Opinion
Case No. 03-10814 (AJG)
April 2, 2004
MEMORANDUM DECISION DENYING APPLICATION OF UNITED STATES TRUSTEE TO DISMISS DEBTOR'S CHAPTER 7 CASE WITH PREJUDICE PURSUANT TO 11 U.S.C. § 707(b)
The Court has been asked to determine whether the petition filed under chapter 7 of title 11 of the United States Code (the "Bankruptcy Code") by Harold Drillman (the "Debtor") should be dismissed with prejudice as constituting substantial abuse under section 707(b) of the Bankruptcy Code. After holding two hearings and considering all the evidence, the Court finds that Debtor's petition should not be dismissed for substantial abuse. Based on the totality of the circumstances, affording Debtor a chapter 7 discharge and a "fresh start" would not be a substantial abuse of the provisions of chapter 7 of the Bankruptcy Code.
PROCEDURAL HISTORY
On February 12, 2003, Debtor filed a voluntary petition under chapter 7 of the Bankruptcy Code. Richard O'Connell (the "Trustee") was appointed interim trustee and subsequently qualified as permanent trustee. The United States Trustee inquired by letter dated February 21, 2003, why Debtor had not filed the case under chapter 13 of the Bankruptcy Code. Debtor's counsel, Kevin Costello, Esq., responded by letter dated March 5, 2003. On March 13, 2003 the Trustee examined Debtor at the Section 341(a) meeting of the creditors. This Court, on April 4, 2003, "so ordered" the stipulation and agreement among Debtor's counsel, the Trustee and the United States Trustee extending the time for the United States Trustee to file a motion to dismiss pursuant to sections 707(a) and (b), and extending the time for the United States Trustee and the Trustee to object to discharge pursuant to section 727 of the Bankruptcy Code from May 12, 2003 to July 14, 2003. By Stipulation and Order signed on September 4, 2003, the time was further extended to September 12, 2003.
On May 8, 2003 Debtor submitted an amended Schedule I, amended Schedule J and an estimate of $5,400.00 for future dental expenses by Debtor's dentist. The section 341(a) meeting of the creditors was continued on June 19, 2003. According to the United States Trustee, there was no testimony that contradicted or changed the information provided by the Debtor in response to the United States Trustee's inquiry on February 21, 2003.
The United States Trustee filed its Application to Dismiss the Debtor's Chapter 7 Case With Prejudice Pursuant to 11 U.S.C. § 707(b) (the "Application to Dismiss") on September 2, 2003. Debtor filed a Memorandum of Law in Opposition to the United States Trustee's Application to Dismiss (the "Memorandum in Opposition") and Declaration of Harold Drillman (the "Declaration") on September 26, 2003. The Court held a hearing on October 1, 2003. On March 10, 2004, the Court held a post-conference hearing regarding the submissions addressing the calculations of Debtor's available disposable income ("Disposable Income").
Debtor's Disposable Income is herein defined as his monthly net disposable income. Section 1325(b)(2)(A) of the Bankruptcy Code defines "disposable income" as "income which is received by the debtor and which is not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor." 11 U.S.C. § 1325(b)(2)(A).
FACTUAL BACKGROUND
Mr. Drillman, Debtor, is a 56 year-old single individual who is employed as an accountant by Lutz and Carr, CPA, LLP, an accounting firm that services not-for-profit companies. The Debtor is not a CPA. Debtor's gross income is $87,984.00 per year. He lives alone in an apartment in New York City for which he pays $1,632.00 per month in rent. The personal property owned by Debtor consists of $88,170.00 in pension and 401(k) plans, $140.00 in a bank account, $250.00 in household furnishings and $250.00 in clothing; all of which are exempt assets. Over a period of years, Debtor accumulated $75,000.00 of unsecured debt plus interest amounting to $132,459.70 of total unsecured debt. His debt is attributable to credit card purchases and cash advances to cover "day-to-day purchases." Decl. ¶ 2; see also, Schedule F.
