In re Guzman

• Decision Date: 19 July 2006
• Docket Number: No. 05-45978-SVK.,05-45978-SVK.
• Citation: 345 B.R. 640
• Parties: In re Tomas H. GUZMAN and Caroline A. Guzman, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin

345 B.R. 640

In re Tomas H. GUZMAN and Caroline A. Guzman, Debtors.

No. 05-45978-SVK.

United States Bankruptcy Court, E.D. Wisconsin.

July 19, 2006.

John A. Foscato, Green Bay, WI, for Debtors.

Memorandum Decision on Trustee's Objection to Confirmation

SUSAN V. KELLEY, Bankruptcy Judge.

At the ceremony when President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), making sweeping changes to Title 11 of the United States Code (the Bankruptcy Code), the President stated:

In recent years, too many people have abused the bankruptcy laws. They've walked away from debts even when they had the ability to repay them. This has made credit less affordable and less accessible, especially for low-income workers who already face financial obstacles. The bill I sign today helps address this problem. Under the new law, Americans who have the ability to pay will be required to pay back at least a portion of their debts. Those who fall behind their state's median income will not be required to pay back their debts. This practical reform will help ensure that debtors make a good-faith effort to repay as much as they can afford.¹

The President's remarks reflect a common sentiment that BAPCPA would force "above-median" debtors into chapter 13 to make a good faith effort to repay their creditors. When the above-median debtors in this case filed a plan proposing to pay nothing to unsecured creditors, even though their budget showed that they had excess funds available, the chapter 13 trustee objected to confirmation of their plan. For the reasons stated in this Decision, which constitutes the Court's Findings of Fact and Conclusions of Law, the debtors' plan complies with BAPCPA's new standards, and the Trustee's Objection cannot be sustained.

Section 1325(b)(1) of the Bankruptcy Code requires that if a creditor or the chapter 13 trustee objects, the court cannot confirm the debtor's proposed plan unless either all claims are paid in full, or the plan provides that all of the debtor's projected disposable income will be paid to unsecured creditors. This concept was added to chapter 13 by the Bankruptcy Amendments and Federal Judgeship Act of 1984 (BAFJA), and seems straightforward enough: the benefits that come with a chapter 13 confirmation are contingent upon excess income being dedicated to the creditors. Of course, what constitutes excess or disposable income is debatable. Prior to the effective date of BAPCPA on October 17, 2005, "projected disposable income" was defined as income that was not reasonably necessary for the maintenance or support of the debtor or a dependent. 11 U.S.C. § 1325(b)(2)(A) (2005).

Determining what expenses were "reasonably necessary" for the debtor's maintenance or support required bankruptcy courts to face "many difficult questions of lifestyle and philosophy." 5 Norton Bankruptcy Law & Practice 2d § 122:10, at 122-111 (2006 West). See, e.g., In re Kitson, 65 B.R. 615, 621 (Bankr.E.D.N.C. 1986) (Debtor must eliminate $48 for health club membership, $20 for gymnastics class, $24 for newspapers and $433 of miscellaneous expenses); In re Reyes, 106 B.R. 155, 157-58 (Bankr.N.D.Ill.1989) (New four-wheel drive Blazer is extravagance and budget is inflated: $120 recreation; $120 transportation; and $300 food for single person); Univest-Coppell Village, Ltd. v. Nelson, 204 B.R. 497, 500 (E.D.Tex.1996) (District Court reversed Bankruptcy Court and held $395 per month for private school tuition not reasonably necessary); In re Woodman, 287 B.R. 589, 592-593 (Bankr.D.Me.2003) (Tobacco expenses of $240 per month were reasonable and necessary). These cases invariably included an analysis of the debtor's budget, which is included in the bankruptcy schedules as Schedule I (Current Income) and Schedule J (Current Expenditures).

