In re Rezentes, 06-00754.

• Citation: 368 B.R. 55
• Decision Date: 02 April 2007
• Docket Number: No. 2.,No. 06-00754.,No. 23.,06-00754.,2.,23.
• Parties: In re Gilbert Joseph REZENTES and Heidi Pualani Jimenez Kelly Rezentes, Debtors.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Hawaii

368 B.R. 55

In re Gilbert Joseph REZENTES and Heidi Pualani Jimenez Kelly Rezentes, Debtors.

No. 06-00754.

No. 2.

No. 23.

United States Bankruptcy Court, D. Hawai`i.

April 2, 2007.

Blake Goodman, Honolulu, HI, for Debtors.

MEMORANDUM OF DECISION ON OBJECTION TO PLAN CONFIRMATION

ROBERT J. FARIS, Bankruptcy Judge.

I. INTRODUCTION

The question is whether debtors with above-median income can calculate their chapter 13 plan payments by deducting from their income the IRS local standard housing expense even though the debtors' actual housing expense is substantially less. I reluctantly conclude that the answer is no; such debtors can claim the IRS local standard amount or their actual housing expense, whichever is less.

II. FACTUAL BACKGROUND

Gilbert and Heidi Rezentes filed a chapter 13 petition as joint debtors on October 18, 2006. Gilbert Rezentes is a bus driver for the City & County of Honolulu transit system and Heidi Rezentes is a teacher in the Hawaii public schools. They have four minor children.

The debtors' schedules show modest assets of $39,850, of which $13,675 is exempt; secured debt of $32,189.20 for a car loan and financed furniture; and unsecured nonpriority debt of $107,336.27, of which $42,105.14 is student loan debt. eCAST has filed claims totaling $55,292.57, which represents more than half of the debtors' unsecured debt.

As the rules require, the debtors filed two sets of forms that reflect their income and expenses. The first form is the Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income, or Form B22C. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), which applies to this case, requires all debtors to provide the information requested in Form B22C. Form B22C requires debtors to state their "current monthly income," meaning the, average monthly income they received in the six months prior to the bankruptcy. 11 U.S.C. § 101(10A)(A)(i). The debtors' Form B22C lists combined "current monthly income" of $7,944.73.

The debtors also filed Schedule I, which states their income at the petition date (rather than their average income during the, prior six months). On their Schedule I, the debtors listed combined monthly gross wages of $7,928.58 and combined average monthly take-home income of $6,380.74. Thus, the debtors' income at the petition date is not materially different from their "current monthly income," as defined.

The two sets of forms show dramatically different expenses. The debtors' Schedule J shows combined monthly expenses of $4,976, which leaves combined monthly net income after expenses of $1,404.74. The debtors' Form B22C, however, shows monthly disposable income of negative $110.08, or $1,514.82 less than the figure arrived at by subtracting actual monthly expenses listed on Schedule J from monthly income reported on Schedule I.

The difference is almost entirely attributable to a difference in the reported housing expense.

The debtors' actual housing expense is 5300 per month. Until recently, the debtors and their children lived in a series of rented homes in Kailua, where Heidi Rezentes works. The family paid $2,100 in monthly rent for a three-bedroom house in the first six months of 2005 and then sought less expensive accommodations in the face of tightening finances. From July 2005 to June 2006, the debtors rented another three-bedroom house for $1,800 per month. When money got even tighter, the family moved in June 2006 to the home of Gilbert Rezentes' parents in nearby Waimanalo. With Gilbert Rezentes' brother also living at the Waimanalo residence, there are nine people sharing a three-bedroom house. Gilbert and Heidi Rezentes pay $300 per month in rent to his parents. Accordingly, the debtors properly listed a monthly housing expense of $300 on Schedule J.

The debtors' Form B22C, however, shows a housing expense of $2,000 per month. This inconsistency results from the fact that the debtors' annualized current monthly income on Form B22C ($95,-336.76) exceeds the median income for a family of six in Hawaii ($91,840). Because the debtors earn more than the median, section 1325(b)(3)¹ requires calculation of their monthly expenses in accordance with the chapter 7 "means test" of section 707(b)(2)(A) and (B). The means test uses the IRS national and local standards for allowable expenses. The local standard for mortgage/rent expense for a family of six in the City & County of Honolulu is $2,000. Including the $2,000 housing deduction, the debtors' deductions on Form B22C totaled, 054.81 against current monthly income of $7,944.73, leaving net income of negative $110.08.

