Honorable Jim D. Pappas, United States Bankruptcy Judge
In this Memorandum, the Court considers whether the proposed chapter 13
Debtor purchased a home in Blackfoot, Idaho, several years ago. He fell behind on his mortgage payments while attending vocational training at a local university. After finishing his training, Debtor took a job as a diesel mechanic, the occupation for which he was trained. He resumed making regular mortgage payments but was faced with substantial arrearages.
Primarily to deal with the delinquent mortgage payments, on November 11, 2014, Debtor filed a chapter 13 petition. Dkt. No. 1. In his original schedule I, Debtor listed his income, but did not include any contribution from his live-in girlfriend, Cassandra.
Debtor is a below-median income debtor according to his Form 22C, Dkt. No. 7. In his plan, Debtor proposed to make 36 monthly plan payments of $300, to be used by Trustee to pay the mortgage arrears and his attorney's fees, with any remaining funds to be distributed to his unsecured creditors. Dkt. No. 3. The plan also proposed that Debtor retain up to $1,621 of his annual tax refunds, and to remit amounts above that sum to Trustee for distribution to creditors.
Trustee recommended that Debtor's proposed plan not be confirmed because Debtor's income had recently increased due to his completion of school and his new job, the zero year-to-date income on the SOFA was inaccurate, that Debtor had miscalculated the balance due on the attorneys fees, and that Cassandra's income was not included in schedule I and Form 22C. Dkt. No. 23.
Debtor filed an amended chapter 13 plan which proposed to increase his monthly payments to $370. Dkt. No. 27. It also resolved the attorney fee issue, and omitted a plan provision allowing him to directly pay real property taxes, since they are paid via an escrow funded by his monthly mortgage payment. Id. at ¶¶ 4.3 and 6.4. It provided for an approximately ten percent dividend to unsecured creditors. Dkr. No. 27. Along with the amended plan, Debtor also filed an amended Form 22C, which included $1,346.67 in monthly income from Cassandra. Dkt. No. 31. However, even with Cassandra's income included, Debtor's household income remained well below Idaho's median income. Id. Debtor also filed amended schedules I and J reflecting his income and expenses, on which he included a monthly income "contribution" from Cassandra of $200, but increased the line-item expense for "food and housekeeping supplies" from $350 to $550 per month. Dkt. No. 32. Debtor also eliminated the $35 monthly property tax payment from his schedule of expenses. Id.
Although Trustee did not file a formal objection to confirmation, on February 17, 2015, she filed a recommendation that Debtor's amended plan not be confirmed.
Debtor's amended plan came before the Court for a confirmation hearing on April 7, 2015, at which time the parties presented evidence and testimony. Dkt. No. 43. Following the hearing, the Court invited the parties to file additional briefing, after the completion of which, the Court deemed the issues under advisement. At the confirmation hearing, and in briefing, the parties have focused, generally, on whether Debtor has proposed his amended plan in
Section 1325(a) of the Code lists the standards for confirmation of chapter 13 plans. One of those requirements is that the debtor's plan must have been "proposed in good faith and not by any means forbidden by law[.]" § 1325(a)(3).
Trustee contends that Debtor's amended plan was not proposed in good faith for three reasons. First, while Debtor included the $200 income contribution from Cassandra on his schedule I, he simply increased other expenses, namely food, on schedule J to effectively negate the additional income. Second, Trustee contends that Debtor's plan is proposed merely to cure the mortgage arrears, and not to pay much of anything to unsecured creditors. Finally, Trustee contends that Debtor should not be able to retain $1,621 in tax refunds each year, as he has not shown those funds are necessary to fund day-to-day expenses.
Debtor responds, generally, that all of the requirements for confirmation in § 1325(a), including good faith, have been satisfied.
To determine whether a plan has been proposed in good faith, the Court must examine the totality of the circumstances. Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1224-25 (9th Cir.1999); Drummond v. Cavanagh (In re Cavanagh), 250 B.R. 107, 114 (9th Cir. BAP 2000); In re Stitt, 403 B.R. 694, 700 (Bankr.D.Idaho 2008). Whether Debtor's plan is proposed in good faith is a question of fact. In re Stitt, 403. B.R. at 700 (citing Smyrnos v. Padilla (In re Padilla), 213 B.R. 349, 352 (9th Cir. BAP 1997)). Although it is Trustee who objected (though not formally) to confirmation, it is Debtor who bears the burden of establishing good faith. Id.
