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UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION In re John D. McIvor Case No. 06-42566 Chapter 7 Debtor. Hon. Marci B. McIvor
OPINION DENYING TRUSTEE’S MOTION TO DISMISS CASE This matter came before the Court on the U.S. Trustee’s Motion to Dismiss pursuant to 11 U.S.C. §§ 707(b)(2)(presumption of abuse) and (b)(3)(totality of the circumstances). A hearing on the Motion was held October 11, 2006. At the conclusion of the hearing, the Court issued a bench opinion denying the Trustee’s Motion on both grounds. This written Opinion is issued to memorialize and clarify the Court’s prior ruling. Background Debtor filed a voluntary chapter 7 bankruptcy petition on March 6, 2006. Debtor’s schedules show general unsecured debt of $ 51,536.01, which is primarily consumer debt. Debtor’s means test form (Form B22A) shows monthly disposable income of $157.66– an amount that reflects a $471 monthly transportation expense (line 23 of form B22A) taken for a car which Debtor owns. Debtor has no monthly car payment. Debtor’s schedules I and J disclose a monthly surplus of $208.17, which includes $500 for food and $100 for laundry expenses. On May 17, 2006, the U.S. Trustee filed a Motion to Dismiss the case pursuant to 11 U.S.C. §§ 707(b)(2) and (b)(3). The Trustee argues that Debtor incorrectly deducted the $471 vehicle ownership expense on line 23 of form B22A. Because Debtor does 2 not make any monthly payments on the vehicle, the Trustee argues that Debtor is not entitled to the expense. The Debtor’s inclusion of the expense on the B22A form causes an understatement of Debtor’s monthly income such that a presumption of abuse does not arise. The Trustee contends that if the ownership expense is excluded and the proper expense (a $200 operating expense) is taken, Debtor’s monthly income increases by $271 and the presumption of abuse arises. Debtor’s case must then be dismissed under § 707(b)(2). The Trustee also argues that Debtor’s monthly expenses for food and laundry are excessive. The Trustee believes that if Debtor cuts those expenses by half, he would have a monthly surplus in excess of $500, an amount that would enable him to pay over 50% of his unsecured debt over the course of a 60 month plan. Because he believes the expenses, as scheduled, are excessive, the Trustee seeks dismissal under § 707(b)(3)’s totality of the circumstances test. Jurisdiction The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(A). Analysis 11 U.S.C. § 707(b)(1) provides that the Court “may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or with the debtor’s consent, convert such a case to a case under chapter 11 or 13 of this title if it finds that the granting of relief would be an abuse of the provisions of this chapter.” Section 707(b)(2)(the “means test”) provides: 1The National and Local Standards referred to are the Collection Financial Standards used by the Internal Revenue Service to determine a taxpayer’s ability to pay delinquent taxes. As applied in this case, those standards set the monthly transportation expense for this geographic area at $471. 3 (2)(A)(i) In considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter, the court shall presume abuse exists if the debtor’s current monthly income reduced by the amounts determined under clauses (ii), (iii), and (iv), and multiplied by 60 is not less than the lesser of – (I) 25 percent of the debtor’s nonpriority unsecured claims in the case, or $6,000, whichever is greater; or (II) $10,000. In the present case, Debtor’s monthly disposable income as calculated on Form B22A is insufficient to give rise to the presumption of abuse. The Trustee contends that the form understates Debtor’s monthly income by including a $471 expense for owning a car even though Debtor has no monthly car payment. In determining the appropriate transportation expense, the Court must look to the language of the code. The relevant section, 11 U.S.C. § 707(2)(A)(ii)(I), states: 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. . . (Emphasis added). 1 Debtor and the Trustee disagree on the meaning of the term “applicable.” The Trustee argues that if a debtor does not have a monthly car payment, there cannot be any “applicable monthly expense amounts” for a car payment. Debtor asserts that the monthly expense is not tied to any actual expense, rather it is a 2See, In re Haley. 2006 WL 2987947 (Bankr. D. N. H. Oct. 18, 2006); In re Fowler, 349 B.R. 414 (Bankr., D. Del. 2006); In re Demonica, 345 B.R. 895 (Bankr. N.D. Ill. 2006);(cases allowing an ownership expense when debtor has no monthly car payment): Contra In re McGuire, 342 B.R. 608 (Bankr. W.D. Mo. 2006); In re Hardacre, 338 B.R. 718 (Bankr. N.D. Tex. 2006); In re Harris, 2006 WL 2933891 (Bankr. E.D. Okla.). 