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finding 401k contribution not a special circumstance because it was non-mandatory, not reasonable or necessary, and expense for which debtors had alternative
Summary of this case from In re HanksOpinion
No. 7-06-10585 SA.
October 2, 2007
MEMORANDUM OPINION ON WHITE CAP CONSTRUCTION SUPPLY'S MOTION TO DISMISS CHAPTER 7 CASE
This matter is before the Court on the Motion to Dismiss Chapter 7 Case filed by creditor White Cap Construction Supply ("White Cap"). White Cap argues that granting relief to the Debtors under Chapter 7 would be an abuse of the provisions of Chapter 7, so it seeks dismissal pursuant to 11 U.S.C. § 707(b)(2)(A) (presumption of abuse) and/or 11 U.S.C. § 707(b)(3) (totality of circumstances). To resolve this case, the Court must determine the proper Form 22A deduction for taxes (line 25) and for payments on priority claims (line 44). If the presumption of abuse arises, the Court must determine whether Debtors have shown special circumstances under 11 U.S.C. § 707(b)(2)(B) that rebut the presumption of abuse. If Debtors are successful in rebutting the presumption, then the Court must determine if the case should be dismissed under the totality of the circumstances. This is a core proceeding. This Memorandum Opinion constitutes the Court's findings of fact and conclusions of law. Bankruptcy Rule 7052.
Based on the discussion below, the Court finds that the presumption of abuse arises and is not rebutted by the Debtors. White Cap's Motion is well taken and will be granted.
FACTS
1. Debtors filed a joint chapter 7 petition on April 17, 2006. They filed the means test form, Official Form 22A, with the petition.
2. Debtors debts are primarily consumer debts.
Debtors' petition claims that the debts were primarily business debts, and denied the allegation by White Cap that the debts were primarily consumer. Debtors stipulated at trial that the debts were primarily consumer. See also Stewart v. United States Trustee (In re Stewart), 175 F.3d 796, 808 (10th Cir. 1999) (defining "primarily" in the context of § 707(b) as meaning consumer debt exceeding fifty percent of the total debt).
3. The parties stipulated at trial to the following numbers:
Line Description Amount 12 Total Current Monthly Income 10,801.95 21 Local Standards 12.73 27 Other Necessary Expenses: life insurance 35.58 29 Other Necessary Expenses: education 20.83 31 Other Necessary Expenses: health care 200.50 32 Other Necessary Expenses: telecommunication 122.74 34 Health Insurance, Disability Insurance 456.78 40 Continued Charitable Contributions 6.67 4. The parties disagreed on taxes (line 25) and payments on priority claims (line 44). White Cap also disagrees that any of the circumstances claimed by Debtors qualify as "special circumstances" that would allow them to adjust their income to reflect a one time bonus received during the 6 months before filing, or to take deductions for "transportation expenses for child visits," "student loan payment" or "non-mandatory retirement."5. Exhibit 30, page 2, shows that the Debtors had an average monthly withholding tax of $1,632.02 for the 6 months preceding filing. Mr. Robinette testified that he did not expect a refund for calendar year 2006, but that it would "break even." No other evidence on current tax liabilities was presented.
The parties stipulated to admission of White Cap's exhibits 1 to 32, and Debtors' exhibits 33 and 34.
6. Debtors listed a federal income tax refund receivable of $12,492.00 and a state income tax refund receivable of $3,470.00 on their Schedule B. Exhibit 3. Both were claimed exempt. Exhibit 3, Schedule C. Mr. Robinette testified that they received these refunds late in 2006 and used the money to live on and pay child support. These large refunds were the result of a $60,263 net operating loss from Mr. Robinette's business, which had since closed. Therefore, this operating loss will not recur. See Exhibit 25.
7. Exhibit 29, pages 9 and 10, show that Mr. Robinette owed Internal Revenue Service taxes of $7,439.61 (941 taxes for tax period 12/31/2004) and $11,800.41 (941 taxes for tax period 9/30/2004) as of June 19, 2006. This total, $19,240.02, includes interest at 7%, see id., page 5, from the filing date to June 19, 2006. Therefore, the Court will subtract $209.36 from the IRS tax liability to find that the amount due on the petition date was $19,030.66.
8. Exhibit 33 shows that the Debtors owed CRS taxes to the state of New Mexico of $33,895.47 principal only. The Debtors did not provide the amount of interest or penalties.
9. Total priority claims are therefore $52,926.31.
10. Ms. Robinette received a one-time bonus of $6,600.00 when she signed up to work at her current job. The Court finds that she has no reasonable alternative to replace this income.
11. The Court finds that $233.33 for transportation expenses for child visits is both reasonable and necessary. The Court also finds that there is no reasonable alternative to avoid this expense.
12. Similarly, the Court finds that $137.83 for educational loan repayment is both reasonable and necessary. The Court also finds that there is no reasonable alternative to avoid this expense because student loans are nondischargeable.
13. In contrast, the Court finds that $180.00 for "non-mandatory retirement" is not a necessary expense. There is also an alternative — Debtors can simply stop the non-mandatory deduction.
