Opinion
No. 01-83417; Adv. No. 01-8297
June 17, 2002
OPINION
This matter is before the Court on the Complaint filed by Patricia A. Izer ("PATRICIA") against the Debtor, George D. Reed, Sr. ("DEBTOR"), for a determination of the dischargeability of a debt under Section 523(a)(15) of the Bankruptcy Code. 11 U.S.C. § 523(a)(15). The matter was taken under advisement following trial.
After twenty-four years of marriage, PATRICIA and the DEBTOR were divorced on February 8, 2001. On June 18, 2001, following a hearing, the state court entered its Judgment for Remaining Issues (the "JUDGMENT") distributing the marital property and allocating the debts between the parties. The parties have stipulated that the obligations arising from the JUDGMENT are not in the nature of alimony, maintenance or support under Section 523(a)(5) of the Bankruptcy Code. The sole basis for PATRICIA'S claim of nondischargeability is Section 523(a)(15).
The obligations in question are set forth in Paragraphs I, J and M of the JUDGMENT. PATRICIA was awarded $1,250.00 from a credit union account, the DEBTOR was ordered to pay the MasterCard credit card debts, one-half (1/2) of the Discover card debt and the Northwestern Mutual Life loan. The DEBTOR was also ordered to pay PATRICIA the sum of $6,500.00 in order to equalize the distribution of property between the parties.
Subsection (15) of Section 523(a) provides that an individual is not discharged from any debt:
(15) not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, a determination made in accordance with State or territorial law by a governmental unit unless —
(A) the debtor does not have the ability to pay such debt from income or property of the debtor not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor and, if the debtor is engaged in a business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business; or
(B) discharging such debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse, or child of the debtor.
11 U.S.C. § 523(a)(15). Although the creditor bears the burden to prove that the debt is within the purview of subsection (15), once that showing has been made, the burden of proof shifts to the debtor to prove either of the two (2) exceptions to nondischargeability. Matter of Crosswhite, 148 F.3d 879, 884-85 (7th Cir. 1998). In short, once the creditor's initial proof is made, the debt is excepted from discharge and the debtor is responsible for the debt unless either of the two (2) exceptions, subpart (A), the "ability to pay" test or (B), the "detriment" test, can be proven by the debtor. Id. The applicable standard of proof is preponderance of the evidence. Grogen v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
Both subparts (A) and (B) of Section 523(a)(15) require an examination of a party's financial circumstances. The statute does not indicate at what point in time the circumstances are to be reviewed. Although courts are not unanimous on this point, this Court believes the better rule is that the state of the parties' finances at the time that the dischargeability complaint is tried is the appropriate starting point for determining whether the debtor has the ability to pay the debt, or whether the benefit of a discharge to the debtor is greater than the detriment of discharge to the non-debtor ex-spouse. See, In re Strayer, 228 B.R. 211, 215 (Bankr.S.D.Ind. 1996); In re Gantz, 192 B.R. 932 (Bankr.N.D.Ill. 1996). However, the court's inquiry should not be strictly limited to present circumstances but may consider future anticipated changes. In re Taylor, 191 B.R. 760 (Bankr.N.D.Ill. 1996).
If the debtor can establish an inability to pay the debt under subpart (A), the examination stops and the debtor prevails. The debtor establishes an inability to pay if he proves that paying the debt would reduce his income below that necessary for the support of the debtor and the debtor's dependants. In re Dean, 277 B.R. 381(Bankr.C.D.Ill. 2002); In re Allgor, 276 B.R. 221 (Bankr.N.D.Iowa 2002). The language of subpart (A) mirrors the disposable income test found in Section 1325(b)(2) and it is appropriate to use an analysis similar to that used in determining disposable income in Chapter 13 cases. Dean, at 386; Allgor, at 224. In evaluating whether expenses are reasonably necessary, the Court should seek a balance between allowing a debtor a reasonable lifestyle, while insuring a serious effort to pay creditors by eliminating unnecessary and unreasonable expenses. In re Allgor, 276 B.R. at 224. After determining the debtor's disposable income, the court must then consider whether the debtor's disposable income will allow for substantial and meaningful monthly payments within a reasonable time. In re Metzger, 232 B.R. 658, 665 (Bankr.E.D.Va. 1999).