In reviewing the totality of the circumstances, the bankruptcy court should consider the following factors:
In re Leavitt, 171 F.3d at 1224.
In addition, the Ninth Circuit Bankruptcy Appellate Panel has set forth additional non-exclusive factors which the bankruptcy court may consider when adjudging the good faith of a debtor's proposed plan. Fid. & Cas. Co. of N.Y. v. Warren (In re Warren), 89 B.R. 87, 93 (9th Cir. BAP1987). Those factors
The determination of whether a debtor filed a petition or plan in bad faith so as to justify dismissal for cause is left to the sound discretion of the bankruptcy court. In re Leavitt, 171 F.3d at 1222-23; Marsch v. Marsch (In re Marsch), 36 F.3d 825, 828 (9th Cir.1994); Greatwood v. United States (In re Greatwood), 194 B.R. 637, 639 (9th Cir. BAP 1996), aff'd, 120 F.3d 268 (9th Cir.1997).
Considering the Leavitt factors in this case, there is no evidence that Debtor has had any prior bankruptcy case filings and dismissals, nor was there any state court litigation to which Debtor was a party. The Court also finds nothing to suggest that Debtor has behaved egregiously either before filing, or during, this case.
Applying the Warren factors relevant in this case, the Court finds there is no surplus of funds available to Debtor, and that the monthly payment of $370 he proposes in the amended plan seems to be all that he can manage based upon his current modest income. While his income might be expected to increase in the future, Debtor only recently completed his vocational training and immediately secured a position working in the field for which he was trained; any future increases in Debtor's income may be addressed through plan modification under § 1329(a). Furthermore, the term of the amended plan, 36 months, is in accord with § 1325(b)(4), and, as noted above, this is Debtor's first bankruptcy filing.
Warren suggests that the Court should examine Debtor's motivation and sincerity in seeking chapter 13 relief. The Court finds that Debtor has been forthright about his motives. He fell behind in his mortgage payments while he was in school, at least in some part because he encountered difficulties in promptly obtaining his GI Bill education benefits. When he graduated and obtained employment, he sought help in chapter 13 to pay his mortgage lender to retain his home. Utilizing a plan to cure mortgage arrears and save the debtor's home is a classic — and accepted — justification for a debtor's resort to chapter 13, assuming the petition is filed, and the plan is proposed, in good faith. In re Metz, 820 F.2d at 1497 ("courts have uniformly held that [§ 1322(b)(2)] allows the debtor to `cure' (i.e., pay or bring current) arrearages on the debt and thereby reinstate the debt.")
There is no evidence that Debtor's debts and assets were inaccurately reflected on his bankruptcy schedules and statements.
One of the Leavitt factors instructs the Court to consider whether Debtor "misrepresented facts in his plan, unfairly manipulated the Bankruptcy Code, or otherwise [filed] his Chapter 13 plan in an inequitable manner." In re Goeb, 675 F.2d at 1391. Trustee argues that by not including Cassandra's total income in his schedule I, and not paying unsecured creditors any significant sums while paying the mortgage arrears in full, as well as retaining tax refunds, Debtor's plan runs afoul of this factor. The Court disagrees.
The Court concludes that it is not bad faith for Debtor to retain up to $1,621 of his annual tax refunds. Debtor does not intend to simply pocket these funds; instead, he has included one-twelfth of the tax refund as income each month, thereby effectively accounting for it in calculating his plan payments. And in the event Debtor receives tax refunds of more than $1,621 in any given year, the plan requires those funds to be remitted to Trustee. To the Court, this is a rational, and not an inequitable, approach by Debtor to account for the use of the tax refunds. Such proposal requires some measure of discipline on Debtor's part, as well as poses some risk should his refunds total less than $1,621.
