Summary
applying the Stewart Factors to determine whether debtors' case must be dismissed under § 707(b)
Summary of this case from In re JaramilloOpinion
Case No. 08-18017 HRT.
11-16-2009
In re: WAYNE D. ZIEGLER and RONDA E. ZIEGLER, Chapter 7, Debtors.
The matter before the Court is the Motion to Dismiss Debtors' Case under 11 U.S.C. § 707(b)(1) and § 707(b)(2) or (b)(3) (the "Motion," docket #31), filed August 20, 2008, by the United States Trustee ("UST"), and the objection thereto filed by the Debtors (docket # 40). Although the Motion initially sought dismissal under either § 707(b)(2) or (b)(3), the UST subsequently withdrew the Motion's request under § 707(b)(2). See docket #48 (withdrawal), #52 (order allowing withdrawal). The matter before the Court is therefore limited to dismissal under § 707(b)(3).
The Court held a hearing on the Motion on August 12, 2009 (docket #71). Because the testimony at the hearing included changes from the Debtors' originally-filed Schedules I and J, the Court ordered the Debtors to file a pro forma Schedule I and J reflecting the changes (docket #76). The UST also filed a revised Exhibit 12 (docket #75). The parties filed objections to each other's supplemental documents (docket #77, #78), and the UST filed a supplemental brief (docket #79). The Court heard closing arguments on September 25, 2009 (docket #80). Having reviewed the evidence submitted at the hearing, the supplemental documents and brief, and the parties' closing arguments, the Court is now prepared to rule and hereby finds and concludes as follows.
Background
In 2007, the Debtors purchased a home at 11894 Hannibal Street, Commerce City, Colorado. In connection with the purchase of that home, the Debtors signed two notes: a balloon note in the principal amount of $310,500, with interest at 9.55% annually, and a second note in the principal amount of $100,000, with interest at 14.025% annually. The two notes represented 125% of the value of the home. The monthly payments on the two notes totaled $4,343.00.
At the time of purchase, the Debtors believed that the value of the home would increase within three months, allowing them to refinance into a 30-year mortgage with a fixed interest rate. They testified that their belief was a result of misrepresentations made to them by their mortgage broker. Whether the Debtors were the victims of fraud is beyond the scope of the Motion before the Court. Ultimately, the Debtors were unable to obtain the anticipated refinancing. When they filed their bankruptcy petition on June 9, 2008, they indicated an intent to surrender the home, and the first mortgage holder was subsequently granted relief from stay to pursue foreclosure (docket #28).
In August 2008, the Debtors and their two minor children moved into a rental home at 15732 E. 107th Avenue, Commerce City, Colorado. The Debtors testified that they wanted to remain in the same neighborhood as their prior home so that their children would not have to change schools, particularly their son, who was then a senior in high school. The Debtors further testified that rental homes in the area ranged from $1,500 to $2,000 in monthly rent. They signed a two-year lease for their current location, which provides for monthly rent payments of $1,651.
The Debtors' son, now age 18, graduated from high school and is attending Adams State College in Alamosa, Colorado. The cost of tuition is approximately $1,100 per month. The son applied for scholarships and grants, but he did not receive any. The Debtors applied for loans to finance the tuition, but they did not receive any. It does not appear that the son applied for student loans. The Debtors have stated that they wish to pay for their son's tuition and have included $1,100 monthly tuition payments in their pro forma Schedule I.
Both Debtors are employed, and both of their employers offer 401(k) retirement plans. The Debtors each have a history of contributing to their 401(k) plans, but from time to time they have had to reduce their contributions and have had to borrow from their plans. At the time of the hearing, the balance due on outstanding 401(k) loans was approximately $9,000, which included amounts taken out in connection with the Debtors' move into their present home. The Debtors have included both 401(k) contributions (totaling $1,181.18 per month) and loan repayments (totaling $14.47 per month) in their pro forma Schedule I. They have also included $375 per month for penalty and taxes that would be incurred if they did not repay the loans.
The Debtors and their children suffer from various medical conditions. The Debtors have included in their pro forma Schedule J monthly medical expenses of $368, plus additional monthly expenses of $181.67 for their son's treatment, $100 for their daughter's knee treatment, and $303 for prescriptions.
Applicable Law
Section 707(b)(3) of the Bankruptcy Code requires this Court to determine whether the granting of relief would be an abuse of the provisions of Chapter 7, considering the totality of the circumstances of the Debtors' financial situation. 11 U.S.C. § 707(b)(3). In considering the totality of the circumstances, the Court looks to the following factors: (1) whether the debtor enjoys a stable income; (2) whether the debtor is eligible for Chapter 13 relief; (3) whether the debtor suffered a sudden calamity precipitating the bankruptcy filing; (4) whether the debtor made pre-petition purchases far in excess of his ability to repay; (5) whether the debtor's expenses are excessive; (6) whether the debtor's schedules are accurate; (7) whether the debtor has demonstrated good faith; and (8) whether the debtor has an "ability to pay" a significant portion of his debt through a Chapter 13 bankruptcy or otherwise. In re Stewart, 175 F.3d 796, 809 (10th Cir. 1999).
Discussion
The first two Stewart factors are not disputed here, as the Debtors enjoy a stable income from long-held employment, and they are eligible for Chapter 13 relief. The first two factors may be considered to support the UST's Motion.
Regarding the third factor, the Debtors argue that their inability to refinance their home at 11894 Hannibal Street was a sudden calamity. The Court disagrees. Courts have held that a sudden calamity is an event beyond a debtor's control. See In re Violanti, 397 B.R. 852, 859 (Bankr. N.D. Ohio 2008) (citing In re Stewart, 383 B.R. 429, 434 (Bankr. N.D. Ohio 2008)). Here, the Debtors' decision to purchase a home that was beyond their ability to pay may have been influenced by representations made by their mortgage broker, but it was nevertheless a decision within their control. The Debtors testified that they had planned to refinance within a three-month period but were unable to obtain favorable financing. The Debtors' inability to obtain financing cannot be considered a sudden calamity. The third factor therefore does not support the Debtors.