14. Debtors' annualized current monthly income is $129,623.40, which is above New Mexico's median income for a family of two ($41,228.00).
15. Based on the above, the Court prepared a Form 22A that is attached to this Memorandum as Exhibit A.
CONCLUSIONS OF LAW OVERVIEW
White Cap seeks dismissal under 11 U.S.C. § 707(b), which provides in part:
(b)(1) After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, trustee (or bankruptcy administrator, if any), or any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor's consent, convert such a case to a case under chapter 11 or 13 of this title, if it finds that the granting of relief would be an abuse of the provisions of this chapter. In making a determination whether to dismiss a case under this section, the court may not take into consideration whether a debtor has made, or continues to make, charitable contributions (that meet the definition of "charitable contribution" under section 548(d)(3)) to any qualified religious or charitable entity or organization (as that term is defined in section 548(d)(4)).
The Court must presume that abuse exists if Debtors' Current Monthly Income is greater than the median family income of the applicable state for a family of the same or fewer individuals and such income, reduced by amounts determined in § 707(b)(2)(A)(ii), (iii) and (iv), and multiplied by 60 is not less than the lesser of (I) 25 percent of the debtors' nonpriority unsecured claims or $6,000 (whichever is greater); or (II) $10,000. 11 U.S.C. § 707(b)(2)(A)(i) and (b)(7)(A). Section 707(b)(2)(A)(ii) allows deductions in the amounts established by the National Standards and Local Standards issued by the Internal Revenue Service for the Debtors' area. For certain categories of expenses, Debtors are also allowed to deduct the actual amount of certain other expenses specified as "Other Necessary Expenses".See id. Section 707(b)(2)(A)(iii) and (iv) allows debtors to deduct the average monthly payment on account of secured and priority unsecured debt respectively.
"Current Monthly Income" is defined at 11 U.S.C. § 101(10A) as:
(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 files the schedule of current income required by section 521(a)(1)(B)(ii);
plus other amounts not relevant to this case.
The calculations required by 11 U.S.C. 707(b)(2) are referred to as "the means test." If a debtor does not "pass" the means test, there is a presumption of abuse. However, the debtor may rebut that presumption by demonstrating "special circumstances" that justify additional expenses or an adjustment of current monthly income for which there is no reasonable alternative. 11 U.S.C. § 707(b)(2)(B)(i). Even if debtor "passes" the means test, the Court can consider dismissal under 11 U.S.C. § 707(b)(3).
DEBTORS' DEDUCTIONS
Form 22A, line 25, allows a deduction for "the total average monthly expense that you actually incur for all federal, state and local taxes, other than real estate and sales taxes, such as income taxes, self employment taxes, social security taxes, and Medicare taxes." The Court found no cases interpreting this phrase in the chapter 7 context. However, there are numerous cases that construe it for chapter 13 purposes. These cases unanimously agree that 1) the amount withheld is not necessarily the amount "incurred", 2) computation of this number is difficult because actual tax liability is not determined until the future, 3) debtors must make their best guess estimate of the number. See In re Stimac, 366 B.R. 889, 893-94 (Bankr. E.D. Wisc. 2007) (Establishing rough-cut rule that the deduction would be 1/12th of prior tax return's liability unless debtor shows a change in circumstances.); In re Lawson, 361 B.R. 215, 223 (Bankr. D. Utah 2007) (Debtors must make their best efforts to estimate their actually incurred tax expenses.); In re Balcerowski, 353 B.R. 581, 588 (Bankr. E.D. Wisc. 2006) (Court rules that it would leave it to the parties to determine how to make the best estimate of actual tax expense.)
In the case before the Court, the only evidence of actual tax liability was that, at the current withholding levels, Debtors expected no refund. This was not challenged. In effect, the parties have determined among themselves what the appropriate figure is. Id. Therefore, the Court finds that the amount incurred in this case is the amount actually withheld. Therefore, Debtors line 25 tax deduction is $1,632.02.
The next item on which the parties disagreed was the deduction for priority taxes. Findings 7 through 9 above found that the priority debt was $52,926.31. White Cap argues that, if the IRS and State of New Mexico had offset the tax refunds, the priority debt would have been much smaller, entitling Debtors to a smaller deduction on line 44. The Court finds that it should not compute this offset. The fact is that on the petition date, Debtors owed $52,926.31. Form 22A represents a snapshot of financial condition on the petition date. The taxing authorities did not offset when notified of the bankruptcy; they refunded the money.
Turning now to Exhibit A to this Memorandum, it shows, in summary: presumption applies.
Line Description Amount 12 Total Current Monthly Income 10,801.95 33 Total Expenses Allowed under IRS Standards -5,041.03 41 Total Additional Expense Deductions 707(b) -463.45 46 Total Deductions for Debt Payment -3,640.28 47 Total of all Deductions allowed -9,144.76 50 Monthly Disposable Income under § 707(b)(2) 1,657.19 51 60-month disposable income 99,431.40 52 Line 51 is more than $10,950, Because the presumption applies, the burden now shifts to the Debtors to show that their special circumstances allow them to seek chapter 7 relief.SPECIAL CIRCUMSTANCES
If the presumption of abuse arises, the debtor may attempt to rebut it under 11 U.S.C. § 707(b)(2)(B). That provision states:
(i) In any proceeding brought under this subsection, the presumption of abuse may only be rebutted by demonstrating special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.
