In re Schnabel
| Decision Date | 23 April 1993 |
| Docket Number | Bankruptcy No. 92 B 17901. |
| Citation | 153 BR 809 |
| Parties | In re Edward W. SCHNABEL, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
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Terri M. Long, Sherman & Sherman, Chicago, IL, for plaintiff.
Jeffrey P. White, Barrington, IL, for debtor/defendant.
This case comes before the Court on hearing for confirmation of the Debtor's chapter 13 plan. The standing trustee and an unsecured creditor have objected and the Court must decide whether the Debtor's exempt income, his non-debtor wife's exempt income, the Debtor's claimed business expenses, and the Debtor's proposed car payments should be included in calculating "disposable income" under 11 U.S.C. § 1325(b)(2). For the reasons stated below, the Court holds that the Debtor's disposable income includes: all of the Debtor's income, including social security and pension payments, his non-debtor wife's social security payments, $410.00 per month that the Debtor has allocated for business expenses, and car payments above the monthly installments set forth in the original loan documents.
The Court has jurisdiction to hear this matter pursuant to 28 U.S.C. §§ 1334 and 157, and Local District Court Rule 2.33. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B) and (L). Unless otherwise stated, all statutory references herein shall be to the Bankruptcy Code, 11 U.S.C. § 101 et seq. (the "Code"). This opinion serves as the Court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
Edward W. Schnabel (the "Debtor") filed a Chapter 13 petition on August 11, 1992. The Court held confirmation hearings for the Debtor's plan on December 1, 1992, and February 4, 1993. Michael W. Lescher, an unsecured creditor (the "Creditor"), objected to the plan, alleging that it did not comply with the good faith requirements of § 1325(a)(3) or the disposable income requirement of § 1325(b). The standing Chapter 13 trustee (the "Trustee") joined in the Creditor's objection.
The Debtor testified to undisputed facts. On June 30, 1992, a judgment was entered in state court against the Debtor in favor of the Creditor for breach of contract in the amount of $35,273.26. Prompted by the Creditor's attempt to collect on the judgment, the Debtor filed a Chapter 13 petition. He had previously received a Chapter 7 discharge in August, 1987.
The Debtor testified that he is retired and that he and his non-filing wife have a combined monthly income of $3,587.00, comprised solely of pension and social security benefits. The Debtor receives pension payments in the amount of $2,504.00 per month and social security payments in the amount of $743.00 per month; his wife receives social security payments in the amount of $340.00 per month.
The Debtor's amended budget includes a $410-per-month business expense. The Debtor testified that this expense reflects the operating costs of a real estate development business, incorporated under Illinois law, which he began two-and-a-half years ago. He is attempting to act as a promoter, packaging real estate developments to be funded by others. The Debtor testified that the $410 includes rent, transportation and entertainment for clients. The monthly rent for office space is $125. The Debtor failed to substantiate the remaining $285. He cited only a few recent occasions when he entertained individuals for business purposes; and was unable to either cite recent travel beyond his immediate vicinity or explain how the travel expense included in the $410 was not separately included in his $150 transportation expense.
The Debtor testified that his business has not produced income of any kind since its inception. Although he has located sites to build villas, made some telephone calls and produced some brochures, he has not been successful in acquiring financing. The banks he has approached would not provide financing because the Debtor could not meet their requirement of 20 to 30 percent equity investment. He has begun speaking with insurance companies that he believes may provide funding as early as next year without any equity from him. He testified, however, that he has not included any future business income on his schedules, and that he does not expect to make plan payments out of income to be realized from his business.
The Debtor proposes to fund a 36-month plan with payments of $714.00 per month until September, 1993, and $939.00 per month thereafter. Unsecured creditors would receive 39% of their allowed claims. Before paying the unsecured creditors, the Debtor would pay in full the following claims: administrative costs, Chrysler Credit Corporation ("Chrysler") in the amount of $460.00 per month (reflecting double payments), and a priority tax claim in the amount of $1,784.00.
