 827, 835 (Bankr.N.D.Ohio 2001) (debtor possessed ability to pay under § 523(a)(15)(A) where monthly disposable income permitted payment of debt in eight years); Koenig v. Koenig (In re Koenig), 265 B.R. 772, 776 (Bankr.N.D.Ohio 2001) (debtor possessed ability to pay under § 523(a)(15)(A) where monthly disposable income permitted payment of debt in eight and one-half years); Christison v. Christison (In re Christison), 201 B.R. 298 (Bankr.M.D.Fla. 1996) (marital debt nondischargeable under § 523(a)(15) to the extent of debtor's disposable income over ten year period).
CONCLUSION
For the foregoing reasons, the Defendant's obligation — arising out of an October 12, 2001 divorce decree — to hold the Plaintiff harmless on four joint debts will be NONDISCHARGEABLE pursuant to § 523(a)(15). This debt shall be payable in monthly installments of $177.70. An order to this effect will be entered.