In re Harmon

• Decision Date: 16 February 2011
• Docket Number: No. 10–15329 ELF.,10–15329 ELF.
• Citation: 446 B.R. 721
• Parties: In re Susan L. HARMON, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

446 B.R. 721

In re Susan L. HARMON, Debtor.

No. 10–15329 ELF.

United States Bankruptcy Court, E.D. Pennsylvania.

Feb. 16, 2011.

Dave P. Adams, USDOJ, Philadelphia, PA, for U.S. Trustee.Richard J. Gromen, Mount Joy, PA, for Susan L. Harmon.

MEMORANDUM OPINION

ERIC L. FRANK, Bankruptcy Judge.

I. INTRODUCTION

The United States Trustee (“the UST”) has filed a motion (“the Motion”) seeking dismissal of the chapter 7 bankruptcy case of Debtor Susan Harmon (“the Debtor”) on the ground that the grant of bankruptcy relief would be an “abuse” of the Bankruptcy Code within the meaning of 11 U.S.C. § 707(b)(1).

The controversy centers on the UST's contention that in her “Chapter 7 Statement of Current Monthly Income And Means Test Calculation” (Official Form B22A), the Debtor improperly listed two expense deductions:

(1) $153.00/month in housing expenses for her leased residence; and

(2) $565.64/month expense for repayment of a nondischargeable student loan debt.

There is no dispute that if these expense deductions are disallowed, a presumption of abuse has arisen under § 707(b)(2)(A). The UST further contends that the Debtor has not rebutted that presumption under § 707(b)(2)(B) and therefore, the case should be dismissed.

The Debtor does not question the UST's arithmetic calculation, but argues that the expense deductions are proper and that no presumption of abuse has arisen. In the alternative, she argues that even if the presumption has arisen, she has rebutted it because “special circumstances” exists justifying her deduction of the disputed expenses. See 11 U.S.C. § 707(b)(2)(B).

As explained below, I conclude:

(1) the Debtor may not take a deduction for her monthly student loan repayment obligation under § 707(b)(2)(A)(ii);

(2) a presumption of abuse has arisen under § 707(b)(2)(A)(I); ¹

(3) based on the record in this case, the Debtor has not established that “special circumstances” exist under § 707(b)(2)(B) to permit her to treat her monthly student loan payment as an allowable expense; and,

(4) the presumption of abuse has not been rebutted by the Debtor.

Therefore, I will grant the Motion.

II. PROCEDURAL HISTORY

The Debtor commenced this bankruptcy case on June 30, 2010. The § 341 meeting of creditors was held and concluded on August 10, 2010. On August 19, 2010, the UST filed a Statement of Presumed Abuse. See 11 U.S.C. § 704(b)(1)(A). ² In the Statement, the UST stated:

Having considered [the materials filed by the Debtor] in reference to the criteria set forth in 11 U.S.C. Sec. 707(b)(2)(A), and, pursuant to 11 U.S.C. Sec. 704(b)(2), the United States Trustee has determined that:(1) the debtor's[ ] case should be presumed to be an abuse under section 707(b); and (2) the product of the debtor's current monthly income, multiplied by 12, is not less than the requirements specified in section 704(b)(2)(A) or (B).(Doc. # 16).

On September 17, 2010, the UST timely filed the Motion.³ (Doc. # 19). The Debtor filed a response to the Motion on October 7, 2010. (Doc. # 24). The Debtor also filed a Declaration In Support of Rebutting the Presumption of Abuse Pursuant to 11 U.S.C. § 707(b) on November 12, 2010. (Doc. # 26).

I held and concluded a hearing in this contested matter on November 24, 2010. Thereafter, both sides submitted a memorandum of law in support of their respective positions, the last of which was filed on December 20, 2010.

III. FACTS

The Debtor is a single individual with no dependents. She owns no real estate. Exclusive of her interests in two retirement plans, the value of her personal property totals approximately $23,000.00, $20,000 of which is the value of her 2010 Subaru Forester. The Debtor has minimal equity in the automobile as it serves as collateral for a loan with a balance of approximately $19,500.00.

On her Schedule F, the Debtor listed four credit card debts totaling $71,689.70. In addition, on Schedule E, the Debtor listed as a priority debt a “school loan” of $38,000.00 owed to American Education Services. But see 11 U.S.C. § 507(a) (listing ten categories of priority debts, none of which refer to student loans). She has no secured debts other than the automobile loan mentioned above. The student loan has been in pay status since December 2008. (Ex. D–1, ¶ 4). The Debtor has approximately eight more years of payments before the loan will be repaid. ( Id.). Her monthly payment on the loan is $565.64. She concedes that repayment of the student loan would not impose an “undue hardship” on her within the meaning of 11 U.S.C. § 523(a)(8) and therefore, that the student loan is a nondischargeable debt in this bankruptcy case. ( Id. at ¶ 8).

