In re Scarafiotti, 06-11402 EEB.

• Citation: 375 B.R. 618
• Decision Date: 07 September 2007
• Docket Number: No. 06-11402 EEB.,06-11402 EEB.
• Parties: In re Carl SCARAFIOTTI, Pamela Jean Scarafiotti, Debtors.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado

375 B.R. 618

In re Carl SCARAFIOTTI, Pamela Jean Scarafiotti, Debtors.

No. 06-11402 EEB.

United States Bankruptcy Court, D. Colorado.

September 7, 2007.

COPYRIGHT MATERIAL OMITTED

Anthony R. Cross, John Turner, Colorado Springs, CO, for Debtors.

ORDER

ELIZABETH E. BROWN, Bankruptcy Judge.

THIS MATTER came before the, Court on the Motion to Dismiss Chapter 7 Case Under 11 U.S.C. § 707(b)(1), filed by the United States Trustee ("Trustee"), and the Debtors' Response. The disputed issues in this case center around the proper application of the "Means Test" under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"). In particular, it raises the questions of whether the Debtors may deduct (1) the ownership expense allowance specified in the IRS Local Transportation Standards for two vehicles they own free and clear; (2) a housing expense greater than the amount provided for under the IRS Local Housing Standards; and (3) Thrift Savings Plan contribution and loan repayment amounts deducted from their bi-monthly paychecks.

I. FACTUAL BACKGROUND

The Debtors filed their Chapter 7 petition on March 31, 2006. As required by BAPCPA, the Debtors timely filed form B22A, the "Statement of Current Monthly Income and Means Test Calculation" ("Form B22A"),¹ checking the box to indicate that the presumption of abuse under 11 U.S.C. § 707(b)(1)² did not arise in their case. On subsequent review, the Trustee concluded the opposite, namely that the Debtors' case should in fact be presumed to be an abuse under § 707(b)(1). The parties agree that the Debtors' Current Monthly Income ("CMI") of $5,577.44, exceeds the median income for a family of three in Colorado.³ They differ on whether three of the Debtors' claimed expenses are allowable under the Means Test, and/or whether special circumstances exist to allow the claimed expenses.

A. Vehicle Ownership Allowance

The Debtors own two vehicles, a 1988 Chevy Blazer and a 1993 Plymouth Acclaim. The Acclaim has over 190,000 miles on it; the Blazer has over 300,000. Neither car is encumbered by a lease or loan payment obligation. Despite this fact, the Debtors have claimed a vehicle ownership expense of $803.

B. Housing Allowance

The IRS Local Standard for housing for a family of three, living in Pueblo County, Colorado, is $1,084. This figure represents a combined allowance for both housing and utilities. The Debtors' utility expense is $331 per month. Their monthly rental payment is $1,050.⁴ Thus, their combined figure for housing and utilities exceeds the Local Standard by $297. The Debtors claim that their special circumstances warrant an increase in the housing allowance.

Subtracting the $331 utility figure from the Local Standard for both housing and utilities of $1,084 would leave the Debtors with only $753 for a rental payment. According to the Debtors, they cannot rent a suitable home for $753 or less per month. Presently, the Debtors reside in Pueblo West, Colorado, with their 10 year-old son, in a ranch-style home, with three bedrooms, two baths, and a two-car garage. The Debtors had previously owned a home, but lost it in foreclosure. Soon after, they began searching for a suitable rental home in Pueblo West, utilizing the services of Coldwell Banker. They discovered that rental units were available in Pueblo County in the price range of approximately $750, but they were located in unsuitable and potentially unsafe neighborhoods. Mrs. Scarafiotti also testified, without objection, that the Coldwell Banker representative had informed them that a reasonable rental unit for a family of three would cost approximately $925 in the Pueblo County market. They were able to locate a few 2-bedroom homes which were available for approximately $900 per month, but these homes were located far away from where the Debtor's son attends school. After searching for approximately three months, the Debtors settled on their present home.

The Debtor's son is currently seeing a child psychologist each month for mental and emotional difficulties. He previously attended an elementary school in Pueblo West, where he was bullied by his classmates and maintained a poor grade point average. His parents then transferred him to Swallows Charter Academy, also in Pueblo West. His grades improved dramatically and he is well-received by his classmates. In order for him to attend Swallows Charter Academy, the Debtors only have to reside somewhere within Pueblo County. However, Mrs. Scarafiotti testified that their child psychologist strongly recommended that their son needed to live in a neighborhood where he could interact with other children from his school. The location of their present home fills this need. The Trustee did not dispute these assertions, but countered that the Debtors could move to El Paso County, where both Debtors work, and where cheaper housing is available. The Debtors have never considered moving to El Paso County, despite a commute of over 100 miles per day to and from work, because they need the after-school child care assistance of their extended family, which is only available in Pueblo.

