Friday, May 4, 2007

In re: Melvin and Aretha Watson (Maryland U.S. Bankr. Ct.)

Signed April 11, 2007--Opinion by Chief Judge Duncan W. Keir.

Melvin and Aretha Watson ("Debtors") filed their Second Amended Chapter 13 Plan. Debtors' original Chapter 13 plan was met with objection by the agent for five different unsecured creditors, which together represented an alleged 21% of the unsecured claims. Debtors' Second Amended Plan proposed the same payment to the Trustee for the first four months with a slight monthly increase for the remaining 56 months. At a September 2006 hearing ("September Hearing") held upon the Second Amended Plan, the Trustee informed the court that Debtors had agreed to further amend their plan, this time increasing significantly monthly payments for the final 55 months of the plan. At the September Hearing, the parties stipulated that Debtors' income exceeded that of the median family income and that Debtors owned two vehicles, neither of which was collateral for a secured debt requiring monthly installment payments. Further, Debtors listed as an allowable expense both an operating allowance and ownership allowance for each vehicle. Various interested parties disputed Debtors' entitlement to the ownership allowance because Debtors did not have secured payments due as payment for the vehicles. All the parties agreed at the initial hearing that if Debtors were not entitled to claim such expense as part of the analysis required by 11 U.S.C. 707(b), Debtors would be unable to confirm a plan unless the court found that projected disposable income for the purposes of Section 1325(b)(1) was not required to be the disposable income calculated pursuant to Section 707(b). The Debtors' actual expenses on Schedule J differed significantly from those set forth under Section 707(b).

The first issue raised was whether, when applying the means test of Section 707(b), Debtors are entitled to deduct as allowable expenses both ownership and operational vehicle expenses where the subject vehicles are not subject to liens. The second question was whether the court must restrict its confirmation analysis to the final number shown on Form B22C, or whether the court may also take into account other evidence regarding income and expense of Debtors at the time confirmation is considered.

The Bankruptcy Abuse Prevention And Consumer Protection Act of 2005 ("BAPCPA") amended Section 707(b) to include, inter alia, new subparagraph (b)(2). Under this new provision, in certain cases, the court shall presume abuse exists if the debtor's CMI, reduced by amounts determined under clauses (ii), (iii), and (iv) and multiplied by 60, is not less than the lesser of: (A) $10,000.00, or (B) the greater of 25% of the debtor's non-priority unsecured claims in the case, or $6,000.00. This calculation of expenses becomes relevant and applicable to the issue of confirmation of a debtor's plan in a Chapter 13 case by virtue of Section 1325(b), which provides in substance that if the Trustee or holder of an allowed unsecured claim objects to confirmation, the court may approve the plan only if, as of the effective date of the plan, the value of property to be distrubted under the plan on account of such claims is not less than the amount of such claims, or the plan provides that all of the debtor's projected disposable income to be received during the applicable commitment period of the plan will be applied to make payments to unsecured creditors under the plan. The term "disposable income" is defined as CMI received by the debtor (other than child support, foster care payments or disability payments for a dependent child to the extent reasonably necessary to be expended for such child) ("Adjusted CMI"), less amounts reasonably necessary to be expended for the maintenance and support of the debtor or dependent of the debtor, charitable contributions to a qualified religious or charitable entity up to 15% of debtor's gross income, and expenditures necessary for the continuation, preservation, and operation of a debtor's business.

BAPCPA added new subsection 1325(b)(3) as to the determination of amounts reasonably necessary to be expended. Where the debtor's Adjusted CMI when multiplied by 12 is greater than the applicable median family income for the State, then amounts reasonably necessary to be expended shall be determined in accordance with subparagraphs (A) and (B) of Section 707(b)(2). In other words, in a Chapter 13 case in which a party-in-interest has objected to confirmation, a plan can only be confirmed if the plan pays 100% of the allowed claims provided for in the plan, or the plan provides that all of the debtor's projected disposable income would be applied to make payments to unsecured creditors for the period of the plan. Projected disposable income is the Adjusted CMI of the debtor minus amounts reasonably necessary to be expended for certain support and maintenance. If the debtor's CMI multiplied by 12 exceeds the median family income applicable to the debtor's household, amounts reasonably necessary to be expended are determined under Section 707(b)(2)(A)(ii). This provision further adds to such expenses the enumerated items set forth in Section 707(b)(2)(A)(ii)(II, III, IV and V), (iii) and (iv). This calculation of expenses is the Allowable Expenses. Although perhaps not clearly stated in the statute, courts (including this Court) have held that a debtor is not entitled to include the aggregate of the Local Ownership Allowance plus the average monthly loan payment for a vehicle in calculating the Allowable Expense.

The remaining issue is the relationship between "disposable income" and the "projected disposable income" that may be required to be applied to payments under the plan pursuant to Section 1325(b)(1)(B). The Court reasoned that § 1325(b)(1)(B)'s requirement that a plan propose to pay projected disposable income means that the number resulting from Form B22C is a starting point for the Court's inquiry only. Section 1325(b)(2) defines Disposable Income but § 1325(b)(1)(B) requires that a debtor propose a plan paying Projected Disposable Income. The word "projected" means to calculate, estimate, or predict [something in the future] based on present data or trends. By placing the word "projected" next to "disposable income," Congress modified the import of "disposable income." The significance of "projected" is that it requires the Court to consider both future and historical finances of a debtor in determining compliance with § 1325(b)(1)(B). Consequently, the Court held that the Local Ownership Allowance is properly included by the debtor in the calculation of "disposable income" on Form B22C. The Court further held that "disposable income" as calculated on Form B22C is the presumptive "projected disposable income" for application of Section 1325(b)(1)(B). However, by evidence a party may demonstrate "a substantial change in circumstances such that the numbers contained in Form B22C are not commensurate with a fair projection of the debtor's budget in the future. If the presumption is rebutted, a projected budget based upon the evidence, reflecting projected earnings and projected reasonable necessary expenses, will govern the determination of "projected disposable income" for purposes of confirmation of the plan.

The full opinion is available in PDF.

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