In making the ability to pay analysis, it is appropriate to consider the financial contribution made by a new spouse, if the debtor is remarried, or even by a live-in companion. Crosswhite, 148 F.3d at 888-89; In re Adams, 200 B.R. 630 (N.D.Ill. 1996). If either party has remarried or has otherwise established a marriage-like relationship with a sufficient degree of economic interdependence to have altered their economic situation, then this alteration should be taken into account by the court. Crosswhite, 148 F.3d at 889 n. 17. The factors to consider include the period of time the individuals have lived as a single economic unit and the degree to which they have commingled their assets. Id.
The DEBTOR has an established relationship with Fern Orhberg (FERN), who testified at trial. Although the DEBTOR and FERN spend a substantial amount of time together, they maintain separate residences, each with a full array of ordinary household expenses. They each have independent sources of income and most of their regular living expenses are unrelated to their relationship with each other. The only evidence of any economic interdependence is that FERN supports their joint food, entertainment and other incidental expenses to the tune of about $400.00 per month. There is no evidence that they share bank accounts or that their assets are otherwise commingled. On the basis of the evidence in the record, the Court finds that the DEBTOR and FERN do not have a sufficient degree of economic interdependence to justify consolidating FERN'S income and expenses with the DEBTOR'S for the purpose of the analysis under Section 523(a)(15). The DEBTOR'S disposable income is properly determined solely on the basis of his own income and expenses.
The DEBTOR is sixty-one (61) years old and is retired from Case I.H., where he worked as a laborer. Although he did not retire until 1992, because of a number of physical ailments, he was relegated to working as a janitor from 1985 to 1990 and was off work on disability from 1990 until his retirement in 1992. In addition to problems with his hands, arms and shoulders, his vision is poor and he cannot read without the assistance of a magnifying glass. He cannot drive an automobile, does not have a driver's license and does not own a car. For these reasons, the Court finds that the DEBTOR is unable to work.
The DEBTOR has two (2) sources of income. According to his testimony, he currently receives $1,259.00 in monthly Social Security benefits, net of a Medicare premium deduction, and $552.52 per month as a pension benefit. His gross pension benefit is actually higher but PATRICIA receives a direct payment of a portion of his pension in the amount of $260.97 pursuant to a qualified domestic relations order entered in the divorce action. The net Social Security and pension benefits that the DEBTOR receives total $1,811.52 per month. The DEBTOR voluntarily withholds $200.00 per month for Federal Income taxes. On cross-examination, the DEBTOR admitted that he incurs no tax liability and that the $200.00 monthly deduction is fully recovered through an annual tax refund. Accordingly, this amount should be added back in as income for the purpose of computing his disposable income. Therefore, based on the evidence received at trial, the Court finds that the DEBTOR'S current net monthly income is $2,011.52.
The DEBTOR'S monthly living expenses listed on his declaration filed at the Court's direction total $1,827.87. The DEBTOR was awarded the marital residence in the divorce action and he spends $1,101.86 per month for the mortgage payment, taxes, insurance and utilities. His other expenses are all quite modest except for a home maintenance expense of $200.00 per month. There was no evidence introduced at trial specifically supporting this expenditure or indicating that the house is in poor condition or in need of significant repairs. In the large volume of Chapter 13 cases that this Court sees, the average amount budgeted by homeowners for home maintenance is $100.00 per month. In the absence of evidence supporting a higher expenditure, the DEBTOR'S home maintenance expenditure will be reduced to $100.00 per month so that his adjusted monthly living expenses total $1,727.87. Accordingly, the Court finds that the DEBTOR has current monthly disposable income of $283.00.
