In re Vanlandingham, Case No. 13–12642
| Decision Date | 30 September 2014 |
| Docket Number | Case No. 13–12642 |
| Citation | 516 B.R. 628 |
| Parties | In re: Johanna Vanlandingham, Debtor. |
| Court | U.S. Bankruptcy Court — District of Kansas |
Eric D. Bruce, Bruce Bruce & Lehman LLC, P. O. Box 75037, Wichita, KS 67275, J. Michael Lehman, Bruce Bruce & Lehman L.L.C., 3330 W. Douglas Ave., Studio East, P. O. Box 75037, Wichita, KS 67275–5037, Brian D. Sheern, US Attorney's Office, 1200 Epic Center 301 N. Main, Wichita, KS 67202, for Creditor.
William J. Fields, 421 E. Third, Wichita, KS 67202, for Debtor.
Chapter 13 provides an orderly means for debtors to resolve financial difficulties by repaying their unsecured creditors, at least in part, over the life of their plans. Under 11 U.S.C. § 1325(b)(1)(B), (b)(2) and (b)(3), above-median-income debtors must pay their projected disposable income, as calculated under 11 U.S.C. § 707(b)(2)(A) and (B), to the unsecured pool during the applicable commitment period which is usually five years. The question presented here is whether a debtor's voluntary contributions to a 401(k) plan that first began after debtor filed her bankruptcy petition may be excluded from the calculation of disposable income. Contributions for 401(k) or other defined contribution retirement plans are not among the enumerated deductions in § 707(b)(2)(A), but § 541(b)(7) excludes wages withheld for that purpose from property of the estate and further provides that these withholdings “shall not constitute disposable income” as it is defined in § 1325(b)(2).
Shortly before she filed this chapter 13 bankruptcy, Johanna Vanlandingham submitted paperwork to enroll in her employer's 401(k) plan, but her 401(k) contributions via payroll deduction did not actually commence until after she filed her case. She had not previously participated in her employer's plan. On Official Form 22C, she deducted those 401(k) contributions from her disposable income as Line 55 invites her to do. The trustee objects to confirmation of her plan and contends that the § 541(b)(7) safe harbor only applies to retirement contributions that were established before the petition date; as a result, debtor is not entitled to exclude the 401(k) contributions from the calculation of disposable income and she is not contributing all of her projected disposable income to the plan. I conclude that, while the § 541(b)(7) exclusion from disposable income is oddly placed, nothing in the Code requires that a debtor have established 401(k) contributions prior to filing a chapter 13 case. Consistent with the “forward looking approach” of projected disposable income articulated by the Supreme Court in Lanning and in the absence of a lack of good faith objection under § 1325(a)(3), the debtor's plan should be confirmed.1
On the same date that Ms. Vanlandingham filed her chapter 13 bankruptcy and chapter 13 plan, her prepetition enrollment in her employer's 401(k) retirement plan was confirmed.2 She elected to contribute $68.13 to her 401(k) plan by payroll deduction each paycheck, or 4%. Ms. Vanlandingham was paid on a bi-weekly basis and the first payroll deduction for her 401(k) contribution covered the post-petition pay period of October 12–25, 2013. She has been employed by Cox Communications since 2003, but had not been enrolled in Cox's 401(k) plan prior to October 10, 2013. Ms. Vanlandingham is an above-median-income debtor, divorced, and has no dependents.
On Form 22C—the Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income, Ms. Vanlandingham deducted on Line 55 her monthly 401(k) contribution of $151.67 from her disposable income calculation.3 This exclusion, along with the allowed expense deductions from current monthly income [CMI] under § 707(b)(2), yields negative projected disposable income of on Line 59 of Form 22C, resulting in no distribution to unsecured creditors.4
Ms. Vanlandingham originally proposed to pay $320 for 60 months.5 Plan payments would be applied to her attorney's fees of $2,783, tax claims of about $7,500, and a 910–car loan creditor. Unsecured creditors would receive nothing. The plan provided that her home mortgage loan would be paid outside the plan. The chapter 13 trustee objected to confirmation of this plan on grounds of feasibility and that debtor was not committing all of her projected disposable income to paying unsecured creditors under § 1325(b)(1)(B). The trustee objected to debtor's deduction of her 401(k) contribution from the calculation of disposable income.
