In re Singletary

• Decision Date: 19 October 2006
• Docket Number: No. 06-30339-H4-7.,06-30339-H4-7.
• Parties: In re Lemanda K. SINGLETARY and Jeffrey L. Singletary, Debtors.
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Southern District of Texas

354 B.R. 455

In re Lemanda K. SINGLETARY and Jeffrey L. Singletary, Debtors.

No. 06-30339-H4-7.

United States Bankruptcy Court, S.D. Texas, Houston Division.

October 19, 2006.

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Jeffrey P. Norman, Gipson and Norman, Houston, TX, for Debtors.

MEMORANDUM OPINION ON THE MOTION OF THE UNITED STATES TRUSTEE TO DISMISS CHAPTER 7 CASE PURSUANT TO 11 U.S.C. § 707(b)(2)

JEFF BOHM, Bankruptcy Judge.

I. INTRODUCTION

LeManda and Jeffrey Singletary (the Debtors) filed a Chapter 7 petition on February 1, 2006 indicating that the presumption of abuse did not arise based en their belief that they had sufficient deductions to their current monthly income under U.S.C. § 707(b)(2)(A)(iii)¹ for payments on secured debts. The United States Trustee (the UST) filed a motion to dismiss pursuant to § 707(b)(2) claiming that: (:1) the Debtors should not be allowed to deduct payments on secured property that they intend to surrender; and (2) without those deductions, the presumption of abuse arises. Hence, the issue presented in this case is whether payments on secured debt may be deducted under § 707(b)(2)(A)(iii)(I) as being "scheduled as contractually due to seared creditors in each month of the 60 months following the date of the petition" when: (1) the collateral has been surrendered before the motion to dismiss was filed; or (2) the Debtors' Statement of Intention indicates that they Will surrender the, collateral. This is a matter of first impression before this Court.

This Court holds that the mere act of declaring an intent to surrender collateral on a Statement of Intention does not extinguish the Debtors' right to deduct those payments under § 707(b)(2)(A)(iii). However, for purposes of a motion to dismiss based on the presumption of abuse formula found in § 707(b)(2)(A) (Presumption of Abuse Motion), the relevant date on which calculations should be based is the date of the filing of the motion, not the date of the filing of the petition. Therefore, any events occurring post-petition and up to the date of the fling of the motion must be taken into account in applying the means test. Thus, if a debtor has carried through with his intent to surrender the collateral and relief from stay has been granted before the filing of the Presumption of Abuse Motion,² the payments on that debt would not be counted under § 707(b)(2)(A)(iii).

II. BACKGROUND OF AMENDED § 707(b)

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) became fully effective on October 17, 2005. One goal of the BAPCPA amendments was to regulate abuse in consumer bankruptcies. The abuse that concerned Congress was debtors receiving a full discharge under Chapter 7 when they had regular income that could be used to repay some portion of their unsecured debt in a Chapter 13 plan.³ The principal method implemented to steer debtors away from Chapter 7 and into Chapter 13 is the new version of § 707. Colloquially referred to as the "means test," this nomenclature is both an oversimplification and somewhat of a misnomer. Section 707 presents not a single test, but rather a series of requirements with multiple opportunities for debtors to be pushed into Chapter 13. It is a misnomer in the sense that the "test" being conducted is not whether the debtor has means to pay, but rather whether the debtor has no means to pay. Therefore, the phrase "pass the means test" hereinafter means that a debtor will be allowed to stay in Chapter 7; and conversely, to "fail the means test" means that a debtor will face dismissal or conversion unless he is able to show "special circumstances." Exhibit A provides a simplified flow chart of the mechanics of § 707(b) and will be helpful to read in conjunction with the following description of the means test.