There is a discrepancy in the Debtor's papers as to whether the Debtor is 55 or 56 years old at the time such pleadings were filed. The Debtor's arguments appear to use the age 56 to estimate the time at which he would retire i.e. at age 62. The UST seems to assume he is 55 when she states that the Debtor's retirement will likely occur in seven to ten years. For purposes of the Court's analysis there is no significance in the age discrepancy and for the sake of convenience, the Court will use the age 56 in this decision.
Debtor's salary has been calculated from Debtor's amended Schedule I.
Debtor's voluntary petition filed on February 12, 2003 includes Debtor's initial Schedule I, which lists his monthly gross income as $7,000.00, payroll and social security taxes as $2,900.00, and total monthly income after taxes and deductions as $4,100.00. Debtor's initial Schedule J lists his monthly expenses as $3,317.00. On May 8, 2003, however, Debtor submitted amended Schedule I and Schedule J, as well as an estimate from his dentist of $5,400.00 in future medical expenses. Debtor's amended Schedule I lists his gross monthly wages as $7,332.00, payroll and social security taxes as $2,623.83, insurance as $112.30, 401(k) contribution as $288.27, Section 125 contribution as $43.33, and total monthly incomes after taxes and deductions as $3,067.73. Debtor's amended Schedule J lists his monthly expenses as $3,732.00, including $450.00 per month that he will incur in dental expenses. Additionally, Debtor's monthly rent will increase by $70.00 per month starting August 1, 2003 and $200.00 per month for the following year until the expiration of his lease.
The dentist's estimate lists $5,400.00 as the total dental expense, $450.00 per month for twelve months. As will be addressed subsequently, Debtor revised the $5,400.00 estimate to $6,500.00; as a result, the expenditure will be $450.00 per month for months one through fourteen and $200.00 for month fifteen.
ARGUMENTS A. The United States Trustee's Contentions
The United States Trustee argues that Debtor's chapter 7 case should be dismissed with prejudice for a period of one year pursuant to section 707(b) because Debtor has $604.09 per month in excess income from which he has the ability to pay a portion of his debt obligations; therefore, granting Debtor a discharge would be a "substantial abuse" of chapter 7. Based on an analysis of Debtor's circumstances the United States Trustee asserts that Debtor has substantial present and future income to repay his creditors and there are no mitigating factors that would impact his ability to pay. The United States Trustee asserts that Debtor is seven to ten years away from retirement, that Debtor's 401(k) monthly contributions are voluntary and not required for employment; therefore, his 401(k) monthly contributions should be included in calculation of his available Disposable Income. The United States Trustee acknowledges Debtor's monthly rental increase of $70.00 and includes it in her calculations.
The United States Trustee's calculations are as follows:
Current Monthly Gross Wages, Salary, inter alia $7,333.34 Less: Social Security and Medicare (548.56) Less: Federal Withholding Taxes (1,456.26) Less: N.Y. State Withholding Taxes (390.85) Less: N.Y. City Withholding Taxes (229.21) Less: 401(k) Contribution (288.28) Other Deductions (194.26) __________ Total Net Monthly Take Home Pay $4,225.92 Plus: Post-tax Value of 401(k) Monthly Contribution 180.17 __________ Revised Monthly Net Income $4,406.09 Less: Monthly Expenses (amended Schedule J) (3,732.00) Less: Upcoming Monthly Rental Increase (70.00) __________ Total Disposable Income $604.09
The United States Trustee contends that Debtor's Disposable Income of $604.09 is sufficient to fund a material distribution to his creditors. According to the United States Trustee, Debtor has sufficient excess income to fund a chapter 13 three-year plan with a distribution of approximately 15 percent to general unsecured creditors or a five-year plan with a 25 percent distribution. Furthermore, the United States Trustee asserts that even if the Court were to exclude the 401(k) contributions from the calculation of Debtor's total Disposable Income and accept Debtor's calculation of $532.26 per month, Debtor would still be able to fund a chapter 13 three-year plan with a 13 percent distribution to general unsecured creditors or a five-year plan with a 21.7 percent distribution. The United States Trustee submits that these amounts represent a significant percentage of Debtor's unsecured debt and therefore, the Court should find that Debtor has the ability to pay his creditors.