The Debtor's income is derived both from employment and a U.S. Air Force pension. Her primary employment is as an information technology technician with the Commonwealth of Pennsylvania. She also works part-time at a second job. She works approximately 47 1/2 hours per week.

On bankruptcy Schedule I, the Debtor listed her net monthly employment income after taxes as $2,936.98 and her monthly pension as $561.50, for a total monthly income of $3,498.48. On her Schedule J, she listed her total monthly expenses as $3,456.01, which includes a monthly rental payment of $981.00 for her residence and the $565.64 monthly student loan payment.

IV. DISCUSSION

A.

Section 707(b) of the Bankruptcy Code was amended dramatically by Congress in 2005 in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109–8, 119 Stat. 23 (2005). Currently § 707(b) provides that:

[a]fter notice and a hearing, the court, on ... a motion by the United States trustee ... 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.

11 U.S.C. § 707(b)(1) (emphasis added). Section 707(b) then sets out a complicated process, commonly referred to as the “means test,” for ascertaining whether, initially a “presumption of abuse” exists and then, ultimately, whether “abuse” exists. See 11 U.S.C. § 707(b)(2).

The statutory means test methodology is memorialized in Official Form B22A promulgated by the Supreme Court and titled “Chapter 7 Statement of Current Monthly Income And Means Test Calculation” (hereafter, “Form B22A”). The rules of court mandate that each chapter 7 debtor complete and file Form B22A. See Fed. R. Bankr.P. 1007(b)(4).

In general terms,⁴ the means test analysis involves the following steps:

1. calculating the debtor's “current monthly income” (“CMI”), defined in the statute, at 11 U.S.C. § 101(10A), as the historical average of the debtor's actual income from all sources, except social security and certain victim payments, received during the six months prior to filing, see, e.g. In re Melvin, 411 B.R. 715, 719 (Bankr.D.Kan.2008);

2. determining whether the debtor's CMI is “above median,” see 11 U.S.C. § 707(b)(6); ⁵

3. if the debtor's CMI is above median, determining the allowable amount of the debtor's expenses that may be applied against the CMI, some of which are based on the debtor's actual expenses and some of which are “deemed” expenses, see 11 U.S.C. § 707(b)(2)(A)(ii), (iii) and (iv); ⁶ 4. determining whether a presumption of abuse arises, by computing whether the debtor's “Monthly disposable income” (“MDI”),⁷ calculated by reducing CMI by the allowable expenses, exceeds certain objective standards that are set out in the statute; see 11 U.S.C. § 707(b)(2)(A)(i)(I). ⁸

5. if a presumption of abuse arises, determining whether the debtor has rebutted the presumption by demonstrating “special circumstances” that “justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative” and which reduce the difference between CMI and allowable expenses below the objective statutory “abuse” standard. See 11 U.S.C. § 707(b)(2)(B).⁹

In addition, pursuant to 11 U.S.C. § 707(b)(3), if a presumption of abuse does not arise or is rebutted, a court may dismiss a chapter 7 case (or convert it to chapter 11 or chapter 13 with the debtor's consent) for abuse based on either the debtor's bad faith in filing the bankruptcy petition or the totality of the circumstances.

Based on this statutory framework, I turn to the dispute in this case.

B.

The first issue is whether the presumption of abuse has arisen after allowable expenses are deducted from the Debtor's CMI.

On Form B22A, the Debtor listed her CMI as $4,881.64. The Debtor does not dispute that her CMI is “above median.” See n.5, supra & accompanying text. However, she calculated her allowable expenses as totaling $4,862.20. In doing so, on Line 44 of Form B22A, she took her monthly student loan payment of $565.64 as an allowable expense for a payment of a prepetition priority claim. See 11 U.S.C. § 707(b)(2)(A)(iv). Based on her claimed expenses, the Debtor calculated her MDI as $19.44, an amount that does not give rise to a presumption of abuse.¹⁰

The UST asserts that the Debtor improperly claimed the deduction for her monthly student loan payment of $565.64 because the student loan debt is not a priority debt that may be deducted from CMI pursuant to § 707(b)(2)(A)(iv). If the monthly student loan payment is disallowed as an expense, the Debtor's MDI increases to $585.08, which, multiplied by 60 equals $35,104.80. Under § 707(b)(2)(A)(i)(II), this calculation creates a presumption of abuse because $35,104.80 exceeds both $1,166.40 and $22,422.43. See n.10, supra.

I conclude easily that the UST's objection to the Debtor's deduction of her monthly student loan payment is well taken. There is no mention of student loan debts in 11 U.S.C. § 507(a) and therefore, there is no statutory basis for treating such debts as priority debts under the Bankruptcy Code. As a result of the disallowance of the monthly...