The pre-BAPCPA version of § 707(b) was largely retained in § 707(b)(1) with a few substantial alterations. The previous standard of § 707(b), whether "granting of relief would be a substantial abuse of provisions of this chapter," allowed for broad judicial discretion in determining whether a case should be dismissed. Congress dropped the "substantial" adjective, leaving just the issue of whether granting the debtor relief would be an "abuse." Subsections § 707(b)(2) and (3) provide two methods of determining whether or not there is abuse under (b)(1). However, in § 707(b)(7), Congress also created a threshold income test so that a large portion of debtors can be fast-tracked past the more complex calculations of the means test in (b)(2). Therefore, § 707(b)(7) provides the first "test" as follows:

(A) No judge, United States trustee (or bankruptcy administrator, if any), trustee, or other party in interest may file a motion under paragraph (2) if the current monthly income of the debtor, including a veteran (as that term is defined in section 101 of title 38), and the debtor's spouse combined, as of the date of the order for relief when multiplied by 12, is equal to or less than —

(i) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner;

(ii) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals; or

(iii) in the case of a debtor in a household exceeding 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals, plus $ 525 per month for each individual in excess of 4.

(B) In a case that is not a joint case, current monthly income of the debtor's spouse shall not be considered for purposes of subparagraph (A) if —

(i) (I) the debtor and the debtor's spouse are separated under applicable nonbankruptcy law; or

(II) the debtor and the debtor's spouse are living separate and apart, osier than for the purpose of evading subparagraph (A); and

(ii) the debtor files a statement under penalty of perjury —

(I) specifying that the debtor meets the requirement of subclause (I) Or (II) of clause (i); and

(II) disclosing the aggregate, or best estimate of the aggregate, amount of any cash or money payments received from the debtor's spouse attributed to the debtor's current monthly income.

Current monthly income (CMI) is a new term defined in § 101(10A), which states:

(A) means the average monthly income from all sources that the debtor receives (or in a joint case the debtor and the debtor's spouse receive) without regard to whether such income is taxable income, derived during the 6-month period ending on —

(i) the last day of the calendar month immediately preceding the date of the commencement of the case if the debtor flies the schedule of current income required by section 521(a)(1)(B)(ii); or

(ii) the date on which current income is determined by the court for purposes of this title if the debtor does not file the schedule of current income required by section 521(a)(1)(B)(ii); and

(B) includes any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor's spouse), on a regular basis for the household expenses of the debtor or the debtor's dependents (and in a joint case the debtor's spouse if not otherwise a dependent), but excludes benefits received under the Social Security Act, payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes, and payments to victims of international terrorism (as defined in section 2331 of title 18) or domestic terrorism (as defined in section 2331 of title 18) on account of their status as victims of such terrorism.

Thus, the first test of § 707(b) is to determine whether the debtor's annualized CMI is lower than the state median income for a household of the same size. If the debtor's income is below the median, he is exempt from the presumption of abuse test in § 707(b)(2). However, the median income exemption of § 707(b)(7) does not make a debtor completely immune from motions to dismiss or convert. Even if the debtor's income is under the state median, he could still face a motion under § 707(b)(3). Conversely, if the debtor's annualized CMI is greater than the state median income, then the debtor becomes subject to the income calculations of § 707(b)(2).

The previous § 707(b) presumption in favor of granting the debtor relief was turned upside down by the newly-enacted § 707(b)(2), the heart of the means test. It creates a presumption of abuse under certain circumstances when a debtor's disposable income exceeds fixed amounts. Pursuant to Fed. R. Bankr.P. 1007(b)(4),⁴ and in order to facilitate the execution of the means test calculations, Official Form B22A is completed by every debtor and filed along with his schedules. Form B22A is used by both the debtor and the United States Trustee in order to determine whether the presumption of abuse arises. The debtor's CMI is reduced by the expenses allowed in § 707(b)(2)(A)(ii)(iv) to determine how much of the debtor's monthly income remains available for creditors. The deduction at issue in this case is § 707(b)(2)(A)(iii)(I), which allows a deduction for the average monthly payment on secured debts for "all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the petition." A debtor passes this part of the means test by sufficiently reducing his CM: to under $100 or $167, depending on the amount of his unsecured debt.⁵ Based on the formula described in § 707(b)(2)(A), if the debtor's disposable income is too great, a presumption of abuse will arise.

However, a debtor's "failure" on this part of the test is not an absolute bar to Chapter 7. Since "failing" this portion of the means test only creates a presumption, § 707(b)(2)(B) allows the debtor a chance to rebut the presumption of abuse by showing special circumstances as follows:

(i) In any proceeding brought under this...