Ms. Vanlandingham filed an amended plan in April 2014.6 This plan proposed to make $320 monthly payments for 6 months and $218 payments for the remaining 54 months. This was prompted by the debtor's post-petition surrender of a vehicle and purchase of a 2010 Mustang with borrowed money. The new car loan (approved by the trustee) would be paid outside the plan at $380 per month.7 The trustee reiterated her objections to confirmation. Under either plan, the unsecured creditors, who hold claims totaling $71,347 would receive no distribution.
With respect to feasibility, the trustee demonstrated that the amended plan was short approximately $1,100 of paying the administrative expenses and tax claims in full.8 However, debtor is willing to pay an additional $20 per month to cover the shortfall and make the plan feasible. Thus, confirmation of Ms. Vanlandingham's amended plan turns on the disposable income objection—whether the 401(k) contribution should be excluded from the disposable income calculation. The chapter 13 trustee completed an adjusted Form 22C—removing the deduction for debtor's 401(k) contribution on Line 55 (i.e. including it in disposable income), together with other unspecified minor adjustments, and arrived at monthly projected disposable income of $145.65 rather than .9 This change in disposable income yields payment of $5,956 on unsecured claims, or an 8.348% dividend.10 Thus, if the trustee's legal objection is sustained and her disposable income calculation is correct, Ms. Vanlandingham's amended plan cannot be confirmed.
Determining whether voluntary retirement contributions may be excluded from a chapter 13 above-median-income debtor's projected disposable income calculation starts with the statutory language. Section 1325(b)(1)(B) requires that a debtor's plan pay all of her projected disposable income received during the applicable commitment period to unsecured creditors. As pertinent here, § 1325(b)(2)(A) defines ‘disposable income’ as “current monthly income received by the debtor ... less amounts reasonably necessary to be expended” for the maintenance or support of the debtor or debtor's dependents that first becomes payable after the date the petition is filed. The expense side of the disposable income equation—“amounts reasonably necessary to be expended for the maintenance or support of the debtor”—is not a defined phrase, but when the debtor is an above-median-income debtor as here, § 1325(b)(3) requires that those deductions or expenses be determined in accordance with certain of the means test components, § 707(b)(2)(A) and (B). That statute enumerates a number of allowed deductions or expenses from current monthly income and how the amount is determined.11 Some expenses such as housing, transportation, and food are standardized amounts determined by reference to IRS tables given the debtor's locale and household size (i.e. applicable monthly expenses).12 Other allowed deductions for “Other Necessary Expenses” such as health insurance expense are not standardized amounts but are determined by the actual monthly expense incurred by the debtor.13 There is no specific allowance for voluntary retirement contributions in § 707(b)(2)(A) or (B) and the only provision possibly covering such contributions is the category of “Other Necessary Expenses” in § 707(b)(2)(A)(ii)(I). But the case law interpreting this category consistently disallows voluntary payroll deductions for retirement plan contributions as an Other Necessary Expense.14 In short, nothing in § 1325(b)(2) or by incorporation, § 707(b)(2)(A) and (B), explicitly authorizes voluntary retirement contributions as an allowable expense or deduction in calculating disposable income in a chapter 13 case. If this were the only statute in play, my analysis would end and the trustee would prevail on her objection to confirmation. But it isn't.
In what has been described as an “oddly-worded ‘hanging paragraph,’ ”15 “awkward,”16 and a “Gordian knot,”17 Congress amended § 541 in 2005 with the enactment of BAPCPA and directly spoke to voluntary retirement contributions when determining disposable income under § 1325(b)(2). Much of the interpretative dispute results from the placement of the chapter 13 “disposable income” concept in a statute that defines what constitutes “property of the estate.” Section 541(a) defines, in part, property of the estate in a chapter 13 case; it includes all legal or equitable interests of debtor in property as of the commencement of the case, unless excluded by § 541(b).18 In a chapter 13 case property of the estate is supplemented by § 1306(a). Specifically, § 1306 also includes as property of the estate § 541 property that is acquired postpetition and postpetition earnings. Section 541(b) describes property that is excluded from property of the estate. Section 541(b)(7) provides in part:
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Section 3.11 Effect of Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
...views of how 401(k) contributions should be treated, and a summary of the differing lines of cases may be found in In re Vanlandingham, 516 B.R. 628 (Bankr. D. Kan. Sept. 30, 2014) (Nugent,...