In re Farrar-Johnson

• Decision Date: 15 September 2006
• Docket Number: No. 06 B 3089.,06 B 3089.
• Parties: In re Carolyn FARRAR-JOHNSON and Ronnie Nelson, Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

353 B.R. 224

In re Carolyn FARRAR-JOHNSON and Ronnie Nelson, Debtors.

No. 06 B 3089.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

September 15, 2006.

COPYRIGHT MATERIAL OMITTED

Patrick J. Hart, Libertyville, IL, for debtors.

Gerald Mylander, Lisle, IL, for Chapter 13 Trustee Glenn B. Stearns.

MEMORANDUM OPINION

A. BENJAMIN GOLDGAR, Bankruptcy Judge.

This matter is before the court on the motion of Chapter 13 Trustee Glenn Stearns to dismiss the bankruptcy case of debtors Carolyn Farrar-Johnson and Ronnie Nelson. The trustee complains that the debtors have failed to file an amended plan and amended Schedule J, and the resulting unreasonable delay, prejudicial to creditors, requires dismissal of their case under section 1307(c)(1) of the Bankruptcy Code, 11 U.S.C. § 1307(c)(1). The debtors respond that their plan and Schedule J are perfectly acceptable. For the reasons that follow, the motion to dismiss will be denied.¹

1. Jurisdiction

The court has subject matter jurisdiction over this case pursuant to 28 U.S.C. § 1334(a) and the district court's Internal Operating Procedure 15(a). This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) and (L).

2. Background

The record discloses no factual disputes necessitating an evidentiary hearing. The following facts are taken from the debtors' petition, schedules, and plan, as well as from the parties' memoranda.

Debtors Carolyn Farrar-Johnson and Ronnie Nelson are married and live in Great Lakes, Illinois. Farrar-Johnson lists her employer as "DFAS," presumably the Defense Finance and Accounting Service. Nelson lists his employer as "Nexcorn," the Navy Exchange Service Command. It is unclear whether the debtors are members of the military or civilian employees, but it is clear that they live in military housing at the Great Lakes Naval Station.

The debtors filed their chapter 13 petition on March 25, 2006, making them subject to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"). Their schedules show no mortgage debt. The only secured creditors listed on Schedule D are two automobile lenders. Schedule F, however, discloses $59,053 in unsecured debt, virtually all of it credit card debt.

On their Schedule I, the debtors listed combined gross monthly wages of $5,284 and combined net monthly income (after deductions for taxes and insurance) of $4,176. Consistent with Schedule D, the debtors' Schedule J discloses neither a mortgage payment nor any form of rent. However, the debtors did list on Schedule J $250 for monthly home maintenance expenses and $175 for homeowner's insurance. They also listed as monthly expenses $200 for clothing, $700 for transportation, $150 for recreation, $245 as "pet expense" ($45 of it for "pet insurance"), $500 for food, $100 for cable television, and $46 for a DSL internet connection. Schedules I and J together leave the debtors with $286 in monthly income net of expenses.

Along with their petition and schedules, the debtors completed and filed the required Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income, known as "Form B22C." The calculation of their annualized income on the form comes to $63,408, putting them over the $53,320 median income for a two-member Illinois household and requiring them to determine their disposable income under 11 U.S.C. § 1325(b)(3). The debtors therefore entered on the form the deductions allowed under 11 U.S.C. § 707(b)(2). Among other things, they claimed a deduction of $1,233 for housing using the IRS Local Standard for a two-member household in Lake County, Illinois. The debtors' total deductions on Form B22C are $4,953, leaving them monthly disposable income of $331.

The debtor's proposed plan addresses only their unsecured debt. The two automobile lenders are to be paid directly through military pay allotment. The debtors propose in their plan to pay their unsecured creditors $17,380 of the $59,053 those creditors are owed, or 29%, over the debtors' five-year "applicable commitment period," 11 U.S.C. §§ 1325(b)(1)(B), (4)(A)(ii).

Trustee Stearns takes umbrage at this proposal. In his view, the debtors' expenses on their Schedule J are overstated and unreasonable — $200 on clothing, $150 on recreation, $245 on pets, and so forth — and the debtors thus are not committing all disposable income to the plan as the Code requires.² Even after BAPCPA, the trustee argues, courts not only can but "must" consider Schedule J in determining disposable income. The trustee also complains that the debtors have improperly claimed a housing expense on Form B22C when they have no housing expense. Finally, the trustee argues, "a good faith analysis is still appropriate under BAPPA." Given the Schedule J and Form B22C, he says, the debtors have not acted in good faith.³

3. Discussion

For good or ill, the trustee loses on all counts. When a debtor is above the median income as these debtors are, BAPCPA's new section 1325(b)(3) calculates disposable income without considering the debtor's Schedule J. By reference to section 707(b)(2)(A), section 1325(b)(3) also lets an above-median debtor claim a housing expense on Form B22C even if he has no housing expense. And whether a debtor is above or below the median, the "good faith" requirement in section 1325(a)(3) cannot be used to attack a debtor's calculation of disposable income.

a. Schedule J and the Above-Median Debtor

The trustee's objection to the expenses shown on the Schedule J in this case would have been a strong one in the period before BAPCPA's enactment.⁴ Under the new section 1325(b)(3), however, Schedule J is not relevant to the determination of disposable income when a debtor's income is above the median.