The parties represented the amount of the debts in question as follows:
Credit Union account $ 1,250.00
Citibank card 575.00
Wells Fargo card 1,694.69
One-half (1/2) of Discover card 2,216.50
Property equalization 6,500.00
TOTAL $12,236.19
The DEBTOR testified that it was not his understanding that he was obligated to pay the cumulative total of these amounts. However, the JUDGMENT clearly lists these amounts as separate and independent obligations and it is not this Court's role to reconsider the propriety of the JUDGMENT. There was also contradictory evidence as to whether the $1,250.00 award from the credit union account had been paid. On direct examination the DEBTOR testified that it had already been paid from an income tax refund. However, on cross-examination, it came out that the JUDGMENT included a separate obligation to pay one-half (1/2) of the tax refund to PATRICIA and that the amount from the credit union account had not actually been paid. The JUDGMENT also includes an obligation not listed above, that the DEBTOR pay the Northwestern Mutual Life loan. However, in the JUDGMENT, each party was awarded their own life insurance policies. The Northwestern Mutual Life policy insures the DEBTOR'S life. Accordingly, it appears that repayment of the Northwestern Mutual Life loan would be for the DEBTOR'S benefit, not PATRICIA'S benefit. Therefore, that debt is not one that is owed to or payable for the benefit of PATRICIA and is properly excluded from consideration since it is not a debt covered by Section 523(a)(15).
Although it is not the bankruptcy court's place to rewrite or modify the state court JUDGMENT, it is necessary and appropriate for the bankruptcy court to use current debt balances for its (a)(15) analysis. Although neither party addressed it at trial, the court file for the DEBTOR'S Chapter 7 case evidences a post-petition payment on the Discover card debt. The DEBTOR'S bankruptcy turned out to be an asset case in which the Chapter 7 Trustee distributed to unsecured creditors the sum of $3,277.54, all of which went to Discover Bank as the sole timely-filed, allowed unsecured claim. The parties agreed that the Discover card debt had a petition date balance of $4,433.00 and that the JUDGMENT provides that the DEBTOR and PATRICIA would each pay one-half (1/2) of that debt. The Chapter 7 Trustee's distribution satisfied the DEBTOR'S obligation in full and reduced PATRICIA'S liability for her half by $1,061.04. This unaccounted-for benefit to PATRICIA should be credited, for the DEBTOR'S benefit, against the $6,500.00 property equalization payment obligation.
PATRICIA testified that she has been released from any further obligation for the Wells Fargo balance in consideration for her payment of $200.00. Since the DEBTOR was responsible for the entire Wells Fargo balance, given PATRICIA'S release, he may now satisfy this obligation to PATRICIA by reimbursing her for the $200.00 payment.
Accordingly, with the foregoing adjustments, the Court finds that the current balance due on the JUDGMENT debts in question covered by Section 523(a)(15) are as follows:
Credit Union account $1,250.00
Citibank card 575.00
Wells Fargo card 200.00
One-half (1/2) of Discover card 0.00
Property equalization 5,438.96
TOTAL $7,463.96
The amount at issue of $7,463.96 could be paid by the DEBTOR at the rate of $280.00 per month over a term of twenty-seven (27) months or at a rate of $250.00 per month over thirty (30) months, well within the minimum three (3) year period for Chapter 13 plans. The amount could be paid over the maximum Chapter 13 term of five (5) years in monthly payments of about $125.00. In determining what is a reasonable repayment term, some courts go beyond the five (5) year limit for Chapter 13 plans. See, In re Brodeur, 276 B.R. 827 (Bankr.N.D.Ohio 2001) (eight-year repayment period not unreasonable, given the priority which the Bankruptcy Code accords to domestic obligations). Because the DEBTOR has sufficient disposable income to pay the obligations in question under either the three (3) year minimum or the five (5) year maximum term for a Chapter 13 plan, which this Court finds to be a reasonable term, it is not necessary to consider whether a term beyond five (5) years is reasonable.