The United States Trustee's calculations account for the payment of chapter 13 trustee's fees of 10 percent, but do not account for an increase of $250.00 per month of excess income beginning in the second year of a chapter 13 plan. Although the United States Trustee discusses that beginning in the second year of a chapter 13 plan, Debtor will have an additional $450.00 per month disposable income resulting from the completion of his dental treatment. Debtor will also incur a $200.00 per month rental increase starting in the second year of a chapter 13 plan; the United States Trustee does not make the adjustment based upon these amounts in her calculation. Nonetheless, adjusting the calculations to reflect her argument regarding the adjustments, Debtor will have $250.00 additional in monthly disposable income ($450.00 less $200.00). Based upon the $6,500.00 estimate of dental expenses, the Debtor's monthly disposable income will increase to $654.09 ($604.09 plus $50.00) beginning in month fifteen of any plan and to $854.09 in subsequent months, under the United States Trustee's calculations.
The United States Trustee reaches this figure based on Debtor's amended Schedules I and J, which does not include the $70.00 per month rental increase.
The distribution percentages account for the payment of ten percent in fees to the chapter 13 trustee, but do not account for an increase of $250.00 per month of excess income beginning in the second year of a chapter 13 plan.
B. Debtor's Contentions
Debtor requests that the Court deny the United States Trustee's Application to Dismiss because under the totality of the circumstances Debtor's petition under chapter 7 is not a substantial abuse pursuant to section 707(b) of the Bankruptcy Code. Debtor contends that he does not have the ability to repay his creditors. He states that he is over 55 years of age and less than seven years away from retirement. Debtor also states that he did not initially incur debt "far in excess of his ability to pay" and that he filed his petition in good faith. He contends that his future employment is not certain because of his age and his lack of license as a Certified Public Accountant ("CPA"). Debtor further contends that his employer, Lutz and Carr, CPA, LLP, has been paying him a higher salary than another firm would pay because of his long work history with them. Debtor argues that he is only realistically employable by accounting firms that service not-for-profit companies because he is not a CPA. He also argues that he has no job security because Lutz and Carr, CPA, LLP has been downsizing and there is a possibility that his employment would be terminated before he reaches retirement age. For these reasons, Debtor argues that in order to adequately provide for his retirement it is imperative for him to contribute to his 401(k) plan on a monthly basis and therefore, the $288.28 should be excluded from the calculation of Disposable Income. Debtor also states that the initial estimate for his dental expenses is $5,400.00, but that he will also need additional treatment and the correct estimate is $6,500.00. Decl. ¶ 8; Decl. Ex. A. Furthermore, Debtor states that there are no state remedies available to ease his financial situation and that he is deserving of a fresh start based on his particular circumstances. Debtor also states that he contacted a consumer credit counseling agency for the purpose of making alternate arrangements with his creditors but was advised that his situation had progressed too far. Decl. ¶ 3.
Debtor states that he has approximately $532.26 per month in Disposable Income, which does not account for any increases in rent, cost of living or for his future dental expenses.
Debtor's calculations are as follows:
Debtor's calculations are based on his amended Schedules I and J.
Current Monthly Gross Wages, Salary, inter alia $7,332.00 Less: Payroll Taxes and Social Security (2,623.83) Less: Insurance (112.30) Less: 401(k) Contribution (288.27) Less: Section 125 Contribution (43.33) __________ Total Net Monthly Take Home Pay $4,264.27 Less: Monthly Expenses (3,732.00) __________ Total Disposable Income $532.27
Debtor asserts that he has tried to resolve and repay his debts without success. He also asserts that he does not have the ability to pay his creditors and given his particular circumstances he should be given a discharge.
LEGAL STANDARD
Section 707(b) of the Bankruptcy Code provides:
After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, but not at the request or suggestion of any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts if it finds that the granting of relief would be a substantial abuse of the provisions of this chapter. There shall be a presumption in favor of granting the relief requested by the debtor. In making a determination whether the 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)).