As noted above, Debtor's use of a chapter 13 plan to catch up missed mortgage payments is a common, appropriate goal. Because the arrearage is significant, it is true unsecured creditors will not greatly benefit from Debtor's monthly payments. Even so, this is not, per se, bad faith, as the amount paid to unsecured creditors through a chapter 13 plan is not solely determinative on the issue of good faith. See Downey Sav. And Loan Assn. v. Metz (In re Metz), 820 F.2d 1495, 1498 (9th Cir.1987) ("The fact that [debtor's] plan provides for no payment to unsecured creditors is not sufficient to conclude that the plan was submitted in bad faith."); In re Goeb, 675 F.2d at 1391 (the fact that the plan would pay unsecured creditors only one cent on the dollar is relevant, but not determinative, on the issue of good faith).
Finally, in judging good faith, Warren instructs the Court to examine the accuracy of the debtor's statements about income and expenses, and Leavitt requires an examination of whether the debtor has misrepresented facts, unfairly manipulated the Code, or whether any inaccuracies were an attempt to mislead the Court. Trustee contends Debtor's choice to exclude Cassandra's income on his schedule I and in computing plan payments is strong evidence of bad faith.
In addition, Trustee has not shown that Cassandra is otherwise legally obligated to financially contribute to the joint household, nor are any of the assets in play community property. Because the cases she cites involves such conditions, Trustee's authorities are inapposite. Moreover, the case law concerning treatment of the contributions of "significant others" generally has arisen in the context of eligibility to be a chapter 13 debtor under § 109(e) in connection with whether the debtor has the requisite "regular income" with which to fund a plan. See, e.g., In re Murphy, 226 B.R. 601, 604 (Bankr. M.D.Tenn.1998) (noting that while the Code does not specifically exclude any source of funding from the regular income calculus, it does require that the source of income claimed by a debtor must be regular and stable enough to fund a plan.) Indeed, courts have held that, absent a formal agreement to contribute, a significant other's income should not be counted toward a debtor's regular income. See In re Heck, 355 B.R. 813, 825 (Bankr.D.Kan. 2006); In re Jordan, 226 B.R. 117, 119-20 (Bankr.D.Mont.1998); In re Fischel, 103 B.R. 44, 49 (Bankr.N.D.N.Y.1989).
Of course the issue here is not whether Debtor is eligible to be a chapter 13 debtor under § 109(e). Nevertheless, it seems to the Court that if a non-spouse's contribution is not stable and regular enough to be counted toward a debtor's eligibility for chapter 13, logic and consistency dictate that it is also not worthy of inclusion on the debtor's schedule I and factored into computing required plan payments. Given this, it surely cannot be said that a live-in significant other's income must always be included on schedule I under every circumstance, and that it amounts to bad faith for a debtor to do otherwise.
Since it was not per se bad faith for Debtor to exclude Cassandra's total income in computing his plan payments, was it at least evidence of bad faith to do so under these facts? See In re Gress, 257 B.R. 563, 568 (Bankr.D.Mont.2000). The Court finds it was not.
Here, Cassandra routinely contributes $200 per month which she uses to purchase groceries for household. Both Debtor and Cassandra eat that food. Although it is unclear to what extent, perhaps the household expenses are higher because she lives in the home. However, the bulk of the expenses must be paid by Debtor, as the homeowner and an occupant, regardless of whether Cassandra lives in the house.
In addition, Debtor testified without contradiction that he does and will not pay any of Cassandra's personal debts or non-household expenses. Even more significant, when Debtor was asked at the hearing to speculate about what would occur if he were to ask Cassandra to contribute cash to fund plan payments, Debtor testified that she would likely "pack her bags." While the situation might be different if Debtor proposed to pay Cassandra's debts or non-household expenses, this is not the
Debtor has carried the burden of showing that his proposed amended plan satisfies the requirements for confirmation. In particular, as measured by the Leavitt and Warren factors, the Court concludes that Debtor's plan was indeed proposed in good faith. As Trustee has not identified any other impediments to confirmation, counsel for Debtor and Trustee shall promptly submit an approved form of confirmation order.