PATRICIA also contends that the Court should consider the fact that the DEBTOR owns a pontoon boat and a johnboat that could be sold or pledged as collateral for a loan to enable the DEBTOR to pay a portion of the amounts in question. The DEBTOR contends that these items of personal property should not be taken into consideration since they were "bought back" from the DEBTOR'S Chapter 7 Trustee and the net proceeds were used to pay the DEBTOR'S creditors, i.e., Discover Bank. It is undisputed that FERN loaned the DEBTOR the sum of $4,400.00 which was paid to the Trustee as a compromise of the Trustee's right to sell those nonexempt assets in the course of his administration of the Chapter 7 bankruptcy estate. The DEBTOR argues that it would amount to unfair double-dipping to take the boats' value into account for the ability to pay test. Although, as expressly stated in Section 523(a)(15)(A), the Court may consider the DEBTOR'S ability to pay not only from his income, but also from his "property," it is not necessary for the Court to decide whether the value of the two (2) boats must be taken into account for this purpose since the Court finds that the DEBTOR has the ability to pay the debts in question in installment payments over a reasonable term solely from his disposable income.
For these reasons, the Court concludes that the DEBTOR has failed to carry his burden to prove that he does not have the ability to pay the debts in question over a reasonable period of time from income or property not reasonably necessary to be expended for the maintenance or support of the DEBTOR or a dependent of the DEBTOR. It is therefore necessary to proceed to the analysis under subpart (B).
Under Section 523(a)(15)(B) the DEBTOR bears the burden to prove that the benefit to him of discharging the subject obligations outweighs the detrimental consequences that such a discharge would have on PATRICIA. The inquiry is inherently equitable in nature and is not reducible to a universal formula. Crosswhite, 148 F.3d at 888-89. The court should consider the totality of both parties' circumstances. Id.
Evaluating the benefit of the discharge to the DEBTOR is straightforward. As determined earlier herein, the current balance of the DEBTOR'S obligations to PATRICIA under the JUDGMENT is $7,464.00. With his disposable income, he can pay this balance in full within thirty (30) months at the rate of $250.00 per month. It follows that the benefit to the DEBTOR of having this obligation discharged will be an increased availability of discretionary income of approximately $250.00 for the next two and one-half (2 1/2) years.
Following the divorce, PATRICIA moved to Florida. Although she has not remarried, she lives with Michael A. McCombie (MICHAEL). Based on the testimony of both PATRICIA and MICHAEL, it is clear that they have a marriage-like relationship in which they pool their income and assets and share all household and other living expenses. Accordingly, the Court finds that PATRICIA and MICHAEL have a sufficient degree of economic interdependence to justify treating them as a single economic unit for the purpose of subpart (B).
Like the DEBTOR, both PATRICIA, who is fifty-five (55) years old, and MICHAEL, who is sixty-two (62) years of age, are unable to work. PATRICIA'S income is made up of the $260.97 payment that she receives from the DEBTOR'S pension each month, $425.00 in Social Security benefits, $140.00 in disability benefits and $84.00 in food stamps, for a total of $909.97. MICHAEL'S only source of income is the $648.00 that he receives in Social Security benefits. Accordingly, PATRICIA and MICHAEL'S joint monthly income is $1,557.97.
In their declarations, PATRICIA and MICHAEL list monthly living expenses totaling $1,395.90, which the Court finds to be reasonable, so that they have disposable or discretionary income of $162.07 per month. MICHAEL and PATRICIA live a significantly more meager lifestyle than does the DEBTOR, who, himself, lives a relatively modest lifestyle. Whereas the DEBTOR spends about $1,100.00 per month for housing related expenses, PATRICIA and MICHAEL spend about $400.00. They live in a forty (40) foot mobile home worth about $4,000. The DEBTOR lists a monthly expense for food and household supplies of $200.00 for himself, whereas PATRICIA and MICHAEL list the same amount as the total expenditure for both of them. The DEBTOR'S budget contains a $50.00 monthly expenditure for entertainment, while PATRICIA and MICHAEL'S budget provides nothing for entertainment.