(ii) In order to establish special circumstances, the debtor shall be required to itemize each additional expense or adjustment of income and to provide —
Section 707(b)(2)(B) has both substantive and procedural requirements. In re Littman, 370 B.R. 820, 830 (Bankr. D. Idaho 2007). In this case, Debtors did not follow the procedural requirements. However, as discussed below, even if they had followed the procedures of § 707(b)(2)(B)(ii) and (iii), they have failed to rebut the presumption of abuse. See also In re Tamez, 2007 WL 2329805 at *6 (Bankr. W.D. Tex. 2007) (Discussing procedural requirements and approaches courts have taken to satisfy the documentation requirements.); Eisen v. Thompson (In re Thompson), 370 B.R. 762, 773 (N.D. Ohio 2007).
(I) documentation for such expense or adjustment to income; and
(II) a detailed explanation of the special circumstances that make such expenses or adjustment to income necessary and reasonable.
(iii) The debtor shall attest under oath to the accuracy of any information provided to demonstrate that additional expenses or adjustments to income are required.
(iv) The presumption of abuse may only be rebutted if the additional expenses or adjustments to income referred to in clause (i) cause the product of the debtor's current monthly income reduced by the amounts determined under clauses (ii), (iii), and (iv) of subparagraph (A) when multiplied by 60 to be less than the lesser of —
(I) 25 percent of the debtor's nonpriority unsecured claims, or $6,000, whichever is greater; or
(II) $10,000.
The Court finds that the two examples of special circumstances enumerated in the statute are not the only circumstances that debtors may cite, nor even archetypal circumstances. See In re Littman, 370 B.R. 820, 830-31 (Bankr. D. Idaho 2007) ("[T]he two examples do not purport to be exclusive. Nor is there something necessarily inherent in these two examples that will always be present in a BAPCPA-acceptable `special circumstance.'") (Footnote omitted.) Nothing in the language of the statute requires that the circumstance be an act outside of a debtor's control. Id. at 831 and n. 29; In re Graham, 363 B.R. 844, 850 (Bankr. S.D. Ohio 2007); In re Tamez, 2007 WL 2329805 at *5 (Bankr. W.D. Tex. 2007). Nor must the special circumstance be unanticipated. In re Armstrong, 2007 WL 1544591 at *3 (Bankr. N.D. Ohio 2007). The Court should approach the issue of special circumstances on a case-by-case basis. Littman, 370 B.R. at 831.
Ms. Robinette's first special circumstance is her $6,600 job bonus. As discussed above, factually the Court found that this one-time bonus justified an adjustment of current monthly income for which there is no reasonable alternative. See Tamez, 2007 WL 2329805 at *5 (finding job change a special circumstance); In re Heath, 2007 WL 1982194 at *7 (Bankr. E.D. Mich. 2007) (finding unemployment of debtor a special circumstance). Cf. In re Ferando, Case No. BK-06-81855, slip op. at 2 (Bankr. D. Neb., filed March 1, 2007) (Simple fluctuations in income are not special circumstances, but "[t]his is not a situation where Debtor claims that there was a one-time large and unique commission earned during the six-month period.")
The next special circumstance is the travel for child visitation. The Court above found that it was a reasonable and necessary expense for which there was no alternative. It should be allowed as a deduction from disposable income. Compare Armstrong, 2007 WL 1544591 at *4 (Having to maintain 2 separate residences to preserve status as custodial parent counted as a special circumstance.)
The next special circumstance claimed is for student loan expenses. The Court agrees with the cases that have found these expenses to be special circumstances, because there is no reasonable alternative to making the payments. See In re Haman, 366 B.R. 307, 318 (Bankr. D. Del. 2007); In re Templeton, 365 B.R. 213, 216 (Bankr. W.D. Okla. 2007).
The final special circumstance claimed is the non-mandatory retirement contribution. The Court does not find this to be reasonable or necessary, and Debtors have an alternative to the expense. Therefore, the Court finds that it is not a special circumstance.
To rebut the presumption, Debtors must show that the additional expenses and reduction in income, when added together and multiplied by sixty and subtracted from $99,431.40 is less than $10,000. See 11 U.S.C. § 707(b)(2)(B)(iv)(II). It is not.137.83 88,269.60
Line 51 99,431.40 Monthly reduction in income 1,100.00 Child visitation 233.33 Student loan payments Total reductions 1471.16 × 60 = - 60 month disposable income adjusted for special 11,161.80 circumstances Therefore, the Debtors have not rebutted the presumption of abuse. White Cap's Motion is well taken and will be granted by separate Order, but Debtors will be allowed a short time in which to convert to Chapter 13 or 11.Exhibit