For chapter 13 debtors with income above the State median, all of this has changed under BAPCPA. Specifically at issue in this case is the application of new 1325(b)(3), which explicitly defines "reasonably necessary" expenses for debtors whose current monthly income exceeds the applicable State median family income. The question posed is whether such an above-median debtor with no disposable income under § 1325(b)(3) (as shown on Form B22C) but who does appear to have excess income when Schedules I and J are compared, is required to pay that excess income into the plan. Although contrary to the stated purpose of BAPCPA and seemingly discriminatory against chapter 13 debtors with incomes below the median, 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. If the above-median debtor's Form B22C contains enough deductions, the debtor will be entitled to obtain confirmation of a plan paying nothing to the unsecured creditors, even though the debtor's budget shows that excess funds are available.

Tomas and Caroline Guzman filed their chapter 13 petition on December 20, 2005; their Schedule I states that they have two minor children and combined monthly income as of the petition date of $5,301.36. According to their Form B22C "Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income," their combined "current monthly income" totals $7,317.75. The Guzmans' Form B22C income and their Schedule I income differ because Form B22C requires the debtor to list the average monthly income for the six months prior to the petition,² while the Schedule I instructs the debtor to give the "estimate of monthly income as of the filing of the petition." Annualizing their current monthly income from Form B22C totals $87,813, which exceeds Wisconsin's median income for a family of four of $67,869. Accordingly, in BAPCPA parlance, the Guzmans are above-median debtors.

BAPCPA provides a different test for above-median and below-median debtors in calculating the expenses to be excluded to reach disposable income. For our purposes, the relevant provisions of Section 1325(b) state:

(2) [T]he term "disposable income" means current monthly income received by the debtor ... less amounts reasonably necessary to be expended

(A) (i) for the maintenance or support of the debtor or a dependent of the debtor, or for a domestic support obligation, that first becomes payable after the date the petition is filed....

(3) Amounts reasonably necessary to be expended under paragraph (2) shall be determined in accordance with subparagraphs (A) and (B) of section 707(b)(2), if the debtor has current monthly income, when multiplied by 12, greater than

(A) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner;

(B) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals; or

(C) in the case of a debtor in a household exceeding 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals, plus $525 per month for each individual in excess of 4.

Accordingly, under § 1325(b)(3), for above-median debtors, the expenses to be deducted in calculating disposable income shall be determined under Bankruptcy Code § 707(b)(2)(A) and (B). According to § 707(b)(2)(A)(ii), "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, for the debtor, the dependents of the debtor, and the spouse of the debtor in a joint case, if the spouse is not otherwise a dependent." Section 707(b)(2)(A)(iii) and (iv) also allow the deduction of average monthly payments for secured debts and priority claims. Interim Bankruptcy Rule 1007(b)(6) provides: "A debtor in a chapter 13 case shall file a statement of current monthly income, prepared as prescribed by the appropriate Official Form, and, if the debtor has current monthly income greater than the median family income for the applicable state and family size, a calculation of disposable income in accordance with § 1325(b)(3), prepared as prescribed by the appropriate Official Form." In October 2005, the Judicial Conference of the United States promulgated Official Form B22C to enable debtors to provide the information necessary to calculate whether the debtor's income is above or below the median, and, if above, to calculate the deductions allowed by § 707(b)(2)(A).

Since the Guzmans' annualized current monthly income on line 21 of their Form B22C exceeds the Wisconsin median income for a family of four, the Form directs them to complete Part IV, "Calculation of Deductions Allowed under § 707(b)(2).³ The Guzmans filled in the standard amounts under the National Standards for food, clothing, household supplies, personal care and miscellaneous, and the standard amounts under the Local Standards for housing, utilities and two vehicles. Pursuant to the Form, they then inserted actual average monthly expenses for the following categories: taxes, payroll deductions, life insurance, child care, health care, and telecommunication services. The subtotal of the "Total Expenses Allowed under IRS Standards" is $4,408.53. Next, the Guzmans added "Additional Expense Deductions," in Subpart B of Form B22C, for health insurance, education expenses, additional food and clothing expense ($59) and continued charitable contributions ($25), for a total "Additional Expenses" of $203.06. In Subpart C of the Form, the Guzmans provided for future and past due payments on secured claims, priority claims and chapter 13 administrative expenses, i.e., Trustee commissions on their projected chapter 13 plan...