In re Murphy
| Decision Date | 24 January 2020 |
| Docket Number | Case No.: 19-19811-JKS |
| Parties | In Re: Ian J. Murphy, Debtor. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
Chapter: 7
Hearing Date: November 12, 2019
The relief set forth on the following pages, numbers two (2) through thirteen (13), is hereby ORDERED.
/s/_________
HONORABLE JOHN K. SHERWOOD
UNITED STATES BANKRUPTCY JUDGE
Dated: January 24, 2020
George E. Veitengruber, III, Esq.
1720 Highway 34, Suite 10
Wall, NJ 07727
Margaret McGee, Esq.
One Newark Center, Suite 2100
Newark, NJ 07102
Counsel for the United States Trustee
This matter is before the Court on a motion to dismiss by the United States Trustee (the "UST"). Ian J. Murphy (the "Debtor") filed for Chapter 7 relief in order to obtain a discharge of unsecured credit card debt in the amount of $94,983.17. The Debtor also has nondischargeable student loan debt in the amount of $131,930.67. The apparent objective here is to use Chapter 7 to free the Debtor from his credit card obligations and thus make the repayment of his student loan debt more manageable.
The UST contends that the Debtor's bankruptcy case must be dismissed because it is an abuse of the provisions of Chapter 7. The UST benefits from a "presumption of abuse" by the Debtor because the Debtor's income exceeds certain benchmarks established under the Bankruptcy Code known as the "Means Test." There are two (2) issues here: (i) whether the Debtor's sizeable nondischargeable student loan debt constitutes a "special circumstance" that overrides the presumption that this case is an abuse of Chapter 7, and (ii) whether the totality of the Debtor's financial circumstances suggest that this case is an abuse of Chapter 7.
For the reasons set forth below, the Court holds that the Debtor's student loan debt constitutes a special circumstance. As to whether the totality of the Debtor's financial circumstances warrants dismissal of this case, the Court is not prepared to decide this issue as the record now stands and requests additional evidence.
1. On May 14, 2019, the Debtor filed for relief under Chapter 7 of the Bankruptcy Code.1 The Debtor's petition shows the following:
2. On July 5, 2019, the UST filed the Statement of Presumed Abuse.5
3. On August 5, 2019, the UST filed its motion to dismiss the Chapter 7 case for abuse ("Motion to Dismiss"). The UST argues that the case should be dismissed because (a) the Debtor cannot rebut the presumption of abuse under 11 U.S.C. § 707(b)(2) by showing special circumstances, and (b) even if the Debtor can rebut the presumption of abuse, the case should still be dismissed under 11 U.S.C. § 707(b)(3)(B) because the totality of the Debtor's financial circumstances demonstrates abuse.6
4. On September 5, 2019, the Debtor filed an Objection to the Motion to Dismiss (the "Objection") arguing that his student loan obligations constitute a special circumstance that rebuts the presumption of abuse under § 707(b)(2). It is the Debtor's position that the student loan payments should be included in his Means Test calculation and that converting his case to Chapter 13 "will leave the Debtor in a worse financial position upon completion of the Chapter 13 plan."7
5. On October 8, 2019, the Court held a hearing on the Motion to Dismiss. At the conclusion of that hearing, the Court gave the Debtor fourteen (14) days to either convert the case to Chapter 13 or file a detailed certification supporting the Debtor's argument for special circumstances.
6. On October 23, 2019, the Debtor filed a certification in support of the Objection. The certification includes statements for his nine (9) outstanding student loans and amortization schedules for the loans. The Debtor argues that if his case is converted to Chapter 13, then the principal balance on all of his student loans will grow by $40,000 due to negative amortization. This calculation is based on a plan payment of $1,039.42. The nine (9) student loans are of varying amounts, interest rates and maturity dates.8
7. On November 7, 2019, the UST filed a supplemental response to the Motion to Dismiss in which it argues that the Debtor is using an incorrect amount when calculating his disposable income. Citing to § 1325(b), it is the UST's position that the Debtor's disposable income in a hypothetical Chapter 13 case will be $1,432.22. Again, the UST asserts that the Debtor has failed to show that the student loans qualify as a special circumstance under § 707(b)(2). The UST reiterated its position that, even if the student loans qualify as special circumstance, the case should be dismissed for abuse under the totality of the circumstances pursuant to § 707(b)(3)(B).9
8. On November 12, 2019, the Court held another hearing on the Motion to Dismiss and the Objection. Neither party asked for live testimony from the Debtor even though he was present in Court. At the conclusion of that hearing, the Court reserved its decision and allowed the parties to file closing papers based on the record as it currently stands. On November 26, 2019, the Debtor filed his Closing Statement and the UST filed more supplemental pleadings insupport of the Motion to Dismiss.10 In his Closing Statement,11 the Debtor lists the student loan debts as follows:
Loan Current Balance Interest Rate Percentage of Total Unsecured Debts Great Lakes 725 $4,346.21 3.4% 1.915% Great Lakes 726 $7,458.41 6.8% 3.287% Great Lakes 727 $4,370.79 3.86% 1.926% Great Lakes 728 $6,228.90 3.86% 2.745% Sallie Mae 1160 $54,092.87 12.875% 23.839% Sallie Mae 6137 $22,417.55 9.875% 9.879% Sallie Mae 9002 $25,895.75 10.375% 11.412% Navient 1-02 $2,502.95 4% 1.103% Navient 1-02 $3,494.26 4% 1.540%
9. In light of the higher interest rates on the Sallie Mae loans in the chart above, there is no doubt that in a Chapter 13 case, the amount of the Debtor's student loan debt will increase over the lifetime of a Chapter 13 plan if student loan debt is treated the same as other unsecured debt. The UST suggests that the Debtor is lowballing his projected Chapter 13 plan payment of $1,039 to arrive at the $40,000 increase in student loan debt. Based on the UST's analysis, if the Debtor paid $1,750 (the amount the Debtor intends to pay monthly on student loans after receiving a Chapter 7 discharge) under a Chapter 13 plan, his student loan debt will only increase by $7,000. The UST has also provided a middle ground analysis which shows an increase of approximately $21,000 based on plan payments of $1,432 per month. The bottom line is that the Debtor's current student loan debt of approximately $132,000 will grow to approximately $139,000 in the best case and $170,000 in the worst case in a Chapter 13 scenario.12
10. Section 707(b)(2) of the Bankruptcy Code provides for the Means Test, which was enacted by Congress to act as a mechanical screening process to determine whether a debtor may proceed in a case under Chapter 7 of the Bankruptcy Code.13 The Means Test is a statutory formula that determines whether there is a presumption of abuse in a Chapter 7 case.
11. This test "is based upon historical income and expenses, it was 'not intended to . . . produce the most accurate prediction of the debtor's actual ability to fund a chapter 13 plan . . . .'"14
12. In this case, the parties do not dispute that the presumption of abuse under § 707(b) arises. Thus, the Court does not have to engage in a Means Test analysis. Instead, the Court must determine (1) whether the Debtor's student loan payments rise to the level of "special circumstances" under § 707(b)(2)(B), and (2) whether the totality of the Debtor's financial circumstances calls for dismissal of the Debtor's case.
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