The Creditor and the Trustee object that the Debtor is not "engaged in a business," under § 1325(b)(2), so that any of the Debtor's funds allocated for business expenses must be paid into the plan as disposable income; and that proposed payments to Chrysler are double the contract rate, depriving the unsecured creditors of additional disposable income. The Creditor raises the additional concern that, while the Debtor is currently ineligible for a Chapter 7 discharge, he will soon become eligible, before any significant (if any) payments to unsecured creditors would have been made. He accuses the Debtor of filing his plan in bad faith, in contravention of § 1325(a)(3), as an attempt to pay only a negligible portion of his claim.
The Trustee further asserts that 735 ILCS 5/12-1006 exempts income traceable to a pension plan only to the extent that it is necessary for the support of the Debtor and his family; and that, under 735 ILCS 5/12-1001 the social security income of the Debtor and his wife is only exempt to the extent that it is used for personal rather than business purposes.
The Debtor has claimed all of his income as exempt under 735 ILCS 5/12-1001 AND 735 ILCS 5/12-1006. He relies solely on § 522 of the Code and the Illinois exemption provisions, rather than on any spendthrift provisions of the pension plan. He argues that because all income under the plan is exempt it is not property of the estate, and only represents disposable income to the extent he voluntarily contributes it to the plan. In other words, the unsecured creditors should be happy to receive whatever he chooses to give them because in a Chapter 7 liquidation, by reason of § 522, they would receive nothing.
Finally, the Debtor asserts that even if the Court should find that his social security and pension payments are disposable income, at least his wife's social security payments should be excluded from the plan.
The Debtor raises as a threshold matter that exempt property is not property of the estate, calling into question the Court's jurisdiction to rule on its inclusion in "disposable income." Exemptions, however, only affect property that is initially property of the estate. See 11 U.S.C. §§ 522, 541 and 1306; Owen v. Owen, ___ U.S. ___, ___, 111 S.Ct. 1833, 1835, 114 L.Ed.2d 350 (1991); Matter of Geise, 992 F.2d 651, 654 (7th Cir.1993). Therefore, under its grant of jurisdiction, the Court may consider the nature of exempt property when deciding whether to confirm the Debtor's plan. In re Cordes, 147 B.R. 498, 505 (Bkrtcy.D.Minn.1992).
The Debtor has not introduced evidence that his pension benefits qualify for exclusion under § 541(c)(2), so he may not seek to have them excluded on that basis. See Patterson v. Shumate, ___ U.S. ___, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992) (). Knowing of no other basis for exclusion, the Court finds that the Debtor's income is property of the estate, and therefore, properly before the Court in these confirmation proceedings. See 28 U.S.C. §§ 157(b)(2)(A), (B) and (L).
It should be noted at the outset that the issue before the Court is not whether the Debtor is required to include "exempt" income in order to meet the "disposable income" test where he intends to fund the plan with non-exempt sources. This Debtor's plan uses only exempt income that he has voluntarily submitted for payment of his creditors. Under § 522 a debtor may elect to claim those exemptions permitted by law. Section 1322(b)(8) allows a debtor to "provide for the payment of all or part of a claim against the debtor from property of the estate or property of the debtor." "Property of the debtor" includes property of the estate exempt under § 522. See 5 L. King, Collier on Bankruptcy, ¶ 1322.12 n. 3 (15th ed. 1992). Section 1322(b)(8), therefore, allows the Debtor to satisfy claims by voluntarily contributing exempt income to the plan. See In re Tomasso, 98 B.R. 513, 515 (Bkrtcy.S.D.Cal. 1989). Such contribution constitutes an election not to claim the exemptions. To the extent that he has done so, he himself has subjected his exempt income to the control of the Court, and, in effect, removed its exempt status. See In re Craig, 15 B.R. 712, 715 (1981).
Nonetheless, the Debtor has not voluntarily contributed those portions of his income (i.e. business expenses and car payments) that prompted the objections, necessitating the ensuing discussion.
The Trustee objects to the Debtor's claimed exemptions under § 522 of the Code and the Illinois exemption statutes. Under § 522(b)(1), unless a state has "opted out" of the federal exemption scheme, a debtor may choose either the exemptions listed in § 522(d) or applicable state and federal exemptions other than those listed in § 522(d). Since Illinois opted out of the federal scheme (see 735 ILCS 5/12-1201), the Debtor is limited to exemptions allowed under Illinois law....
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