Case No. 05-07378-Imj7 PRE BAPCPA CASE.United States Bankruptcy Court, S.D. Iowa.
September 20, 2010
MEMORANDUM OF DECISION (date entered on docket: September 20, 2010)
LEE JACKWIG, Bankruptcy Judge
The United States Trustee for Region 12 (“U.S. Trustee”) filed an 11 U.S.C. section 707(b) (2000) motion to dismiss this Chapter 7 case. The U.S. Trustee contends permitting Debtor Beth A. Faler (“Debtor”) to proceed with this liquidation case would be a substantial abuse of the provisions governing Chapter 7 because Debtor has the ability to pay a significant percentage of her consumer debt when her non-filing spouse’s income is taken into consideration and when scheduled expenditures are decreased in line with collection financial standards utilized by the Internal Revenue Service (“IRS”). Debtor maintains there is no disposable income to fund a Chapter 13 plan if her non-filing spouse’s debts and expenditures are taken into account. Having reviewed the record and the arguments of the parties, the Court enters its decision in favor of the Debtor.
The Court has jurisdiction of this matter pursuant to 28 U.S.C. section 1334 and the standing order of reference entered by the U.S. District Court for the Southern District of Iowa. This is a core matter under 28 U.S.C. section 157(b)(2)(A) and (O).
BACKGROUND
Debtor, who has been an administrative assistant with Iowa Bank and Trust Company in Iowa City, Iowa for approximately two decades, married John Francis
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McGinnis (“Mr. McGinnis” or “non-filing spouse”) approximately 19 months before she sought relief under Chapter 7 of Title 11 of the United States Code on September 23, 2005. Debtor and her non-filing spouse reside together and pool their incomes to pay their expenses.[1] She has no dependents. Mr. McGinnis’ children do not reside with them.
On Schedule I (Current Income of Individual Debtor(s)), Debtor reported that her net monthly income was $1,989.32, her non-filing spouse’s net monthly income was $2,970.64 and their combined net monthly income was $4,959.96. In her written objection to the motion to dismiss, Debtor explained that she had erred in the computation of Mr. McGinnis’ net monthly income. She should have listed it at $4,278.11, meaning the combined net monthly income was actually $6,267.43. On Schedule J (Current Expenditures of Individual Debtor(s)), she listed monthly expenses totaling $5,941.16. Those expenses included Mr. McGinnis’ $652.50 commuting costs and his $1,050.00 payment on a consolidation note secured by his vehicle.[2] They did not include monthly payments on his unsecured debts.[3] In the objection, Debtor
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indicated that Mr. McGinnis pays approximately $1,060.00 child support via an automatic debit from his bank account. That increases the total monthly expenses to $7,001.16 — an amount exceeding net monthly income by $733.73.
On Schedule D (Creditors Holding Secured Claims), Debtor listed one vehicle debt and two mortgage debts totaling $170,531.00.[4] On Schedule E (Creditors Holding Unsecured Priority Claims), she indicated she had no debts under this category. On Schedule F (Creditors Holding Unsecured Nonpriority Claims), she listed 14 debts totaling $112,000.00. [5]
Debtor testified that some of her scheduled debts were incurred before her marriage and some were incurred after her marriage.[6] A portion resulted from credit card cash advances that covered basic expenses when Mr. McGinnis was out of work.
Mr. McGinnis, an accounting manager for more than two decades, testified that he once earned as much as $90,000.00 to $100,000.00 a year but salaries at subsequent employments ranged between $65,000.00 and $70,000.00 annually. He started working for Barnstead International in Dubuque, Iowa approximately 6 months before Debtor filed her petition. Immediately prior to securing that work, he had been unemployed for three months. During that time, he received $1,200.00 a month in
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unemployment compensation. At his current employment, he was a salaried employee earning between $69,000.00 and $70,000.00 annually.
U.S. Trustee Exhibit 1 (Calculation of Income) indicates Debtor’s net monthly income is $1,999.18 and her non-filing spouse’s net monthly income is $4,278.11. Their combined and rounded down net monthly income is $6,277.00 — an amount exceeding what Debtor stated by $9.57. L. Todd Vandenberg, the U.S. Trustee’s Bankruptcy Analyst for the Southern District of Iowa, testified that the figures on the exhibit were based on Debtor’s semi-monthly pay advice and Mr. McGinnis’ bi-weekly pay advice for the pay period closest to the petition date.