4 standard deduction given to every debtor who owns a vehicle, regardless of whether the vehicle is owned outright or still subject to a lien. According to Debtor, the term “applicable monthly expense amount” refers to the amount applicable to that debtor based on the geographic area in which a debtor resides. Several other courts have grappled with this issue.2 Having reviewed the split of authority that exists on this issue, the Court is persuaded by the reasoning of the court in In re Fowler, 349 B.R. 414 (Bankr. D. Del. 2006). In Fowler, the court ruled that every debtor who owns a vehicle, even those who do not have monthly payments, is entitled to the minimum Local Standards deduction for transportation expenses. The facts of the Fowler case are identical to the case at bar. The trustee sought dismissal of the debtor’s case under § 707 (b)(2), alleging that the debtor overstated his monthly expenses by $471–the Local Standards transportation expense. The debtor owned his vehicle and had no monthly payment. The Court, recognizing that the bankruptcy code borrows the concept of a local standard deduction from the Internal Revenue Code, discussed, and then rejected, the idea that the Local Standards expense must be applied in a manner consistent with the IRS. While the IRS, in the context of determining a delinquent taxpayer’s ability to pay, does not permit a Local Standard vehicle deduction for taxpayers who do not have a monthly car expense, it is not obvious that Congress intended the same result in the bankruptcy context. As 5 discussed in Fowler, following the IRS’ rules in the context of bankruptcy cases can produce patently unfair results. In fact, the legislative history of § 707(b)(2) indicates that a specific reference to the Internal Revenue Service financial analysis was deleted by Congress. Fowler at 419. The Fowler Court discussed the case law and disagreed with those courts which deny a debtor the Local Standards ownership deduction when debtor does not have a a monthly car payment. The court stated: The Court respectfully disagrees with the decisions in McGuire [In re McGuire, 342 B.R. 608, 613 (Bankr. W.D. Mo. 2006)] and Hardacre [In re Hardacre, 338 B.R. 718, 728 (Bankr. N.D. Tex. 2006)] and agrees with the decision of the Demonica [In re Demonica, 345 B.R. 895 (Bankr. N.D. Ill. 2006)] court. The Court in McGuire correctly noted that the Local Standards for transportation applied to vehicles owned by a debtor and stated that ‘[i]f a debtor does not own or lease a vehicle, the ownership expense is not ‘applicable’ to that debtor.’ 342 B.R. at 613. The McGuire Court then concluded, however, that ‘if a debtor is not incurring expenses for the purchase or lease of a vehicle, the debtor cannot claim a vehicle ownership expense under the IRS Standards. This conforms with the IRS’s application of the Standards.’ Id. It appears that the McGuire Court was equating “ownership” with “liability for debt.” Further the McGuire Court acknowledged that during the life of the debtor’s plan, he probably would need to purchase a new car. Id. at 614. The Court stated that, if that happened, the debtor would be able to seek an adjustment of his plan payments to account for that. Id. Obviously, this Court, in determining a motion to dismiss a Chapter 7 case, cannot do that. Fowler, 349 B.R. at 421. This court agrees that a debtor should not be penalized for paying off a vehicle pre-petition. As Judge Wedoff stated in an article for the American Bankrupty Law Journal: Since the means test treats the Local Standards not as caps but as fixed allowances, it is more reasonable to permit a debtor to claim the Local Standards ownership expense based on the number of vehicles the debtor owns or leases, rather than on the number for which the debtor 6 makes payments. This approach reflects the reality that a car for which the debtor no longer makes payments may soon need to be replaced (so that the debtor will actually have ownership expenses), and it avoids arbitrary distinctions between debtors who have only a few car payments left at the time of their bankruptcy filing and those who finished making their car payments just before the filing. Wedoff, Means Testing in the New World, 79 Am. Bankr.L.J. at 255-277 (footnotes omitted). The Fowler court also stated policy considerations for allowing debtors to take the ownership expense based on an applicable local standard. The Court stated: Congress intended that there be an easily applied formula for determining when the Court