In re Williams

• Decision Date: 12 September 2008
• Docket Number: No. 07-19962 EEB.,No. 07-23295 EEB.,No. 07-22823 EEB.,07-19962 EEB.,07-22823 EEB.,07-23295 EEB.
• Citation: 394 B.R. 550
• Parties: In re Kathryn Claire WILLIAMS, Debtor. In re JoAnn Birdwell, Debtor. In re Russell Keller, Debtor.
• Court: U.S. Bankruptcy Court — District of Colorado

394 B.R. 550

In re Kathryn Claire WILLIAMS, Debtor In re JoAnn Birdwell, Debtor In re Russell Keller, Debtor.

No. 07-19962 EEB.

No. 07-22823 EEB.

No. 07-23295 EEB.

United States Bankruptcy Court, D. Colorado.

September 12, 2008.

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Loretta A. Burnett, Colorado Springs, CO, for Debtor Kathryn Claire Williams.

John Turner, Colorado Springs, CO, for Debtor JoAnn Birdwell.

Stephen E. Berken, Denver, CO, for Debtor Russell Clark Keller.

N. April Norton, Denver, CO, for Sally Zeman, Chapter 13 Trustee.

ORDER

ELIZABETH E. BROWN, Bankruptcy Judge.

In each of these cases, the standing Chapter 13 trustee (the "Trustee") objects to plan confirmation on the grounds that the proposed plans fail to use the proper methodology under BAPCPA¹ to calculate the debtor's projected disposable income and/or the plans fail to provide for payment of all of the debtor's disposable income over the applicable commitment period-five years in these cases. This opinion examines the new amendments to 11 U.S.C. § 1325(b) and in this context addresses: (1) how "projected disposable income" is to be calculated; (2) to whom it is to be paid; (3) whether an above-median income debtor may propose a plan for a duration of less than five years without paying unsecured creditors in full; and (4) whether a plan that satisfies the "projected disposable income" and "applicable commitment period" tests may nevertheless be attacked on a good faith basis under 11 U.S.C. § 1325(a)(3).

I. FACTS

The relevant facts of these cases are not in dispute. Each of these debtors have current monthly income that exceeds the median family income for a household of the same size in the State of Colorado. The Debtors in each case have "monthly disposable income," as calculated on Official Form 22C ("Form 22C"), that is less than the amount of "monthly net income" indicated on their Schedules I and J.

In the Birdwell case, Ms. Birdwell's Form 22C reflects monthly disposable income of $318.09, but her Schedules I and J show monthly net income of $470.99. Ms. Birdwell has proposed a 5-year plan, under which she will pay $340 for 60 months, or a total of $20,400. She proposes to pay her Class Four nonpriority creditors the sum of $15,586, which reflects deductions for her attorney's fees and costs and for the Trustee's compensation. The Trustee objected, asserting that the plan fails to contribute all of the Debtor's projected disposable income to the plan, because it does not propose to pay her Schedule I minus J net income of $470 per month, that the Debtor's Schedule I understates her present income, and that the Debtor's plan payment should increase when her vehicle loan is paid off during the plan period.

In the Keller case, Mr. Keller's Form 22C net income is a negative number. According to his Schedules I and J, his net income is $903.66. His plan proposes to pay $903, but only for a period of 44 months, reflecting total plan payments of $39,732, and only offers to pay $6,712 of this amount to the nonpriority unsecured creditors. The balance is to be paid toward priority claims, including his attorney's fees and costs, the Trustee's compensation, and a substantial priority tax debt. The Trustee has objected to his plan only on the basis that the plan's duration of 44 months does not satisfy the minimum length required by the "applicable commitment period" found in § 1325(b)(1)(B) and (b)(4).²

In the Williams case, Ms. Williams' Form 22C also indicates that she has negative "projected disposable income." A review of her Schedules I and J, however, shows that she has monthly net income of $430. In her plan, she has offered to pay the aggregate amount of $13,260. This amount reflects $430 for 12 months, $230 for 4 months, $479 for 8 months, and $279 for 12 months. Thus, the plan's duration is only 36 months. She will pay the nonpriority unsecured creditors only $8,905, which reflects deductions for her attorney's fees and costs and the Trustee's compensation. Similar to the Keller case, the Trustee has objected to her plan only on the basis of its shorter duration.