U.S. Trustee Exhibit 2 (Analysis of Schedule J — Current Expenditures of Individual Debtor(s)) compares expenses Debtor listed on Schedule J with IRS standards based on Bureau of Labor statistics. Specifically, the exhibit indicates Debtor claimed (1) housing and utilities in the amount of $1,609.00 versus the IRS allowance of $1,150.00, (2) food, clothing and other items in the amount of $1,580.00 versus the IRS allowance of $1,280.00, and (3) transportation in the amount of $2,752.00 versus the IRS allowance of $1,158.00. With respect to uncategorized expenses, the exhibit indicates Debtor did not claim such an expense on Schedule J and therefore sets forth no IRS allowance. In sum, Debtor’s scheduled total expenses of $5,941.00 exceeded the total IRS allowance of $3,588.00 by $2,353.00.
U.S. Trustee Exhibit 3 (Repayment Capacity) suggests that Debtor should have $2,689.00 monthly disposable income after taking into account the adjusted income of $6,277.00 and the proposed expenses of $3,588.00. In turn, that amount of monthly disposable income would yield $96,804.00 disposable income over three years and
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$161,340.00 disposable income over five years. With respect to Debtor’s $112,200.00 unsecured debt, said total amounts of disposable income would provide debt service of 86.28% and 143.80% respectively.
Mr. Vandenberg acknowledged that the non-filing spouse’s child support obligation was missing from his calculations and should be allowed as an uncategorized expense. That would change the repayment capacity figures to $1,629.00 monthly disposable income ($2,689.00 — $1,060.00), [7]
$58,644.00 disposable income over three years ($1,629.00 × 36), $97,740.00 disposable income over five years ($1,629.00 × 60), 52.27% debt service over three years ([$58,644.00 × 100] $112,200.00), and 87.11% debt service over five years ([$97,740.00 × 100] — $112,200.00).
On cross-examination, Mr. Vandenberg stated that he assumed the non-filing spouse could reduce his transportation costs significantly and still maintain his level of income. He based that in part on documentation Debtor provided in support of the commuting expenses she set forth on Schedule J. He, however, identified the $1,050.00 car payment as the main problem in the transportation category. He assumed that Mr. McGinnis could rid himself of that debt and obtain a more economical vehicle. He agreed that Mr. McGinnis had unsecured debts that were not included on Debtor’s Schedule J but did not agree that he should have taken those debts into account when preparing Exhibit 2. In sum, with the exception of the child support obligation, it was Mr. Vandenberg’s opinion that the non-filing spouse’s “other unsecured debt shouldn’t be elevated any higher than Mrs. Faler’s debt. So allowing
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Mr. McGinnis to take money out of the household to pay his similarly situated unsecured debt from Mrs. Faler’s debt would be unfair to the unsecured debtor’s creditors.” (Tr. 18, 11.9-13.)
APPLICABLE LAW 11 U.S.C. section 707(b) (2000) provides in relevant part:
After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, but not at the request or suggestion of any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts if it finds that the granting of relief would be a substantial abuse of the provisions of this chapter. There shall be a presumption in favor of granting the relief requested by the debtor.
11 U.S.C. section 707(b) (2000). The Eighth Circuit substantial abuse inquiry focuses primarily on an individual debtor’s ability to pay his or her debts. See In re Koch, 109 F.3d 1285, 1288 (8th Cir. 1997); U.S.Trustee v. Harris, 960 F.2d 74, 77 (8th Cir. 1992); Fonder v. UnitedStates, 974 F.2d 996, 999 (8th Cir. 1992); In re Walton, 866 F.2d 981, 984-85 (8th Cir. 1989). The ability to pay is typically measured by assessing how much disposable income a debtor would be able to pay his or her unsecured creditors under a three to five year Chapter 13 plan. SeeKoch, 109 F.3d at 1288. 11 U.S.C. section 1325(b)(2) (2000) defines “disposable income” as follows:
“disposable income” means income which is received by the debtor and which is not reasonably necessary to be expended —
(A) for the maintenance or support of the debtor or a dependent of the debtor . . . and
(B) if the debtor is engaged in business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business.
11 U.S.C. § 1325(b)(2) (2000). The controlling circuit case law does not require a trial court to find a debtor can pay a specific threshold of unsecured debt over three to five
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years before that court may conclude the Chapter 7 filing amounts to substantial abuse. Rather, “the essential inquiry remains whether the debtor’s ability to repay creditors with future income is sufficient to make the Chapter 7 liquidating bankruptcy a substantial abuse of the Code.” Fonder, 974 F.2d at 999.
