In re Hayes

• Decision Date: 26 September 2007
• Docket Number: No. 06-42638-HJB.,06-42638-HJB.
• Citation: 376 B.R. 55
• Parties: In re Keith E. HAYES, Monica B. Hayes, Debtors.
• Court: U.S. Bankruptcy Court — District of Massachusetts

Page 55

376 B.R. 55

In re Keith E. HAYES, Monica B. Hayes, Debtors.

No. 06-42638-HJB.

United States Bankruptcy Court, D. Massachusetts.

September 26, 2007.

Paul A. Petrillo, DeBruyckere, Petrillo & Fulton, Salem, NH, for debtors.

Stephen E. Meunier, Department of Justice, U.S. Trustee's Office, Worcester, MA, for Richard King, Assistant U.S. Trustee.

Jonathan R. Goldsmith, Springfield, MA, trustee.

AMENDED MEMORANDUM OF DECISION

HENRY J. BOROFF, Bankruptcy Judge.

Before the Court is the United States Trustee's (the "Trustee") "Motion to Dismiss Case Pursuant to 11 U.S.C. § 707(b)(2) and to Extend Time to Object to Discharge Pursuant to 11 U.S.C. § 727 and Move to Dismiss Case Pursuant to 11 U.S.C. § 707(b)(3)" (the "Motion to Dismiss"), and the debtors' objection thereto. Specifically, the Court must address an issue that has arisen in many jurisdictions since the passage of the Bankruptcy Abuse and Protection Act of 2005¹ (the "BAPCPA") — whether, for purposes of the "means test," a debtor may deduct payments to secured creditors when the debtor has indicated an intention to surrender the secured property.

I. FACTS AND TRAVEL OF THE CASE

The material facts relevant to the limited question before the Court are not in dispute. Keith and Monica Hayes (the "Debtors") filed a petition under Chapter 13 of the Bankruptcy Code² on November 29, 2006. On their bankruptcy schedules filed in conjunction with the case,³ the Debtors disclosed, inter alia, debts of $102,951.28 and $411,416.00, respectively, secured by a mortgages on the Debtors' residence.

On March 5, 2007, the case was converted to Chapter 7, following which the Debtors filed a "Chapter 7 Statement of Current Monthly Income and Means-Test Calculation" ("Form 22A", formerly "Form B22A") on March 20, 2007. On Form 22A, the Debtors calculated their Current Monthly Income ("CMI") as $7,917.32 and monthly expenses as $9,467.18. Included in their monthly expense calculation were the payments due to each of the two mortgagees. On March 25, 2007, the Debtors filed their "Chapter 7 Individual Debtor's Statement of Intention" (the "Statement of Intention") regarding their secured debts, wherein they indicated, inter alia, that they intended to surrender their residence secured by the two, mortgages. See 11 U.S.C. § 521(a)(2)(A); Official Form 8.⁴

The meeting of creditors pursuant to § 341 was held on April 3, 2007. On April 13, the Trustee filed the notice required by § 707(b)(4), reflecting her determination that the Debtors' case under Chapter 7 was presumptively abusive pursuant to § 707(b). And on May 15, 2007, the Trustee filed the instant Motion to Dismiss.

At the hearing on the Motion to Dismiss and the Debtors' objection thereto, the Court continued generally the Trustee's request for an extension of time to object to discharge or move for dismissal under § 707(b)(3) and took under advisement the "limited question of whether an above-median debtor in a Chapter 7 case may, for purposes of the means test, deduct mortgage payments on property which the debtor intends to surrender."

II. POSITIONS OF THE PARTIES

A. Statutory Framework

A discussion of the parties' positions must first begin with a brief description of the statutory framework within which the present dispute arises. Pursuant to § 707(b)(2) of the Bankruptcy Code, as amended by the BAPCPA, a Chapter 7 bankruptcy case filed by an individual whose debts are primarily consumer debts⁵ is subject to dismissal if the Court finds that "the granting of relief would be an abuse...." 11 U.S.C. § 707(b)(1). "Abuse," in turn, may be determined pursuant to either § 707(b)(2) or § 707(b)(3). The present case, however, concerns only § 707(b)(2), which sets forth a detailed mathematical "formula" for determining whether a "presumption of abuse" has arisen in a particular Chapter 7 case — the so-called "means test."

As explained by the Bankruptcy Court in In re Singletary, § 707(b)(2) "creates a presumption of abuse under certain circumstances when a debtor's disposable income exceeds fixed amounts. Pursuant to Fed. R. Bankr.P. 1007(b)(4), and in order to facilitate the execution of the means test calculations, Official Form [22A] is completed by every debtor and filed along with his schedules." 354 B.R. 455, 460-461 (Bankr.S.D.Texas 2006). The first portion of Form 22A is used to calculate the debtor's current monthly income, or "CMI". 11 U.S.C. § 707(b)(2)(A)(i).⁶ If the debtor's CMI is below the state median income for a household of the same size, the § 707(b)(2) inquiry ends and no presumption of abuse arises. 11 U.S.C. § 707(b)(7).