II. DISCUSSION

Section 1325(a) sets forth the requirements for Chapter 13 plan confirmation. Even if a plan meets the requirements of § 1325(a), an objection filed by either a trustee or an unsecured creditor will trigger the additional requirements of § 1325(b)(1). Prior to BAPCPA, § 1325(b)(1)(B) required a plan to provide that:

all of the debtor's projected disposable income . . . received in the three-year period beginning on the date of the first payment . . . will be applied to make payments under the plan.

Congress substantially amended § 1325 through BAPCPA, but made only two changes to the requirement set forth in § 1325(b)(1)(B). First, Congress replaced the words "three-year period" with the words "applicable commitment period." Second, Congress inserted the phrase "to unsecured creditors" immediately before the phrase "under the plan," such that § 1325(b)(1)(B) now provides that if a trustee or unsecured creditor objects to confirmation, then the Court may not approve the plan unless:

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.

Perhaps most significantly, Congress redefined the term "disposable income" in § 1325(b)(2). The parties in these cases contest the meaning of the phrases "projected disposable income" ("PDI") and "applicable commitment period" ("ACP") in § 1325(b)(1)(B) as amended by BAPCPA.

In construing the language of § 1325(b)(1)(B), this Court must begin with the language of the statute itself.³ It is also guided by the principle that "[s]tatutory construction . . . is a holistic endeavor. A provision that may seem ambiguous in isolation is often clarified by the remainder of the statutory scheme-because . . . only one of the permissible meanings produces a substantive effect that is compatible with the rest of the law."⁴

A. Calculation of PDI Under BAPCPA

For over two decades, the Code has contained a requirement that a contested Chapter 13 plan apply all of a debtor's PDI toward the payment of creditors. Prior to passage of BAPCPA, determining PDI was typically determined by a relatively straightforward formula. If a debtor accurately reported his income on Schedule I and if the expenses reported on Schedule J were all reasonably necessary, then the difference between Schedule I and Schedule J was the debtor's PDI. Whether an expense was "reasonably necessary" was a determination to be made by the bankruptcy judge. Since the judge's findings were discretionary in nature, some critics characterized the old approach as an "amorphous standard . . . produc[ing] determinations of a debtor's `disposable income' that varied widely among debtors in similar circumstances."⁵

BAPCPA changed this determination by radically altering the definition of "disposable income." A debtor's net income is no longer tied to present income and expenses as set forth on Schedules I and J, but instead is defined as "current monthly income received by debtor . . . less amounts reasonably necessary to be expended . . . for the maintenance or support of the debtor or a dependent of the debtor. . . ."⁶ "Current monthly income" or "CMI" is defined by the Code to be an average of the actual income received by the debtor during the six months before the month of the petition date, subject to certain exclusions.⁷ Thus, it is based on historical figures. Although not at issue in these cases, CMI and Schedule I income may also differ because the definition for CMI excludes Social Security benefits and certain payments to victims of terrorism.⁸ Schedule I, on the other hand, includes a line item for "Social Security or government assistance."⁹

After arriving at CMI, a debtor must then subtract a series of income exclusions and expense deductions to arrive at "disposable income."¹⁰ For present purposes, the most important (and complicated) deduction made from CMI is "amounts reasonably necessary to be expended" for the maintenance or support of the debtor and the debtor's dependents.¹¹ This amount is determined using a different methodology depending on whether the debtor's CMI is above or below applicable median family income. Where a debtor has an above-median income, the statute requires that "amounts reasonably necessary to be expended" be determined in accordance with § 707(b)(2)(A) and (B).¹² Section § 707(b)(2)(A) is a fairly complex mathematical test, often called the "Means Test," used to determine whether a presumption of abuse arises in Chapter 7 cases. Although an oversimplification, application of the Means Test in the Chapter 13 context can generally be described as subtracting from CMI certain monthly expenses and standard allowances. Many of the deductions, including those for general living expenses, housing, utilities, and transportation, are made in standard amounts set by the IRS and do not reflect amounts actually spent by a debtor. After taking the "Means Test" deductions and making certain other adjustments, an above-median debtor then arrives at a figure that is his or her monthly "disposable income" under § 1325(b)(2).¹³

Given the significant differences between the old "Schedule I minus Schedule J" formula and Form 22C's calculations, it is not surprising a debtor's monthly "disposable income" on Form 22C is quite frequently different (and sometimes significantly different) from the monthly net income listed on Schedules I and J. The deviation can be either higher or lower and can result from differences on either the income or expense side of the calculation. For example, if a debtor was unemployed for most of the six months prepetition, but found a job near the petition...