DISCUSSION
Resolution of the pending controversy first requires the Court to determine how much disposable income Debtor would likely have to fund a Chapter 13 plan. Then the Court must decide whether allowing Debtor to retain that amount in lieu of paying her unsecured debts is a substantial abuse of the Chapter 7 provisions. I. The Disposable Income Calculation
Monthly Income
There is no substantive dispute regarding the net monthly incomes of Debtor and the non-filing spouse. To the extent there is a slight variance between the amounts the U.S. Trustee set forth in Exhibit 1 and the amounts Debtor set forth on Schedule I for her income and in Exhibit 7 for her income and that of the non-filing spouse, [8] the Court adopts the figures of the U.S. Trustee because they were based on pay advices for the pay periods closest to the petition date. Accordingly, the Court finds that the combined net monthly income is $6,277.00.
Monthly Expenses
With the exception of Mr. McGinnis’ commuting expense, the U.S. Trustee does not appear to contend that the expenses in issue are not the actual amounts Debtor and
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her non-filing spouse incur on a routine basis.[9] Rather, the U.S. Trustee questions whether the amounts are reasonable when compared to the IRS standards for three of the following four categories:
Housing and Utilities (Local Standard for Johnson County, Iowa).[10]
The relevant maximum allowance is $1,150.00. On Schedule J and Exhibit F (Household Income and Expenses Worksheet), Debtor claims a total of $1,609.25. That amount includes $1,263.00 for two mortgages, [11] $45.00 for electricity and gas, [12] $45.00 for water and sewer, [13] $93.00 for telephone, $75.00 for home maintenance, $75.00 for homeowners association fees, and $13.25 for homeowners insurance.
The $459.25 difference between the sum of the actual expenses and the standard for this category of expenses may be attributable to the monthly payments on the two mortgages that Debtor and Mr. McGinnis acquired shortly before Debtor commenced this case. Both testified that they moved from North Liberty, Iowa to Lisbon, Iowa in order for Mr. McGinnis to cut his travel time to his place of employment
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in Dubuque, Iowa by approximately a half hour.[14] They decided to purchase a condominium in Lisbon because the total of the monthly mortgage payments was no more than what they had been paying to rent a condominium in North Liberty.[15] On Schedule A (Real Property), Debtor indicates that the market value of the condominium is $147,000.00 and that it secures total debt of $147,950.00. Based on the record, the Court finds that the mortgage payments and the other actual expenses in this category are reasonable.[16]
Food, Clothing and Other Items (National Standard).[17] The relevant maximum allowance is $1,280.00. On Schedule J and Exhibit F, Debtor claims a total of $1,580.41. That amount includes $691.00 for food, $150.00 for clothing, $50.00 for laundry and dry cleaning, $200.00 for medical and dental, [18] $100.00 for recreation, $31.41 for health insurance, $45.00 for cable television, $134.00 for miscellaneous items, $108.00 for housekeeping supplies, and $71.00 for personal care products.
The reason for the $300.41 difference between the sum of the actual expenses and the standard for this category of expenses is not readily discernable. The Court
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suspects that one of the items that appears on Schedule J is not an actual expenditure from Debtor’s net monthly income. That is, Debtor lists $31.41 for health insurance on Schedule J but also lists a $62.82 deduction for insurance on Schedule I. At a minimum the Court finds it curious that Debtor, who is paid semi-monthly, listed an amount on Schedule J that is exactly half the amount on Schedule I.[19]
Moreover, with respect to the element of reasonableness, the Court observes that amounts Debtor claimed for food, recreation, miscellaneous and personal expenses exceed amounts this Court has allowed in past written decisions and bench rulings dealing with 11 U.S.C. section 707(b) (2000).[20] Nothing in the record supports finding that application of the standard is not appropriate in this case. Accordingly, the Court finds that the claimed expenses under this category should be reduced by $300.41 to $1,280.00.