The detrimental consequences to PATRICIA if the DEBTOR'S obligations to her are discharged include the nonreceipt of the $5,439.00 remaining balance of the property equalization award and the $1,250.00 that she was to receive from the credit union account. With regard to the Wells Fargo credit card account, PATRICIA testified that she has already received a release of liability from Wells Fargo in exchange for a payment of $200.00 which she would not then be entitled to recover from the DEBTOR. The DEBTOR'S obligation to pay one-half (1/2) of the Discover credit card has already been satisfied via the distribution made by his Chapter 7 Trustee. The Citibank credit card balance of $575.00 will have to be paid by PATRICIA if the DEBTOR'S obligation is discharged. Accordingly, the economic detriment to PATRICIA if the DEBTOR receives a discharge of his obligations to her under the JUDGMENT amounts to a loss of a total of $7,464.00. There is no question that this loss would be a hardship on PATRICIA.
While the DEBTOR is not well off by any means, the evidence compels the conclusion that PATRICIA is economically worse off. Based upon the totality of each party's circumstances, the Court concludes that the DEBTOR has failed to carry his burden to prove that discharging the subject debt would result in a benefit to him that outweighs the detrimental consequences of such a discharge to PATRICIA. Since the DEBTOR has failed to carry his burden under either subpart of Section 523(a)(15), his obligations to PATRICIA arising under the JUDGMENT are nondischargeable.
For the purpose of clarity, it is necessary to distinguish between direct payment obligations from the DEBTOR to PATRICIA and hold harmless obligations. As set forth in the JUDGMENT, the DEBTOR'S obligation to pay $1,250.00 from the credit union account and $6,500.00 (reduced to $5,438.96 as provided herein) as a property equalization settlement are direct payment obligations. The DEBTOR'S responsibility for paying the Citibank, Wells Fargo and one-half (1/2) of the Discover credit card balances are in the nature of hold harmless obligations. However, the $200.00 payment from PATRICIA to Wells Fargo for a release of her liability effectively converted that obligation to one for direct payment of $200.00. Accordingly, the sum of the three (3) direct payment obligations is $6,888.96 and the DEBTOR'S obligation to pay this amount to PATRICIA is nondischargeable.
The provision in the JUDGMENT assigning the marital debts does not include "hold harmless" or other indemnification language. Notwithstanding the absence of such language, however, an allocation of marital debts under Illinois law "mean[s] that the party allocated the debt is expected to pay it and to do so in a manner that does not expose the other party to liability on the debt." In re Marriage of Davis, 292 Ill. App.3d 802, 686 N.E.2d 395, 226 Ill. Dec. 765 (Ill.App. 4 Dist. 1997). See also, In re Gibson, 219 B.R. 195 (6th Cir. 1998).
With respect to the Citibank credit card balance of $575.00, which remains unpaid, the DEBTOR'S personal liability to Citibank has now been discharged. The DEBTOR'S obligation to PATRICIA, however, arising out of the JUDGMENT, to effectively hold her harmless from having to pay the joint debt, is nondischargeable under Section 523(a)(15). As long as PATRICIA has not paid the debt, the DEBTOR could satisfy his obligation to her not only by paying the full balance, but also by negotiating Citibank's release of her liability for a partial payment. A separate Judgment Order will be entered that makes this distinction.
This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.
ORDER
For the reasons stated in an Opinion entered this day, IT IS HEREBY ORDERED that the DEBTOR'S obligation arising under the state court Judgment for Remaining Issues, to pay PATRICIA A. IZER the sum of $6,888.96 is adjudicated and determined to be nondischargeable pursuant to 11 U.S.C. § 523(a)(15), and, further, that the DEBTOR'S obligation to hold PATRICIA A. IZER harmless from the Citibank credit card marital debt, arising from his obligation in the state court JUDGMENT to pay that debt, is also adjudicated and determined to be nondischargeable pursuant to 11 U.S.C. § 523(a)(15).