If, however, the debtor's CMI is greater than the applicable median income, the debtor must complete the expense deduction calculations provided by §§ 707(2)(A)(ii)-(iv). As the Trustee succinctly explained in her brief filed in support of the Motion to Dismiss, a presumption of abuse

does not arise if an above-median debtor's monthly disposable income is less than $100 per month (or $6,000 over 60 months). 11 U.S.C. § 707(b)(2)(A)(i). If the debtor's monthly disposable income exceeds $166.67 per month (or $10,000 over 60 months), the presumption of abuse arises.

Id. If the debtor's monthly disposable income is between $100 and $166.67 per month, the presumption of abuse arises if that amount, over 60 months, if sufficient to pay at least 25% of the debtor's nonpriority secured debt. Id.⁷

If the "means test" calculation of § 707(b)(2) demonstrates that a case is presumed abusive, the Trustee must either file a motion to dismiss the debtor's case or a statement of reasons why she declines to do so. 11 U.S.C. § 704(b)(2). If a motion to dismiss is filed, the debtor may, by "demonstrating special circumstances," rebut the presumption. 11 U.S.C. § 707(b)(2)(B)(i). Should the Court determine that the Trustee is correct in her assertion that the presumption of abuse has arisen and finds that the Debtor has not successfully rebutted that presumption, then the debtor has the option of voluntarily converting the case to one under Chapter 13. 11 U.S.C. § 707(b)(1). If the debtor does not so choose, the case will be dismissed. Id.

Here, the Debtors' CMI, $7,917.32, yields an annualized income of $95,007.84, which is $3,287.84 more than the $91,720.00 median income in Massachusetts for a household of the same size (a household of five). The Debtors, therefore, were required to calculate and deduct their expenses pursuant to §§ 707(b)(2)(A)(ii)-(iv). The Debtors completed the required calculations on Form 22A, including in their calculation $4,545.77 in monthly mortgage payments. They further indicated on the form that no presumption of abuse had arisen, as their total allowed expenses were $9,467.18 (approximately $1,500.00 more than their CMI).

The Trustee, however, takes issue with the Debtors' deduction of mortgage payments as allowable expenses pursuant to § 707(b)(2)(A)(iii)(I), which allows debtors to deduct from their CMI the average of monthly payments due on secured debt, "calculated as the sum of ... the total of all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the petition...." 11 U.S.C. § 707(b)(2)(A)(iii)(I). The Trustee contends that the mortgage expenses should not be included in the Debtors' mean-test calculation because the Debtors, on the Statement of Intention, have indicated an, intent to surrender their residence. Instead, the Debtors should be allowed only to claim the $1,711 standard mortgage/rent expense provided by the Local Standards for housing and utilities issued by the Internal Revenue Service. According to the Trustee's calculation, the Debtors have a monthly disposable income of $1,156.47,⁸ well above the $166.67 threshold for presumed abuse.

B. Trustee's Position

The Trustee argues that the phrase "scheduled as contractually due to secured creditors in each of the 60 months following the date of the petition" requires the Court to examine a debtor's bankruptcy schedules and statements, including the Statement of Intention, and to ascertain whether the claimed expense for secured debt "will actually be paid by the debtor in the future." According to the Trustee, both a plain reading of the statute and a consideration of congressional intent compel this approach.

First, as to the statutory language, the Trustee argues that the term "scheduled" refers to a debtor's bankruptcy schedules and statements filed with the case. Thus, the Court must consider a debtor's intention to surrender property, as stated in their Statement of Intention, to determine whether a claimed secured payment will be "contractually due" in the future. Additionally, the Trustee posits that the ordinary meaning of the word "following" leads to the conclusion that deductions for secured payments are only allowed if they "will be made `subsequent to' or `after' the petition date, and payments for surrendered property that will never be made would not qualify."

To support her argument, the Trustee relies on legislative history — specifically, Congress' stated purpose that the BAPCPA was intended to ensure "that those who can afford to repay some portion of the unsecured debts be required to do so...." 151 Cong. Rec. S2470 (March 10, 2005). The Trustee maintains that allowing a deduction for secured property the debtor intends to surrender amounts to allowing a deduction for a "phantom" expense in contravention of Congress' intent that debtors use their disposable income to pay unsecured debts insofar as they are able.

C. The Debtors' Position

The Debtors, not surprisingly, read the statute differently. According to the Debtors, the phrase "scheduled as contractually due" should be afforded the meaning given to it by the Bankruptcy Court in In re Walker, namely, that the phrase simply refers to those payments due and owing pursuant to the relevant contract at the time the petition is filed. 2006...