C. Retirement Plan Contributions and Loan Repayments

Finally, the Trustee disputes the Debtors' ability to deduct their monthly retirement plan contributions and loan repayments. Both Debtors participate in a Thrift Savings Plan ("TSP") through their respective employers. They have previously taken withdrawals from their retirement plans to pay bills, and have agreed to automatic payroll deductions from their biweekly checks to repay the withdrawals. Mrs. Scarafiotti contributes $150.76 per month to her TSP, and has $201.48 per month taken out for TSP repayments. Mr. Scarafiotti contributes $115.53 per month to his TSP, and has $42.79 taken out for repayments.

II. DISCUSSION

A. General Background on the Means Test

1. Purpose and Scope of Means Testing

Prior to the enactment of BAPCPA, debtors enjoyed a presumptive right to a Chapter 7 discharge.⁵ Congress, perceiving that many debtors who filed under Chapter 7 might have the ability to repay portions of their debts if forced into Chapter 13 plans, constructed a statutory test which certain debtors must overcome before they are allowed to proceed under Chapter 7.⁶ This is the so-called "Means Test" contained in the current version of § 707(b)(2). The Means Test essentially serves as a vehicle to determine how much disposable income a debtor will have each month, after the deduction of allowable expenses. The remaining income is multiplied by sixty. If the product is greater than a given amount, the presumption of abuse arises,⁷ and the debtor must show special circumstances sufficient to rebut the presumption, in order to avoid involuntary dismissal. Alternatively, the debtor may avoid dismissal by voluntarily converting to a Chapter 13 case.

The Means Test only applies when three conditions are present: (1) the debtors are individuals; (2) the debtor's CMI, multiplied by 12, is above the median income of the state in which the debtor resides; and (3) the debtor's debts are primarily consumer debts.⁸ The parties do not dispute the presence of all three conditions in this case.

2. National & Local Standards, Other Necessary Expenses

The Means Test limits a debtor's claimed monthly expenses to standards that have been enacted by the IRS.⁹ These standards, found in the Internal Revenue Service's Financial Analysis Handbook, were originally adopted by the IRS for the purpose of calculating a taxpayer's ability to repay delinquent tax amounts.¹⁰ The Financial Analysis Handbook is a subpart of the larger Internal Revenue Manual ("IRM"), which "contains the policies, procedures, instructions, guidelines, and delegations of authority which direct the operation and administration of the Internal Revenue Service."¹¹

The National Standards set fixed amounts for five categories of expenses: (1) food; (2) housekeeping supplies; (3) apparel and services; (4) personal care products and services; and (5) miscellaneous expenses. These expense amounts are uniform throughout the contiguous United States and are based on the Bureau of Labor Statistics ("BLS") Consumer Expenditure Survey.¹² The expenses vary based only on the taxpayer's gross monthly income and household size.¹³

The Local Standards address only two expenses: transportation and housing/utilities.¹⁴ The transportation portion is further divided into two sub-parts: a nationwide allowance for vehicle ownership expense, and an operating or public transportation expense. The housing/utilities standards are derived from BLS and U.S. Census Bureau data, and vary by county of residence within a given State. The amounts allowed for the National and Local Standards are published only on the Internet, accessible through the IRS website.¹⁵

Other Necessary Expenses refer to the IBM's listing of numerous other categories of expenses that are not covered by the National or Local Standards.¹⁶ The list is non-exclusive, but it does not extend to include, or overlap with, the categories already provided for in the National, and Local Standards.¹⁷ The IRM does not provide any fixed allowances for the Other Necessary Expenses.

4. Special Circumstances

Once the debtor's monthly expenses are calculated in accordance with the Means Test provisions, a statutory formula determines whether the case should be presumed to be an abuse of the provisions of Chapter 7. If the presumption of abuse arises, the debtor may only rebut the presumption by proving "special circumstances" that would justify additional monthly expense amounts. The statute sets forth four prerequisites to claiming "special circumstances." The debtor must (1) itemize each additional expense;¹⁸ (2) provide documentation for the expense;¹⁹ (3) give a detailed explanation that demonstrates that the expense is necessary and reasonable;²⁰ and (4) demonstrate that there is no reasonable alternative other than to allow...