should presume that a debtor is abusing the system by filing a chapter 7 petition. Presumptions are typically created to avoid litigation. . . By reference to the National and Local Standards, Congress intended the Court to use a chart of standard expenses for all debtors which could be easily and uniformly applied: the Court simply takes the expense amount from the applicable column based on the debtor’s income, family size, number of cars and/or locale. This easy application should avoid litigation. Fowler, 349 B.R. at 420-421 (emphasis in original). The Fowler court concluded by declining to follow McGuire and Hardacre, and holding “that section 707(b)(2)(A)(iii)(I) permits the Debtor to take the Local Standards deduction for ownership of a car even though she has no car payment.” Fowler, 349 B.R. at 420. This Court concurs with the analysis and holding of Fowler and adopts its reasoning in the present case. The Court also expressly rejects the Trustee’s assertion that “applicable” expense means “actual” expense. The statute explicitly differentiates between “applicable monthly expense amounts specified under the National Standards and Local Standards” which are used for housing, utility and transportation expenses, 7 and a debtor’s actual monthly expenses for categories specified as “Other Necessary Expenses” (such as taxes, life insurance, health care, court ordered expenses, etc.). Congress was clearly capable of differentiating between the terms “applicable” and “actual” –if every expense was intended by Congress to be the debtor’s “actual” expense, Congress could easily have said so in the statute. See In re Farrar-Johnson, 2006 WL 2662709 (Bankr. N.D. Ill. 2006). The Court finds that the word “applicable” in the context of § 707(b)(2)(A)(ii)(I) means the applicable Local Standards as it pertains to the area in which a debtor resides. On the facts of the present case, Debtor’s Form B22A is correct and the presumption of abuse does not arise. Section 707(b)(3): Totality of the Circumstances 11 U.S.C. § 707(b)(3) provides: In considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter in a case in which the presumption in subparagraph (A)(I) of such paragraph does not arise or is rebutted, the court shall consider– (A) whether the debtor filed the petition in bad faith; or (B) the totality of the circumstances (including whether the debtor seeks to reject a personal services contract and the financial need for such rejection as sought by the debtor) of the debtor’s financial situation demonstrates abuse. The U.S. Trustee argues that based on the totality of the circumstances, the Debtor’s case should be dismissed. The Trustee contends that Debtor has sufficient income to pay reasonable expenses and have sufficient funds left over to pay a meaningful dividend to unsecured creditors through a Chapter 13 plan. For the following reasons 8 the Court finds no abuse under § 707(b)(3). While the case was filed after the enactment of Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), the Court finds that the standard for evaluating abuse under § 707(b)(3) of the new act is identical to the standard used for determining “substantial abuse” pre-BAPCPA. (See In re Travis, case no. 06-43456 (Bankr. E.D. Mich), Opinion Denying Trustee’s Motion to Dismiss dated November 6, 2006). Under the old Act, section 707(b) provided a presumption in favor of granting the relief requested by the debtor. The Court looked to the debtor’s honesty and to the debtor’s ability to tighten his or her belt in order to evaluate substantial abuse. In the present case, the U.S. Trustee did not question Debtor’s honesty in filing his bankruptcy. The only issue is whether the Debtor is sufficiently needy to qualify for the benefits of a Chapter 7 discharge. In In re Krohn, 896 F.2d 123 (6th Cir. 1989), the court set out the following factors to be used in determining a debtor’s “need” for Chapter 7. Those factors are: 1. whether the debtor enjoys a stable source of income; 2. whether he is eligible for adjustment of his debts through Chapter 13; 3. whether there are state remedies with the potential to ease his financial problems; 4. the degree of relief obtainable through private negotiations; and 5. whether his expenses can be reduced significantly without depriving him of adequate food, clothing, shelter, and other necessities. Id. at 126-127. In Krohn, the Sixth Circuit affirmed the bankruptcy court’s dismissal of a debtor’s 9 case for substantial abuse, finding that the debtor consistently lived on credit and beyond his means. The court found that section 707(b) statutory preference in favor of granting relief was inappropriate