11 U.S.C. § 707(b) (emphasis added).
DISCUSSION A. Statutory Presumption
Section 707(b) mandates that "there shall be a presumption in favor of granting the relief requested by the debtor." Id. The United States Trustee bears the burden of proving by preponderance of the evidence that the debtor is not entitled to relief under chapter 7. In re Marcoux, 301 B.R. 381, 385 (D. Conn. 2003) ( citing Fed.R.Evid. 301). The presumption indicates that the court should give the benefit of any doubt to the debtor and "dismiss a case only when a substantial abuse is clearly present." In re Marcoux, 301 B.R. at 385 (internal citations omitted).
B. Primarily Consumer Debts
For a section 707(b) dismissal, the Bankruptcy Code states that the debtor must be an individual whose debts are primarily consumer in nature. 11 U.S.C. § 707(b). A consumer debt is a "debt incurred primarily for a personal, family, or household purpose." 11 U.S.C. § 101(8). According to Debtor's bankruptcy schedules, his total debt of $132,459.70 is in unsecured claims incurred by the use of credit cards and interest accrued thereof; Debtor's obligations are wholly consumer debts. Furthermore, Debtor does not dispute that he is an individual who voluntarily filed a chapter 7 petition for primarily consumer debts. Thus, the Court will consider the remaining issue of whether granting Debtor a discharge would be a "substantial abuse" under section 707(b).
C. Substantial Abuse
Chapter 7 of the Bankruptcy Code authorizes the discharge of an individual's consumer debts in exchange for the liquidation of debtor's assets for the benefit of his creditors. Kornfield v. Schwartz (In re Kornfield), 164 F.3d 778, 781 (2d Cir. 1999). In 1984, Congress added section 707(b) to address the concern that "debtors who could over time easily pay their creditors might resort to chapter 7 to erase their legitimate obligations." Id. Section 707(b) allows a court to dismiss a chapter 7 petition if the court "finds that the granting of relief would be a substantial abuse." 11 U.S.C. § 707(b). The Bankruptcy Code, however, does not define what constitutes a "substantial abuse" under the provisions of chapter 7. Kornfield, 164 F.3d at 781.
Courts have generally used a "totality of circumstances test" when considering motions brought pursuant to section 707(b). Id. "The need to consider the totality of circumstances requires that a substantial abuse determination be made on a case-by-case basis." In re Haddad, 246 B.R. 27 (S.D.N.Y. 2000) ( citing Green v. Staples (In re Green), 934 F.2d 568, 572 (4th Cir. 1991)) (as cited by the Second Circuit in Kornfield). In Kornfield, the Second Circuit rejected a per se test, based solely on a debtor's gross income and his ability to pay in favor of a "totality of circumstances" approach. Kornfield, 164 F.3d at 783. In holding that the paradigm case for a section 707(b) dismissal involved a debtor "enjoying a substantial income but seeking to transfer the cost of an unnecessarily extravagant lifestyle to creditors," the Kornfield Court held that the "totality of circumstances" inquiry is equitable in nature and requires consideration of all relevant circumstances. Kornfield, 164 F.3d at 784.
The Second Circuit, in Kornfield, affirmed the approach used by the bankruptcy court below. Id. at 783. "The bankruptcy court considered the debtors' ability to repay their debts as the primary factor, it then considered a totality of circumstances test to determine whether there were either any mitigating factors which would warrant relieving the debtors of the obligation to pay or any aggravating factors showing the debtors' bad faith or lack of honesty." In re Haddad, 246 B.R. at 32 (explaining the totality of circumstances approach employed by the bankruptcy court in Kornfield). The bankruptcy court evaluating the Kornfield debtors stated that all relevant factors should be incorporated into a court's determination of a section 707(b) motion and listed the following illustrative factors:
(1) Whether the bankruptcy petition was filed because of sudden illness, calamity, disability, or unemployment;
(2) Whether the debtor incurred cash advances and made consumer purchases far in excess of his ability to pay;
(3) Whether the petition was filed in good faith;
(4) Whether the debtor exhibited good faith and candor in filing his schedules and other documents;
(5) Whether the debtor has engaged in `eve of bankruptcy purchases';
(6) Whether the debtor was forced into chapter 7 by unforeseen or catastrophic events;
(7) Whether the debtor's disposable income permits liquidation of his consumer debts with relative ease;
(8) Whether the debtor enjoys a stable source of future income;
(9) Whether the debtor is eligible for adjustment of his debts through chapter 13 of the Bankruptcy Code;
(10) Whether there are state remedies with the potential to ease the debtor's financial predicament;
(11) Whether there is relief obtainable through private negotiation, and to what degree;
(12) Whether the debtor's expenses can be reduced significantly without depriving him of adequate food, clothing, shelter, and other necessities;
(13) Whether the debtor has significant retirement funds which could be voluntarily devoted in whole or in part to the payment of creditors;
(14) Whether the debtor is eligible for relief under chapter 11 of the Bankruptcy Code; and
(15) Whether there is no other choice available to the debtor for working out his financial problems other than chapter 7, and whether the debtor has explored or attempted other alternatives.
