In re Goble

• Decision Date: 17 February 2009
• Docket Number: No. 08-51254.,08-51254.
• Citation: 401 B.R. 261
• Parties: In re Twana J. GOBLE, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

401 B.R. 261

In re Twana J. GOBLE, Debtor.

No. 08-51254.

United States Bankruptcy Court, S.D. Ohio, Eastern Division at Columbus.

February 17, 2009.

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COPYRIGHT MATERIAL OMITTED

Michael W. Warren, Warren Law Firm, Chillicothe, OH, for Debtor.

MEMORANDUM OPINION ON MOTION OF THE UNITED STATES TRUSTEE TO DISMISS DEBTOR'S CHAPTER 7 CASE

JOHN E. HOFFMAN, JR., Bankruptcy Judge.

I. Introduction

This contested matter is before the Court on the Motion of the United States Trustee to Dismiss Pursuant to 11 U.S.C. §§ 707(b)(2) and/or 707(b)(3) ("Motion") (Doc. 23) and the response to the Motion ("Response") (Doc. 25) filed by the debtor, Twana J. Goble ("Debtor"). The United States Trustee ("UST") asserts two grounds in support of his position that granting the Debtor a Chapter 7 discharge would constitute an abuse of that chapter. First, he contends that the Court must presume that abuse exists under the formulaic means test set forth in 11 U.S.C. § 707(b)(2). Second, he argues that abuse exists under § 707(b)(3)'s more amorphous standard, which requires an examination of "the totality of the circumstances ... of the debtor's financial situation...." 11 U.S.C. § 707(b)(3). In particular, the UST contends that abuse exists because the Debtor could—if the case were converted to Chapter 13—pay creditors a significant dividend out of her projected disposable income calculated as of September 19, 2008, the date of the hearing on the Motion ("Hearing").¹

The Debtor seeks to remain in Chapter 7 and therefore opposes the Motion. She contends that the deduction of certain housing expenses, which resulted in a reduction of her net income for purposes of the means test, is appropriate even though she will not actually incur those expenses going forward because she surrendered her residential real property ("Former Residence"). In her view, based on these deductions, she does not have sufficient net income under the means test to trigger a presumption of abuse. She also contends that, based on her purported inability to fund a hypothetical Chapter 13 plan as of the date she filed her bankruptcy petition ("Petition Date"), the Court should find no abuse when it considers the totality of the circumstances of her financial situation.

The Motion and the Response thus raise two issues. The first is whether the Debtor, having surrendered the Former Residence, may avoid a presumption of abuse under the means test by deducting from her income the payments she would have been required to make to retain the Former Residence in a Chapter 13 case. The second issue is whether—in the absence of presumed abuse—the Court may nonetheless conclude that abuse exists based in part on the Debtor's actual ability to fund a Chapter 13 plan and, if so, whether the Court should evaluate her funding ability as of the Petition Date, the Hearing or some other date.

For the reasons stated below, the Court concludes that the Debtor may deduct from her means-test income those amounts that would have been necessary to retain the Former Residence in a Chapter 13 case and that, as a result, the presumption of abuse does not arise under § 707(b)(2). Given the Debtor's ability to pay a significant dividend to her unsecured creditors in a Chapter 13 case, however, the Court concludes that abuse does exist based on its application of the totality-of-the-circumstances standard set forth in § 707(b)(3). The Court, therefore, will enter an order granting the Motion and requiring the Debtor to file, within 20 days from the date of the entry of the order, a motion to convert her case to one under Chapter 13. If she does not timely file a motion to convert, the UST may submit an order dismissing this case.

II. Jurisdiction

The Court has jurisdiction to hear and determine this contested matter pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. 28 U.S.C. § 157(b)(2).

III. Background

On the Petition Date—February 15, 2008—the Debtor filed a voluntary Chapter 7 petition together with her schedules of assets and liabilities (Doc. 1). On Schedule A (real property in which the Debtor has an interest), the Debtor listed her fee simple interest in the Former Residence, subject to two mortgages. On Schedule D (creditors holding secured claims), she listed creditors holding secured claims in the aggregate amount of $137,488.77, including the two mortgages; on Schedule E she listed one creditor holding a priority, unsecured tax claim in the amount of $800 for prepetition real estate taxes incurred on account of the Former Residence; and on Schedule F she listed creditors holding unsecured, nonpriority claims of $27,302.67. In addition to her schedules, the Debtor also filed a Statement of Intention (Doc. 4) on the Petition Date that reflected her intent to surrender the Former Residence.²