under the totality of the circumstances. Krohn’s income was $4,015 per month and his expenses were $3,950. Even after filing his Chapter 7 petition, the debtor continued to spend excessively; his post petition expenses for a three month period included $1,065 for dining out, lunch and recreation (in excess of the $355 he was spending on groceries), $169 for cosmetics, and $66 for cigars. He had ample future income and his financial situation was not the result of any unforseen event or catastrophe. Based on these facts, the Sixth Circuit affirmed the bankruptcy court’s dismissal of the case for substantial abuse under 707(b). Id. At 1270128. When the Krohn standard is applied to the facts of the instant case, the Court finds that the Debtor is, indeed, a Debtor in need of a Chapter 7 bankruptcy. The Debtor testified credibly that he attempted to renegotiate his debt with unsecured creditors and was unsuccessful in doing so. The Trustee has argued that Debtor can reduce his expenses approximately $400 per month without significantly affecting the Debtor’s standard of living. The Court disagrees. The Debtor’s schedule I income was slightly higher than the pay stub income introduced by the Debtor at trial. Even using the higher figure set forth in schedule I, the Debtor’s net disposable income is $3,414.84 per month. The Debtor’s schedule J showed expenses of $3,206.67, leaving $208.17 per month available for possible contribution to unsecured creditors. The U.S. Trustee argued that the Debtor could also easily reduce his food ($500), transportation ($400), and recreation ($150) expense 10 and the Debtor no longer had laundry expense. While these expenses are a little high, they are not unreasonable under the totality of the circumstances. The Debtor’s testimony and the Debtor’s schedules demonstrate that the Debtor’s bankruptcy filing is not an abuse of the bankruptcy system. First, the Debtor drives a 1994 vehicle with 133,000 miles on it. It is reasonable to anticipate that Debtor is going to have a need for a new vehicle in the very near future. Second, Debtor has not incurred his unsecured debt through a pattern of living beyond his means in the period prior to bankruptcy. The Debtor’s credible testimony was that the vast majority of the $51,000 in unsecured debt was incurred during his marriage which lasted from 1999 to 2003. He was the sole owner of the credit cards, although the cards were used to purchase goods for both Debtor and his ex-wife. Approximately $30,000 of his general unsecured debt was incurred prior to the divorce and much of the remaining balance is interest and penalties assessed by the unsecured creditors. The Debtor had not used his credit cards for one year prior to the filing of his bankruptcy. Third, the Debtor’s schedule J and his testimony indicate that Debtor is making interest only payments on his mortgage. After his divorce, Debtor had no assets and testified that he lived with his parents until March, 2004. In March, 2004, he purchased a house with no money down and the mortgage company financing the down payment through a home equity loan. Debtor is making monthly installment payments on the home equity loan and interest only payments on his mortgage. Given that there is no allegation of dishonesty or wrongdoing on the Debtor’s part, it is reasonable to allow the Debtor to use whatever small amounts of income he has to make payments on the 11 principal on his mortgage. Fourth, this Debtor tried to renegotiate his debt, but was unsuccessful. He only turned to bankruptcy when he was unable to make even the minimum payments on his unsecured debt and make his other fixed payments. Based on the totality of the circumstances, this debtor is not a debtor who is abusing the bankruptcy system. “There is nothing in the facts of this case which shocks the conscience of this Court in the context of contravening the fundamental notions of fairness and the provisions of Chapter 7.” In re Keating, 298 B.R. 104, 111 (Bankr. E.D. Mich. 2003), citing In re Hammer, 124 B.R. 287, 289 (1991). Debtor is a working man who is unable to pay his obligations, most of which were incurred more than three years ago by Debtor and his ex-wife. Debtor’s net income is approximately $40,000 per year, and he is working hard to get back on his feet financially. He is entitled to the fresh start provided by Chapter 7 of the Bankruptcy Code. Conclusion For the foregoing reasons, Trustee’s Motion to Dismiss pursuant to 11 U.S.C. § 7070(b)(2) and (b)(3) is denied. . Signed on November 15, 2006 /s/ Marci B. McIvor Marci B. McIvor United States Bankruptcy Judge
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