In re Carlton, 211 B.R. 468, 478 (W.D.N.Y. 1997) (internal citations omitted).
D. Totality of the Circumstances Applied to the Instant Facts Debtor's Ability to Repay
To evaluate whether Debtor has the ability to repay his creditors, the Court will assess Debtor's financial situation and determine his available Disposable Income. Upon determination of Debtor's available Disposable Income, if any, the Court will determine if Debtor has sufficient excess income to fund a hypothetical chapter 13 plan.
Debtor states that his gross monthly income is $7,332.00, his net monthly take home pay is $4,264.27 from amended Schedule I, and his monthly expenses are $3,732.00 from amended Schedule J. According to the United States Trustee, Debtor's net monthly take home pay is $4,225.92. The United States Trustee does not dispute Debtor's monthly expenses and the Court defers to Debtor's amended Schedule J. Furthermore, the United States Trustee does not dispute Debtor's monthly rental increase of $70.00 and the Court accepts this as true. The United States Trustee argues that based upon Disposable Income of $604.09 the Debtor has sufficient income to fund a three-year chapter 13 plan with a 15 percent distribution or a five-year chapter 13 plan with a 25 percent distribution, including payment of 10 percent in fees to the chapter 13 Trustee. The United States Trustee also states that even if a chapter 13 plan were based on Debtor's estimation of Disposable Income of $532.26, a three-year plan would yield a 13 percent distribution and a five-year plan would yield a 21.7 percent distribution to creditors. The comparison between a plan based on $604.09 Disposable Income and $532.26 Disposable Income is flawed because the latter number does not reflect a monthly rental increase of $70.00.
The Court notes that Debtor's disposable income calculation of $532.26 does not accurately account for income taxes and also fails to include a $70.00 monthly rental increase.
The Court recognizes that the parties disagree on how certain items, such as Debtor's 401(k) contribution, should be treated; however, in reviewing the pleadings it appears that the parties also disagree about the actual calculations themselves. The Court reviewed the parties' calculations but was unable to discern from the pleadings and transcript how the parties arrived at their calculations and thereafter instructed the parties to appear on March 10, 2004 for a posthearing conference. At the post-hearing conference, the Court directed the parties to present a joint submission of the relevant calculations for determination of Debtor's Disposable Income. In such submission, the Court directed the parties to explain any differences in calculations, such as tax computation, etc. On March 16, 2004, the Court received a joint letter submission from the United States Trustee and Debtor, explaining the agreed upon calculations for Disposable Income. The letter stated that Debtor's Disposable Income for the first year of a chapter 13 plan is $679.89 if the 401(k) contributions are included and $509.36 in Disposable Income if the 401(k) contributions are not included.
The Court accepts the calculations jointly submitted by the United States Trustee and Debtor and finds that the 401(k) contributions should be excluded from Debtor's Disposable Income. Hence, Debtor's monthly net disposable income is $509.36 for the first year of any chapter 13 plan.
The agreed upon calculations are as follows: No 401(k) Plan 401(k) Plan Total Net Monthly Take Home Pay $4,481.89 $4,311.36 Total Disposable Income $679.89 $509.36
This amount of federal withholding is not calculated according to a withholding table but reflects the Debtor's anticipated federal tax liability for the year, based upon an itemized tax return, with such liability then allotted pro rata on a monthly basis.
