In Re Mona L. Hammock

• Decision Date: 08 July 2010
• Docket Number: No. 09-11485-8-RDD.,09-11485-8-RDD.
• Citation: 436 B.R. 343
• Court: U.S. Bankruptcy Court — Eastern District of North Carolina
• Parties: In re Mona L. HAMMOCK, Debtor.

436 B.R. 343

In re Mona L. HAMMOCK, Debtor.

No. 09-11485-8-RDD.

United States Bankruptcy Court,E.D. North Carolina, New Bern Division.

July 8, 2010.

Algernon L. Butler, Jr., Butler & Butler, L.L.P., Wilmington, NC, for Debtor.

ORDER GRANTING MOTION TO DISMISS CHAPTER 7 PROCEEDING PURSUANT TO 11 U.S.C. § 707(b)(1)

RANDY D. DOUB, Bankruptcy Judge.

Pending before the Court is the Motion to Dismiss Chapter 7 Proceeding Pursuant to 11 U.S.C. § 707(b)(1) and (b)(3) filed on March 11, 2010 (the “Motion to Dismiss”) by the Bankruptcy Administrator and the Response to the Motion to Dismiss filed on March 17, 2010 (the “Response”) by Mona L. Hammock (the “Debtor”). A hearing was conducted in Wilson, North Carolina on June 10, 2010 to consider the Motion to Dismiss and the Response.

BACKGROUND

1. On December 31, 2009, the Debtor filed a voluntary petition for relief under Chapter 7 of Title 11 of the United States Code (the “Bankruptcy Code”). As part of her petition, the Debtor filed her Schedules, Official Form B22A-Chapter 7 Statement of Current Monthly Income & Means Test (“Form B22A”), and her Statement of Financial Affairs. Based on the Debtor's initial calculation of her current monthly income, a presumption of abuse did not arise based on the allowed expenses and deductions set forth on Form B22A.

2. On February 11, 2010, the Bankruptcy Administrator requested the Clerk of Court to issue a notice of presumed abuse. Pursuant to 11 U.S.C. § 704(b)(2), the Statement of Presumed Abuse was timely docketed on February 12, 2010.

3. On March 2, 2010, the Debtor filed an Amended Statement of Financial Affairs, Amended Summary of Schedules, Amended Schedule I, Amended Schedule J, and an Amendment to her Chapter 7 Statement of Current Monthly Income and Means Test Calculation-Official Form 22A (collectively referred to herein as the “March 2nd Amendments”). Although the Debtor had an above-median income on the March 2nd Form B22A, based on her calculation of her current monthly income, she stated that a presumption of abuse did not arise.

4. On March 11, 2010, the Bankruptcy Administrator filed the Motion to Dismiss.

5. On March 17, 2010, the Response was filed by the Debtor.

6. On March 17, 2010, the Debtor filed her Second Amended Statement of Financial Affairs, Second Amended Summary of Schedules, Second Amended Schedule I, Second Amended Schedule J, and Second Amendment to the B22A Form (collectively referred to herein as the “March 17th Amendments”). The Debtor contended that even with her above-median income and the amendments to Form B22A, a presumption of abuse did not arise.

7. Subsequently, on June 9, 2010, the Debtor filed her Third Amended Statement of Financial Affairs, Third Amended Summary of Schedules, Third Amended Schedule I, Third Amended Schedule J, and Third Amendment to Form B22A (collectively referred to herein as the “June 9th Amendments”). The June 9th Amendment to Form B22A provided that the presumption of abuse did not arise.

8. Also on June 9, 2010, the Debtor filed an affidavit of her financial situation (the “June 9th Affidavit”) and the financial arrangement established by a prenuptial agreement that she and her current husband entered into prior to their marriage on May 25, 2001 (the “Prenup Agreement”). The Debtor provided a copy of her Prenup Agreement with her affidavit.

9. On June 10, 2010, the Debtor filed an affidavit of her financial situation and her school loan debt (the “June 10th Affidavit”). Attached to the affidavit are documents from the College Foundation, Inc. provided to her in connection with her school loans (the “CFI Documents”). ¹

ARGUMENT

Pursuant to the Motion to Dismiss, the Bankruptcy Administrator alleges that the Debtor has taken several double deductions in connection with her marital adjustment and expenses and has improperly deducted her school loans from her disposable monthly income available for distribution to unsecured creditors. As such, the Bankruptcy Administrator contends that the Debtor, in fact, has a positive disposable monthly income and, therefore, disputes the Debtor's assertion that the presumption of abuse does not arise in this case or that the presumption of abuse has been overcome.