In their chapter 13 plan filed on October 18, 2006, the debtors propose to pay $200 per month for 60 months. The debtors estimate that the total distribution of $12,000 will pay. 9.9 percent of the debtors' scheduled general unsecured debt.² In addition, the debtors will make monthly payments of $521 and $73 outside the plan on the secured auto and furniture loans, respectively.

III. SUMMARY OF CONTENTIONS

The debtors' largest unsecured creditor, eCAST Settlement Corp., agent for and assignee of various creditors ("eCAST"), filed an amended objection to confirmation on January 12, 2007. eCAST argues that the chapter 13 plan cannot be confirmed because the debtors are not devoting all of their projected disposable income to payment of unsecured claims, as section 1325(b)(1)(B) requires. Specifically, eCAST objects to the debtors' claiming the full deduction of $2,000 under the IRS local standard for mortgage/rent expense for a family of six when the debtors' actual monthly rental expenses is only $300.

eCAST argues in favor of two alternative approaches to determining the debtors' projected disposable income for plan confirmation purposes.

First, eCAST urges that the debtors' projected disposable income be determined by subtracting the monthly expense total on Form B22C from monthly gross income listed on Schedule I, with Form B22C expense deductions capped at amounts actually, expended. If Form B22C deductions are reduced by $1,700 to limit the debtors' housing deduction to the actual expense of $300 and the revised deduction total is subtracted from Schedule I gross income of $7,928.58, the debtors would have $1,573.77 per month in projected disposable income.

Alternatively, eCAST argues that projected disposable income should be determined by subtracting actual monthly expenses listed on Schedule J from net monthly take-home pay on Schedule 1.³ This would leave the debtors with projected disposable income of $1,404.74 per month.⁴

The court heard the objection on January 18, 2007. Blake Goodman, Esq., appeared for the debtors; James Y. Agena, Esq., appeared for eCAST; and the chapter 13 trustee, Howard Hu, appeared for himself. The court determined that the debtors had not provided evidentiary support for certain factual assertions, and it gave the debtors until February 2, 2007, to submit such evidence and eCAST until February 12, 2007, to respond. The court took the matter under advisement.⁵

IV. STANDARD

Under section 1325(b)(1), if the trustee or holder of an allowed unsecured claim objects to confirmation, then the court may not approve the plan unless it either pays unsecured claims in full, or, as of the effective date of the plan,

(B) the plan provides that all of the debtor's projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan.

Before BAPCPA, courts usually calculated the disposable income of chapter 13 debtors by subtracting from Schedule I income the expenses reported on Schedule J that the courts determined were reasonably necessary for the support of the debtor or and the debtor's dependents. For debtors with income below the applicable median, BAPCPA does not change the definition of reasonably necessary expenses. If a debtor's annualized current monthly income is above the median income for his or her state and household size, however, section 1325(b)(3) provides that "[a]mounts reasonably necessary to be expended under paragraph (2) shall be determined in accordance with subparagraphs (A) and (B) of section 707(b)(2)...." Section 707(b)(2)(A)(ii)(I) in turn provides that "[t]he 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...."

The national and local standards referred to in section 707(b)(2) are used by the IRS to determine a taxpayer's ability to pay delinquent taxes. The national standards establish necessary expense amounts for food, housekeeping supplies, apparel and services, personal care products and services, and "miscellaneous." Internal Revenue Manual ("IRM") § 5.15.1.7 ¶ 3. The local standards establish necessary amounts for housing and transportation. IRM § 5.15.1.7 ¶ 4(b). Local housing standards are established for each county within a state. IRM § 5.15.1.7 ¶ 4(a).

The IRS allows taxpayers to deduct the full amount allowed under the national standards without regard to how much is actually spent. However, the Internal Revenue Manual explains that, "Unlike the national standards, the local standards for housing, utilities, and transportation serve as a cap. The taxpayer is allowed the local standard or the amount actually paid, whichever is less." IRM § 5.19.1.4.3.2 ¶ 2 (2002). (Emphasis in original.) The IRS does, however, advise its agents that the [n]ational [and] local expense standards are guidelines" and, "If it is determined a standard amount is inadequate to provide for a specific taxpayer's basic living expenses," a deviation...