The United States Trustee argues that Debtor's 401(k) contribution should be included in the calculation of Disposable Income because Debtor is seven to ten years away from retirement, and his 401(k) monthly contributions are voluntary and not required for employment. The United States Trustee argues that Debtor's Disposable Income is $679.89. The Court does not agree with the United States Trustee's position.
In the United States Trustee's brief, she asserts that Debtor's Disposable Income is $604.09 ($423.92 plus $180.17, the post-tax value of Debtor's monthly 401(k) contribution of $288.28), instead of $679.89 reflected above. The Court, however, modified the Disposable Income amount to reflect the amount set forth by the United States Trustee in the calculations submitted on March 16, 2004 and therefore, the Court uses the $679.89 amount to reflect such modification.
The Second Circuit, in Taylor v. Sapir (In re Taylor), 243 F.3d 124 (2d Cir. 2001), held that "[i]t is within the discretion of the bankruptcy court judge to make a decision, based on the facts of each individual case, whether or not the pension contributions qualify as a reasonably necessary expense for that debtor" and thus, whether the contributions should be included in calculation of that debtor's Disposable Income pursuant to section 1325(b)(2)(A). Id. at 129. The Taylor court listed possible factors that might be considered in such a determination, including: the age of the debtor; the amount of time before the debtor's retirement; the amount of the monthly contribution; the amount of pension contributions that debtor will have to buy-back if contributions are discontinued and whether that will jeopardize debtor's fresh start; whether the debtor has dependants and if applicable, how many dependants the debtor has; evidence that the debtor will suffer adverse employment consequences if contributions were discontinued; the debtor's yearly income; the debtor's overall budget; who moved for an order to discontinue contributions; and "any other constraints on the debtor that make it likely that pension contributions are reasonably necessary expenses for that debtor." Id. at 129-30.
When the factors identified in Taylor are applied to the instant case, it is apparent that Debtor's 401(k) monthly contribution of $288.28 is a reasonably necessary expense given his particular circumstances. Debtor is a 56-year-old individual who expects to retire in six years. As of February 12, 2003, the date of filing his chapter 7 petition, Debtor had a total of $88,170.00 invested in his 401(k) and pension fund. Moreover, Debtor did not increase his monthly contributions upon the eve of filing bankruptcy. Cf. In re Aiello, 284 B.R. 756, 763 (E.D.N.Y. 2002) (the court granted the United States Trustee's motion to dismiss pursuant to 707(b) where the debtor was 25 years away from retirement and had quadrupled his pension contributions prior to meeting with his bankruptcy attorneys. The court excluded $300.00 of the $576.00 monthly pension contribution from debtor's disposable income holding that a contribution of no more than $300.00 per month to debtor's pension plan was a reasonably necessary expense.).
This analysis presumes a retirement age of 62 as indicated by Debtor.
Although there is no evidence that Debtor would suffer from adverse employment conditions if his contributions were reduced or that Debtor would have an obligation to buy back pension contributions if they were reduced, Debtor's financial situation minimizes the significance of those factors. If Debtor were required to stop contributing to his 401(k) plan for the duration of a three-year chapter 13 plan, upon emerging from bankruptcy Debtor would be three years from retirement. He argues beginning in his first year of retirement, assuming a 5 percent rate of interest, he would receive only $1,700.00 per year in interest income from his 401(k) plan and approximately $54,000.00 per year from his pension plan; given Debtor's expenses of $3,732.00 per month, Debtor argues that he would be forced to invade the principal of his 401(k). Debtor also argues that he would quickly use up all of his retirement funds and not be able to provide for himself otherwise.
It is unclear as to whether Debtor is entitled to this amount on a yearly basis or if it is the total value of his pension plan. However, if $54,000.00 is the total amount of his pension plan, then his need to continue to fund the 401(k) plan is even more compelling.
The value of Debtor's 401(k) plan, at the time of filing the Chapter 7 petition, was $33,956.00.