Transportation (Local Standard — Midwest Region).[21] The relevant maximum allowance is $1,158.00 — consisting of $813.00 ownership costs ( $475.00 for first car and $338.00 for second car) and $345.00 operating costs (total for two cars). (U.S. Trustee Exhibit 4.) On Schedule J and Exhibit F, Debtor claims a total of $2,751.50. That amount includes $1,549.00 ownership costs, consisting of $499.00 for her automobile installment payment[22] and $1,050.00 for Mr. McGinnis’ payment of the consolidation loan secured by his vehicle, and $1,202.50 operating costs, consisting of
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$345.00 for her commuting expenses, $652.50 for his commuting expenses, and $205.00 for automobile insurance.[23]
Mr. Vandenberg testified that the main reasons for the $1,593.50 difference between the sum of the actual expenses and the standard for this category of expenses are Mr. McGinnis’ monthly commuting expenses and his monthly payment on the debt secured by his vehicle. With respect to the former, he did not appear to challenge the number of miles Mr. McGinnis drives but did comment that Debtor’s exhibits did not support her non-filing spouse’s commuting expenses.
Operating Costs
Above average operating costs are justifiable in this case. Debtor and her non-filing spouse find themselves in a situation for which there does not appear to be a reasonable alternative. Mr. McGinnis secured the best income-producing job he could find at distance not so far away that it would have required Debtor to give up her employment. They moved to a location that reduced Mr. McGinnis’ commuting expenses more than it increased Debtor’s commuting expenses.
The record suggests that the actual operating costs are similar to the numbers Debtor set forth on Schedule J and Exhibit F. According to Exhibit S, a spreadsheet Mr. McGinnis prepared regarding his mileage and Debtor’s mileage for the first seven weeks in 2006, he drove an average of approximately 630 miles per week and Debtor drove an average of approximately 338 miles per week.[24] Mr. McGinnis used an
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estimated cost of $2.29 per gallon in one column of his spreadsheet and an IRS reimbursement allowance of “@. 445” in another; however, neither expense figure comes close to mirroring the IRS collection financial standard that the U.S. Trustee employed.[25] Relying on information contained in Debtor’s Exhibit C (“Your Driving Costs 2006,” an AAA Publication) that sets forth operating costs for various vehicles based on gas, maintenance and tires, and then taking into account the amount for auto insurance appearing on Schedule J and estimating other relevant costs, the Court finds that the scheduled $1,202.50 operating costs are reasonable.[26]
Ownership Costs
Debtor’s $499.00 automobile installment payment exceeds the $475.00 IRS allowance for a first vehicle by only $24.00. The Court finds this scheduled ownership cost to be reasonable. Mr. McGinnis’ $1,050.00 installment payment on the consolidation loan secured by his vehicle exceeds the $338.00 IRS allowance for a second vehicle by $712.00. The difference is due to this obligation being a consolidation loan rather than the type of car loan addressed by the IRS standard.
Mr. McGinnis incurred this obligation in an effort to pay off his past unsecured debts. His parents are cosigners. The record does not suggest that Mr. McGinnis has
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been a spendthrift, but he does have a total debt load of approximately $79,000.00 that includes a judgment against him.[27] Thus, it is far from certain that he could obtain a vehicle loan with a monthly payment in the range allowed by the IRS standard or successfully renegotiate better terms for the consolidation loan.[28] Hence, given the nature of this obligation and Mr. McGinnis’ financial condition, the Court finds this atypical scheduled ownership cost to be reasonable.
Uncategorized Expenses.
Mr. Vandenberg indicated that Mr. McGinnis’ $1,060.00 child support obligation should be an allowed expense under this category. Though the record is limited, the Court finds this expense to be reasonable.[29]
Monthly Balance
Without taking into consideration the non-filing spouse’s unscheduled monthly payments on unsecured debts, the sum of the allowed monthly expenses is $6,700.75. Subtracting that amount from the monthly income figure of $6,277.00 yields $423.75 negative disposable income.
II. The Substantial Abuse Analysis
Based on the above calculation, Debtor will have no disposable income over three to five years. Parenthetically, the Court observes that this case would not have
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been subject to an 11 U.S.C. section 707(b) (2000) dismissal if the non-filing spouse had been a joint debtor and had been able to limit his vehicle ownership cost to $338.00 because adding his unsecured debt to Debtor’s unsecured debt would have made the impact of $288.25 monthly disposable income negligible.[30] Lastly, to the extent the U.S. Trustee’s argument is that any disposable income in a case like this should be applied to a debtor’s unsecured debts exclusive of all of a non-filing spouse’s unsecured debts, the Court finds that approach to be elevating a debtor’s unsecured debts over those of the non-filing spouse.
CONCLUSION
WHEREFORE, the Court finds that the U.S. Trustee has not overcome the 11 U.S.C. section 707(b) (2000) statutory presumption in favor of granting the Debtor Chapter 7 relief and, therefore, the motion to dismiss must be denied.
A separate Order shall be entered accordingly.
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