Opinion
Case No. 09-12930
11-6-2009
In re: Aiasha Watley, Debtor Chapter 7.
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. 20) and the Debtors' Response (Doc. 29). The issue before the Court is whether this bankruptcy should be dismissed for abuse pursuant to 11 U.S.C. §707(b)(3).
The Debtor works for the State of Ohio; the non-debtor husband also works for the State of Ohio and a second job at Office Depot. Debtor's Schedule I indicates combined gross annual income of $108,252. Debtor's Schedule I also indicates that income will be decreased by the State of Ohio, however no amendments to the schedules have been made to reflect this. The Debtors' Schedule I and J show their average net monthly income to be $6,108 and their average net monthly expenses to be $6,733, resulting in an average net monthly result of negative $625.
The Debtor's monthly negative cash flow may be larger in view of any salary decrease.
The Debtor's total secured debt is $349,882.42 and total unsecured debt is $42,843.
The Debtor values her residential real property at $330,000. There are two mortgages on the property; there is no equity. The Debtor has scheduled a monthly mortgage payment of $2,000 per month, which is 1.72 times the IRS housing allowance of $1,166. The Debtor is surrendering her residence.
The Debtor and her non-filing spouse received a tax refund totaling $2,074 in 2008. Debtor's Schedule J lists monthly payments for three cars totaling $1,206. The Debtor is reaffirming on the Nissan ($387 monthly payment) and is not assuming the lease on the Lincoln ($592 monthly payment).
The UST contends that if the Debtor reduces her housing allowance to 1.5 times the IRS allowance, adjusts federal income tax withholding, and uses the $592 monthly payment from the rejected lease on the Lincoln, the Debtor could pay 55% of her unsecured debt, and that the case should be dismissed for "abuse."
The Debtor asserts that she does not have the ability to fund a Chapter 13 plan. The Debtor states that the $2000 monthly housing expense is an estimate of what the Debtor needs to provide her family a rental home large enough to accommodate her family. The Debtor contends that 1.72 times the IRS allowance is reasonable based on the reasonableness of 1.5 times the allowance cited by the UST in In re DePelligrini, 365 B.R. 830 (Bankr. S.D. Ohio 2007)(Aug, J.).
The Debtor also states that the mortgage payment listed in Schedule J was an interest only payment for the mortgage loan.
The Debtor also contends that the tax refund received was paid to the State of Ohio for income taxes owed.
Finally, the Debtor states that the expenses listed in Schedule J are not accurate and need to be adjusted upward because it does not include payments to support dependents not living at home. She anticipates budgeting $250 per month for two college-aged children
As modified by the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"), 11 U.S.C. §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). Further, Congress has lowered the standard from requiring a showing of "substantial abuse" to a showing of "abuse." See In re Mestemaker, 359 B.R. 849 (N.D. Ohio 2007). Nevertheless, the pre-BAPCPA cases are still 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 Schubert, 384 B.R. 777 (Bankr. S.D. Ohio 2008)(Aug, J.); 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 (10 to 15%); In re Hess, 2007 WL 3028422 (N.D. Ohio Oct. 15, 2007)(14%).
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.
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.).
For purposes of this Court's analysis, the Court will accept the Debtor's contention that the Debtor's federal income tax refund went to pay the State of Ohio income tax owed.
The Debtor does not dispute that she is rejecting the lease on the Lincoln. Rejection of this lease will add $592 to Debtor's monthly budget.
The Debtor's assertion that her monthly budget needs to be adjusted to reflect expenses to support her college-aged children is without merit. The Court does not have sufficient information before it to determine whether these expenses are reasonable and necessary. The Court notes, however, that supporting emancipated children to the detriment of creditors "is contrary to the letter and spirit of the Bankruptcy Code." In re Baker, 400 B.R. 594 (Bankr. N.D. Ohio 2009).
The analysis then falls to the Debtor's allowance for housing. The Debtor believes that the monthly housing expense of $2000 is reasonable although it is 1.72 times the IRS housing allowance. The Debtor supports this contention by citing this Court's In re dePelligrini, 365 B.R. 830 (Bankr. S.D. Ohio 2007) decision for the proposition that this amount is reasonable. However, reasonableness was not the issue in In de Pelligrini. This Court simply noted in that case that if the IRS guidelines were accepted as reasonable, the debtor could pay 80% of his unsecured debt in that case. In re dePelligrini, 365 at 831. This Court then added that the debtor could still pay 40% of the unsecured debt if the Court accepted 150% of the IRS guidelines to be a reasonable amount. Id. In this case, the UST contends that even if the Debtor spends 1.5 times the IRS guidelines for housing, the Debtor could pay 35% of her unsecured debt.
We agree with the UST and conclude that the Debtors have the ability to make a monthly payment of as much as $218 and, therefore, the ability to pay their unsecured creditors a meaningful percentage — 30.5% — without depriving themselves or their children of adequate necessities. See In re Krohn, 886 F.2d 123. The source of funds is the following: $592 [rejection of Lincoln lease]; $251 [housing savings if paid 1.5 IRS housing allowance rather than 1.72] less $625 [Debtors' current monthly shortfall]. Even a lesser monthly payment would still result in a meaningful percentage for the unsecured creditors well within the boundaries of existing case law.
The Court notes the discrepancy listed in Debtor's response as to the housing allowance listed on Schedule J. The Debtor first states that the housing expense listed in Schedule J is an estimate for rental property to accommodate her family. The Debtor then states that the mortgage payment listed was an interest only payment. If the $2000 listed on Schedule J is an interest only mortgage payment, this is indicative of the Debtor purchasing more home than she can afford.
The Court also notes that Debtor's Schedule J expenses currently includes $500 per month for electric and heating fuel, which appears to this Court to be excessive. This may have been an estimate of monthly utility costs for the Debtor's $330,000 home, however as noted above it would appear that the Debtor purchased more home than she can afford. When the Debtor downsizes to a home more reasonable for her circumstances, this budgeted item should also decrease which would provide more funds to pay her creditors.
Focusing on the various factors that comprise the "totality of circumstances," we observe that the Debtor has a stable source of income. The Debtor and her husband have a sizeable annual income, despite any potential salary reduction. This bankruptcy was not caused by an unforeseen or catastrophic event. The Debtors are eligible to file a Chapter 13 case. The Debtor can reduce expenses without depriving herself and her family of adequate necessities.
Accordingly, the UST's motion to dismiss is hereby GRANTED; provided the Debtors shall have 20 days from the entry date of this Order to convert their case to a case under Chapter 13.
IT IS SO ORDERED.