Debtor's reference to his retirement in six years in his declaration seems to indicate that at that time he would be 62 years old (as referenced above) and presumably eligible to receive his employee pension payments. His 401(k) interest income would then be a supplement to his $54,000.00 a year pension and any social security benefits he may be entitled to receive at that time. Even considering the favorable state and city tax consequences of being paid a pension and any other retirement benefits, as opposed to a salary, it appears that at age 62 the Debtor's Disposable Income will decline and he will forced to distribute the principal of his 401(k) to maintain his current level of expenditures. Regarding Debtor's expenditures, the Court finds that they are not exorbitant. In conclusion, based upon the aforementioned, the Court holds that the $288.28 monthly contribution to his 401(k) plan is a reasonably necessary expense and therefore, the amount should be excluded from the calculation of Debtor's Disposable Income.
Based upon the foregoing, the Court finds that Debtor's Disposable Income should be $509.36 and not $679.89. The Court also finds that an increase of $250.00 per month, reflecting a net increase in Disposable Income from the cessation of dental expenses and increase in monthly rent, should be included in the calculation of a three- or five-year chapter 13 plan, beginning in the second year of the plan. The United States Trustee's calculations do not include an increase in $250.00 Disposable Income beginning in the second year of a chapter 13 plan. Debtor has alleged that he will incur $6,500.00 of dental treatment, an increase from his initial estimate of $5,400.00. Decl. Ex. A. The Court accepts Debtor's estimate of $6,500.00 and will apply it to the calculation of a chapter 13 plan. Accordingly, the Court will use the agreed upon calculations of Disposable Income ($509.36) for the first twelve months, decrease such amount by $200.00 for months thirteen and fourteen, increase such amount by $50.00 for month fifteen and increase such amount by $250.00 for any subsequent months. Hence, a three-year chapter 13 plan would yield, reduced by chapter 13 trustee fees of 10 percent, $20,913.26 or a 15.8 percent distribution to creditors and a five-year chapter 13 plan would yield, reduced by chapter 13 trustee fees of 10 percent, $37,315.39 or a 28.2 percent distribution to creditors. The Court notes that if the calculation were done including the 401(k) contribution as part of the Debtor's gross income the Disposable Income under the agreed upon calculations would be $679.89. Assuming all other adjustments remain the same as in the above calculation, a three-year chapter 13 plan would yield, reduced by chapter 13 trustee fees of 10 percent, $26,438.44 or a 20 percent distribution to creditors and a five-year chapter 13 plan would yield, reduced by chapter 13 trustee fees of 10 fees, $46,524.06 or a 35.1 percent distribution to creditors.
The amount $509.36 reflects an expenditure of $450.00 per month for Debtor's dental expenses.
In months thirteen and fourteen, Debtor's Disposable Income will continue to include $450.00 per month in dental expenses. Debtor will also incur an additional $200.00 per month rental increase, therefore, his Disposable Income will decrease by $200.00 per month and will be $309.36.
In month fifteen of a chapter 13 plan, Debtor will have a decrease in dental expenditures of $250.00 but will still have a $200.00 per month rental increase, therefore, his Disposable Income will increase by $50.00 and will be $559.36.
For the remaining months of any plan, Debtor will have a $450.00 decrease in monthly dental expenditures and a $200.00 per month rental increase, therefore his Disposable Income will increase by $250.00 ($450.00 minus $200.00). His Disposable Income will be $759.36 for the remaining months of any plan.