A. The Means Test Form

The Debtor stated on her bankruptcy petition that her debts were primarily consumer in nature. As every debtor with primarily consumer debts is required to do, the Debtor filed a Form B22A Statement of Current Monthly Income and Means Test Calculation (Chapter 7) ("Means Test Form") (Doc. 1), the form used to implement § 707(b) in the context of a Chapter 7 case. According to the information provided on that form, the Debtor had a household of one, and her annualized monthly income as of the Petition Date exceeded the applicable median income for a household of that size, making her subject to the means test for determining whether there is a presumed abuse of the provisions of Chapter 7. See 11 U.S.C. § 707(b)(2). As an above-median income debtor, she was required to complete the remaining sections of the Means Test Form. She first entered $4,358.84 as the amount of her "current monthly income" (i.e., her average monthly income derived during the six-month period prior to the Petition Date). See 11 U.S.C. § 101(10A). The UST does not contest this amount.

As instructed on the Means Test Form, the Debtor then made certain deductions from her current monthly income. Of particular relevance here, on line 43 (past due payments on secured claims), the Debtor deducted the monthly payments she would have been required to make if she had chosen to cure her mortgage arrearage and retain the Former Residence under a Chapter 13 plan. Similarly, on line 44 (prepetition priority claims), she deducted monthly payments for prepetition priority tax claims she would have been required to make to retain the Former Residence in Chapter 13. She then calculated the amount of her net monthly income as $7.30 and multiplied that amount by 60. See 11 U.S.C. § 707(b)(2)(A)(i). The product, $438, is below the minimum amount— $6,575—required to trigger the presumption of abuse under the means test. The Debtor, therefore, stated that the presumption of abuse did not arise.

The UST argues that, because the Debtor signaled her intention to surrender the Former Residence on the Petition Date and did, in fact, surrender it, the appropriate deduction on each of lines 43 and 44 is $0.³ Accordingly, the monthly net income for the Debtor as calculated by the UST is substantially higher than the amount calculated by the Debtor. The product of the UST's recalculated net income for the Debtor times 60 is $10,494.60—below the threshold ($10,950) where presumed abuse exists without the need for further analysis, but above the amount ($6,575) below which no presumption arises and the analysis ends. The UST thus conducted the secondary presumption analysis provided for in § 707(b)(2)(A)(i)(I). Under this secondary analysis, a presumption of abuse arises if a debtor's income reduced by certain expenses and then multiplied by 60 exceeds a quarter of the debtor's nonpriority unsecured debt. Applying the secondary-presumption analysis here, the UST multiplied the Debtor's total nonpriority unsecured debt as reflected on the Debtor's Schedule F ($27,302.67) by .25. The product, $6,825.67, is less than $10,494.60, the Debtor's 60-month disposable income as calculated by the UST. Accordingly, the UST concluded that the presumption of abuse had arisen.

B. Schedules I and J

The UST also contends that, even if the Debtor's case is not subject to dismissal for presumed abuse under § 707(b)(2), the case should be dismissed under § 707(b)(3) because, when the Court considers the totality of the circumstances of the Debtor's financial situation, it should conclude that granting her relief would be an abuse of the provisions of Chapter 7. In support of this argument, the UST turns from the Means Test Form to Schedules I and J (Doc. 1), which the Debtor filed on the Petition Date. Schedule I is entitled "Current Income of Individual Debtor(s)." Unlike the Means Test Form—on which debtors must report their average monthly income derived during the six-month period prior to the commencement of bankruptcy—Schedule I requires debtors to report their projected average monthly income going forward from the commencement of the case. Schedule J, entitled "Current Expenditures of Individual Debtor(s)," requires the same projections with respect to expenses.

Together, the Debtor's Schedules I and J show negative net monthly income. No one would contend that a debtor could fund a feasible Chapter 13 plan with negative monthly income, and the UST does not do so here. The UST, however, correctly notes that the Debtor actually has positive monthly income on Schedules I and J when taking into consideration the Debtor's stipulation that her monthly expenses after the Petition Date were reduced to $1,665. See Docs. 38-40. This reduction is primarily the result of the Debtor's surrendering the Former Residence and moving in with her mother on a rent-free basis so that, as of the date of the Hearing, the Debtor was no longer making mortgage payments or incurring associated expenses such as homeowner's insurance premiums. See Docs. 38...