Before BAPCPA, Schedule J was essential to the disposable income question for every debtor: the analysis was "one-size-fits-all." In re Renicker, 342 B.R. 304, 307 (Bankr.W.D.Mo.2006). Section 1325(b) said that if the trustee or an unsecured creditor objected to confirmation of the plan, the debtor either had to pay all claims in full or he had to commit to the plan all projected disposable income received in the next three years. 11 U.S.C. §§ 1325(b)(1)(A), (B). "Disposable income" was defined in section 1325(b)(2) to mean income "not reasonably necessary to be expended ... for the maintenance or support of the debtor or a dependent of the debtor," 11 U.S.C. § 1325(2)(A), and was generally calculated by subtracting the debtor's expenses on Schedule J from the debtor's income on Schedule I. In re Alexander, 344 B.R. 742, 746 (Bankr. E.D.N.C.2006). The bankruptcy court decided in its discretion whether the expenses on Schedule J were in fact "reasonably necessary." Id.

BAPCPA ushered in a new calculation of "disposable income" for some debtors, one designed to make the determination for those debtors "formulaic." In re Davis, 348 B.R. 449, 452-53 (Bankr.E.D.Mich. 2006). Section 1325(b)(2) still subtracts "amounts reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor" from a debtor's disposable income, 11 U.S.C. § 1325(b)(2)(A)(i), although "disposable income" is now defined as "current monthly income" (a term itself defined in section 101(10A), 11 U.S.C. § 101(10)(A)). The change of significance here comes in new section 1325(13)(3). Under that section, "amounts reasonably necessary" are determined differently if the debtor's current monthly, income exceeds the median income in the debtor's home state. The expenses for such a debtor, section 1325(b)(3) says, "shall be determined in accordance with subparagraphs (A) and (B) of section 707(b)(2)."⁵ 11 U.S.C. § 1325(1)(3).

Those provisions constitute the "means test," long a "central feature" of bankruptcy reform efforts, Eugene R. Wedoff, Means Testing in the New § 707(b), 79 Am. Bankr.L.J. 231, 231 (2005), and employed in BAPCPA to determine whether granting relief to a chapter 7 debtor would be an abuse of that chapter. Like the calculation under section 1325(b)(2), the calculation under section 707(b)(2) subtracts certain monthly expenses from current monthly income. 11 U.S.C. § 707(b)(2)(A)(i); see Wedoff, supra, at 240. Under section 707(b)(2)(A), however, the expenses are drawn, not from the debtor's Schedule J, but from certain Internal Revenue Service standards. 11 U.S.C. § 707(b)(2)(A)(ii)(I); see generally Wedoff, supra, at 252-72.⁶

When a chapter 13 debtor is above the median income, section 1325(b)(3) accordingly makes clear that Schedule J has no role in calculating disposable income. That section states plainly that disposable income "shall" be determined under section 707(b)(2) using the IRS standards. 11 U.S.C. § 1325(b)(3). Although context may sometimes suggest otherwise, "shall" typically means "must." Gutierrez de Martinez v. Lamagno, 515 U.S. 417, 432 n. 9, 115 S.Ct. 2227, 132 L.Ed.2d 375 (1995); see also In re Barr, 341 B.R. 181, 185 (Bankr.M.D.N.C.2006) (noting that "shall" in section 1325(b)(3) makes the use of the means test "mandatory"). For an above-median debtor, then, expenses must be calculated under section 707(b)(2); what the debtor lists as expenses on his Schedule J, outrageous or not, is beside the point. See Guzman, 345 B.R. at 642 (holding that "the unambiguous language of the new statute compels but one answer: the above-median debtor's expense deductions are governed by Form B22C, not by Schedule J"); Alexander, 344 B.R. at 746; Barr, 341 B.R. at 185.

Allowing Schedule J back into the disposable income equation, as the trustee urges, would undo what Congress sought to accomplish in section 1325(b)(3). One of the aims of the means test was to limit judicial involvement — and so judicial discretion — by making mechanical the determination of abuse under section 707(b). See In re Gress, 344 B.R. 919, 922 (Bankr. W.D.Mo.2006). The means test in section 1325(b)(3) is meant to have the same mechanical effect. Se...