The Bankruptcy Administrator also argues that when taken as a whole, even if the presumption of abuse does not arise, this case should be dismissed based on the totality of the circumstances of the Debtor's financial situation under Section 707(b)(3). More specifically, the Bankruptcy Administrator argues that after reviewing the Debtor's bank statements and non-filing spouse's bank statements, it appears as if the Debtor pays for most of the day-to-day living expenses for their household and the non-filing spouse contributes very little. The Bankruptcy Administrator alleges that the non-filing spouse is then permitted to save significant amounts of money whereby the Debtor may benefit from such savings.

The Debtor disputes that she has any disposable monthly income based on her calculation of the means test and that, even if her husband earns a substantial income, she is not entitled to such funds based on her Prenup Agreement. As such, she argues that the Motion to Dismiss should be denied.

DISCUSSION

The Bankruptcy Administrator asserts that this case should be dismissed pursuant to either Section 707(b)(1) or Section 707(b)(3) of the Bankruptcy Code based on the Debtor's abuse of the provisions of chapter 7. As the moving party, the Bankruptcy Administrator has the burden of proving abuse under Section 707. In re Sale, 397 B.R. 281, 284 (Bankr.M.D.N.C.2007).

Section 707(b)(1) provides that the Court may dismiss a case under chapter 7 or, with the consent of the debtor, convert a case to chapter 11 or 13, should the court determine that granting relief would be an abuse of the provisions of chapter 7. To determine whether granting relief would be an abuse, a court should presume an abuse exists if the debtor's current monthly income reduced by certain amounts and multiplied by 60 is not less than the lesser of “(I) 25 percent of the debtor's non-priority unsecured claims in the case, or $6,575, whichever is greater; or (II) $10,950.” 11 U.S.C. § 707(b)(2)(A)(i). The Debtor has $71,287.28 ² in non-priority, unsecured claims. Twenty-five percent (25%) of those claims is $17,821.82. Therefore, if the Debtor's current monthly income multiplied by 60 is not less than $10,950.00, a presumption of abuse arises under Section 707(b)(2).

In addition to a court's ability to find abuse under section 707(b)(1) of the Bankruptcy Code, even if a presumption of abuse does not arise or is rebutted by a debtor, a court has the authority to dismiss a case under section 707(b)(3).

Section 707(b)(3) provides:

In considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter in a case in which the presumption in which subparagraph (A)(i) of such paragraph does not arise or is rebutted, the court shall consider-

(A) whether the debtor filed the petition in bad faith; or

(B) the totality of the circumstances ... of the debtor's financial situation demonstrates abuse.

BAPCPA includes the judicially created totality of the circumstances test in section 707(b)(3). In re Hartwick, 359 B.R. 16, 20 (Bankr.D.N.H.2007); see also Eugene R. Wedoff, Means Testing in the New § 707(b), 79 AM. BANKR. L.J. 231, 236 (2005) (reading § 707(b)(3) to allow judicial determination of debt paying ability). The changes in BAPCPA lowered the standard for a court to find abuse. Pre-BAPCPA, a court was required to make a finding of “substantial abuse” of the provisions of the chapter 7. However, BAPCPA specifically lowers the standard to simply “abuse.” In re Lipford, 397 B.R. 320, 339 (Bankr.M.D.N.C.2008).

Based on the facts and circumstances in this case, the Bankruptcy Administrator asserts that the presumption of abuse arises and that the case should be dismissed under Section 707. In her Response, the Debtor disputes that she miscalculated her current monthly income arguing that the deduction of her school loan payment from her current monthly income as an expense on Form B22A is appropriate. She contends that because the school loan debt is not dischargeable, there could be repercussions such as tax refund garnishments, social security garnishments, or default penalties for failing to timely pay the school loan debt. Furthermore, the Debtor argues the limiting terms of her Prenup Agreement, and the necessity of her degree to maintain her employment are sufficient to establish that payment of the school loan should be considered a special circumstance allowing her to take the school loan payment as a deduction on Form B22A. Furthermore, she states the marital deduction is appropriate, given the limited contribution of her husband to the household expenses and the terms of her Prenup Agreement. She asserts that based on her calculations, she does not have any disposable monthly income and meets the means test standards such that the presumption of abuse under Section 707(b)(2) does not arise. Therefore, the Debtor requests that the Motion to Dismiss be denied.

Current monthly income (“CMI”) is defined by the Bankruptcy Code as the average monthly income from all sources that the debtor receives ... without regard to whether such income is taxable income, derived during the 6-month period ending on the last day of the calendar month preceding the petition date if the debtor files a schedule of current income and expenditures (commonly known as Schedules I and J) and any amounts paid to the debtor on a regular basis for the household expenses of the debtor or the debtor's dependents, subject to certain limitations. 11 U.S.C. § 101(10A).

Part II of Form B22A is titled Calculation of Monthly Income for § 707(b)(7) Exclusion and provides two columns detailing both the debtor's income and the spouse's income. See Lines 3-12 of Form B22A....