Regarding the fourth factor, with the possible exception of the home at 11984 Hannibal Street, there is no evidence that the Debtors made purchases far in excess of their ability to repay. The fourth factor therefore favors the Debtors.
The fifth, sixth, seventh, and eighth Stewart factors are related in this case. The UST argues that the Debtors have inaccurately portrayed their potential disposable income and that they have included erroneous and excessive expenses in their pro forma Schedules I and J. According to the UST, with modest adjustments, the Debtors would have sufficient disposable income to fund a Chapter 13 plan, which calls into question their good faith in filing a Chapter7 case. The Court will not nit-pick each of the Debtors' expenses but will discuss four categories below.
1. Rental Home Expense
The UST objects to the Debtors' claimed rental expense of $1,651, on two grounds. First, it exceeds the applicable standard of $1,321. Second, because the Debtors testified that rental homes in the area ranged from $1,500 to $2,000, the UST argues that the Debtors should have chosen the cheapest in the area. The Court is not persuaded. While in some cases, a higher than average rental expense may support a conclusion that a debtor is asking unsecured creditors to support a lavish lifestyle, this is not such a case. Here, it appears that the Debtors chose a mid-range-priced home in the same area as their previous home, in order to avoid having to change their children's schools, particularly their son, who was then a senior in high school. The Debtors' housing expenses do not support a conclusion of abuse.
2. Son's College Tuition
The UST objects to the Debtors' including their son's college tuition, at $1,100 per month, in their pro forma Schedule J, citing cases such as In re Baker, 400 B.R. 594, 598-601 (Bankr. N.D. Ohio 2009). In Baker, the court held that the debtor's proposed payment of her daughter's college tuition was an abuse of the provisions of Chapter 7, reasoning as follows:
Clearly, supporting an emancipated daughter, who presents no exceptional requirements, is discretionary spending. As the daughter formerly resided with the Debtor, no testimony was given to explain why the daughter could not continue to reside with the mother (Debtor) or other relatives to mitigate expenses. The Debtor's decision of supporting her emancipated daughter, to the detriment of scheduled unsecured creditors who are receiving less than full satisfaction on their respective claims, is contrary to the letter and spirit of the Bankruptcy Code.
Id. At closing argument, counsel for the Debtors candidly admitted that case law did not support an argument to the contrary. The Court is persuaded by Baker and similar cases that the Debtors' creditors should not subsidize the Debtors' adult son's college tuition expenses. The Debtors' inclusion of tuition expenses therefore supports a conclusion of abuse.
3. 401(k) Contributions, Loan Repayments, and Taxes and Penalties
The UST objects to the Debtors' inclusion of 401(k) contributions, loan repayments, and penalties and taxes on loans if not repaid. As an initial matter, the Court notes that the Debtors' expenses should not include amounts for both loan repayments and for penalties and taxes that would be imposed if the loans were not repaid. The two expenses are mutually exclusive. Here, where the Debtors are repaying their loans and have not incurred penalties or taxes, the amounts for penalties and taxes should not be included.
Further, neither 401(k) contributions nor 401(k) loan repayments are permissible expenses under § 707(b). See In re Egebjerg, 574 F.3d 1045, 1048 (9th Cir. 2009). The Debtors' reliance on In re Skvorecz, 369 B.R. 638 (Bankr. D. Colo. 2007), is misplaced. In Skvorecz, the debtor's schedules included both 401(k) contributions and 401(k) loan repayments. The parties agreed that if the debtor converted his case to Chapter 13, he would be allowed to deduct both the contributions and the loan repayments, resulting in a zero dollar distribution to unsecured creditors. The Skvorecz court held that requiring the debtor to convert to Chapter 13, where his unsecured creditors would receive no distribution, would be an absurd result. Id. at 643-44. That court therefore denied the motion to dismiss. This case does not present the same facts as Skvorecz. Here, the UST has shown that the Debtors would be able to make a distribution to creditors if their case were converted to Chapter 13. The Debtors' inclusion of 401(k) contributions and loan repayments therefore supports a conclusion of abuse.
4. Medical Expenses
The Debtors and their children suffer from various medical conditions, causing their medical expenses to exceed the standard amounts. The UST argues that the medical expenses could be reduced, but counsel was unable to point to a specific treatment that was medically unnecessary. The UST admitted that the Debtors have substantiated all of their medical expenses. The Debtors' medical expenses therefore do not support a conclusion of abuse.
Conclusion
The Debtors presented evidence that they have cut back on many expenses. It does not appear that they are living an extravagant lifestyle. There is no evidence that they filed their petition in bad faith, and the income and expenses listed on their schedules are not materially incorrect. However, their expenses, particularly their son's college tuition and their 401(k) contributions and loan repayments, exceed the amounts allowed in a Chapter 7 case. The Debtors are eligible for Chapter 13 relief and would be able to make a distribution to creditors under Chapter 13. Considering the totality of the above circumstances, the Court concludes that this case presents an abuse of the provisions of Chapter 7. Accordingly, it is
HEREBY ORDERED that this case will be dismissed unless Debtors convert their case to another chapter, within thirty (30) days of the date of this Order. --------------- Notes: In their supplemental documents, the Debtors argue that if they are unable to deduct the tuition payments directly, they could accomplish the same result indirectly by taking out additional 401(k) loans to finance their son's education. The Court cautions against such behavior, which could be considered possible grounds for a finding of bad faith.