Chapter 13 Plan Without 401(k) Contributions Included in Disposable Income Month Disposable Multiplied by Total ($) Minus Total Percent of Period Income ($) Number of Chapter 13 Available $132,459.70 in Months Trustee Fees Distribution Debt 3-year Plan Total 5-year Plan Total
Chapter 13 Plan With 401(k) Contributions Included in Disposable Income Month Disposable Multiplied by Total ($) Minus Total Percent of Period Income ($) Number of Chapter 13 Available $132,459.70 in Months Trustee Fees Distribution Debt 3-year Plan Total 5-year Plan Total
Aggravating and Mitigating Factors
Debtor, in this case, has accumulated $132,459.70 in consumer debt. Neither relief under chapter 11 nor chapter 13 would provide an opportunity for Debtor to repay a significant portion of his debts. Under a hypothetical three-year chapter 13 plan, Debtor would have the ability to repay $20,913.26 or 15.8 percent of his entire debt, and under a hypothetical five-year chapter 13 plan, $37,315.39 or 28.2 percent of his entire debt. See In re Marcoux, 301 B.R. 381 (the court denied a motion to dismiss for "substantial abuse" despite the United States Trustee's contention that a hypothetical chapter 13 three-year plan would allow a distribution of 31 percent to creditors); In re Fletcher, 248 B.R. 48 (D. Vt. 2000) (the court held that debtor's inability to pay a substantial part of her debt and the absence of aggravating factors merited denial of a motion to dismiss for "substantial abuse" despite Disposable Income which would fund a hypothetical three-year year chapter 13 plan with a 17 percent distribution to creditors); In re McDonald, 213 B.R. 628 (E.D.N.Y. 1997) (without detailing its totality of circumstances analysis, the court held that debtor's chapter 7 petition would not be dismissed for "substantial abuse" only because debtor's budget showed $400.00 excess in Disposable Income); In re Aiello, 284 B.R. at 761 (even though the court dismissed debtor's chapter 7 case for "substantial abuse," it noted that though "there is no specific percentage of the unsecured debt which must be capable of being repaid in a chapter 13 plan in order to find that the debtor has an ability to pay, most courts have found that the ability to repay 50% of unsecured debt over the life of a hypothetical chapter 11 or 13 plan is sufficient to constitute an `ability to pay.') (internal citations omitted).
Moreover, Debtor accumulated his debt over time. He did not incur cash advances far in excess of his ability to pay. Debtor filed his petition in good faith and showed candor in filing his Schedules and other documents (i.e. detailed dental estimate). Debtor did not engage in "eve of bankruptcy" purchases or material increases to his 401(k) account. As discussed infra, he does not have retirement income that would maintain his ability to meet his current level of expenditures.
Debtor also stated that he is not a licensed CPA and his future employment is not certain. Given Debtor's age and employment situation, his source of future income is not certain. Furthermore, Debtor stated that he contacted a consumer credit counseling agency but was advised that his situation had progressed too far. Additionally, the state remedies available would not offer Debtor a fresh start.
The Court finds no aggravating factors that would weigh against discharge. The United States Trustee does not dispute Debtor's monthly expenses. More importantly, Debtor does not lead an extravagant lifestyle. Debtor's amended Schedule J reveals a modest lifestyle for an individual living in New York City. Contra In re Haddad, 246 B.R. at 40 (the court granted the United States Trustee's motion to dismiss pursuant to section 707(b) for "substantial abuse" holding that debtor's obligations "were a result of her excessive spending which she declined to modify" and that "[s]he was unwilling to adjust her extravagant spending to conform to her income but, rather, chose to allow her creditors to fund that lifestyle" where debtor hired a cleaning service, ate most meals at restaurants, took taxicabs to work and had excessive dermatology expenses).
The Court finds that Debtor does not have sufficient excess income to fund any chapter 13 plan without hardship and also finds that the mitigating factors and absence of aggravating factors weigh in favor of granting relief to Debtor. Based upon the pleadings and the evidence adduced at the hearing, the Court finds that the United States Trustee's Application to Dismiss pursuant to section 707(b) for "substantial abuse" is unsupported by the totality of the circumstances surrounding Debtor. The Court concludes that the United States Trustee has failed to rebut the statutory presumption in favor of granting relief to Debtor and therefore, denies the Application to Dismiss.
CONCLUSION
For the foregoing reasons, the United States Trustee's Application to Dismiss under section 707(b) for "substantial abuse" of chapter 7 is denied.
Debtor is to settle an order consistent with the decision herein.
1-12 509.36 ×12 6,112.32 13-14 309.36 ×2 618.72 15 559.36 ×1 559.36 16-36 759.36 ×21 15,946.56 23,236.96 (2,323.70) 20,913.26 15.8 37-60 759.36 ×24 18,224.64 41,461.54 (4,146.15) 37,315.39 28.2 1-12 679.89 ×12 8,158.68 13-14 479.89 ×2 959.78 15 729.89 ×1 729.89 16-36 929.89 ×21 19,527.69 29,376.04 (2,937.60) 26,438.44 20.0 37-60 929.89 ×24 22,317.36 51,693.40 (5,169.34) 46,524.06 35.1