THOMAS J. TUCKER, Bankruptcy Judge.
The United States Trustee (the "UST") filed a motion to dismiss this Chapter 7 case, on the ground that the case is an "abuse" of Chapter 7, within the meaning of 11 U.S.C. § 707(b)(1).
The Court held several hearings, including an evidentiary hearing. For the reasons stated in this opinion, the Court will grant the motion, based on the presumption of abuse in § 707(b)(2)(A)(i), and the Debtors' failure to rebut that presumption under § 707(b)(2)(B).
This Court has subject matter jurisdiction over this bankruptcy case and this contested matter under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D. Mich.). This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) and (O).
This proceeding also is "core" because it falls within the definition of a proceeding "arising under title 11" and of a proceeding "arising in" a case under title 11, within the meaning of 28 U.S.C. § 1334(b). Matter's falling within either of these categories in § 1334(b) are deemed to be core proceedings. See Allard v. Coenen (In re Trans-Industries, Inc.), 419 B.R. 21, 27 (Bankr.E.D.Mich.2009). This is a proceeding "arising under title 11" because it is "created or determined by a statutory provision of title 11," see id., namely Bankruptcy Code § 707(b). And this is a proceeding "arising in" a case under title 11, because it is a proceeding that "by [its] very nature, could arise only in bankruptcy cases." See id.
The Debtors in this Chapter 7 case, Columbo Maura and Lisa Maura, are husband and wife, and have been married for over 20 years. Columbo Maura works as a salesman for Lipari Foods, Inc. Lisa Maura works as a nurse at Providence Hospital. According to their most recent amended Schedule I, Columbo Maura has an average gross monthly income of
The Debtors have three children. At the time of the evidentiary hearing, the children were ages 19, 16, and 14. The Debtors are Catholic, and the Debtors' children have always attended Catholic elementary school and Catholic high school. As a result of this, the Debtors have paid substantial tuition for their children over the years. At the time of the evidentiary hearing, the 16 year old was attending a Catholic high school, and the 14 year old was in Catholic grade school and due to begin at Catholic high school the following year.
Section 707(b)(1) allows a United States Trustee, a trustee, a party in interest, or the court on its own motion, to seek dismissal of a consumer Chapter 7 case, for "abuse." It provides, in pertinent part:
11 U.S.C. § 707(b)(1) (emphasis added). In this case, the parties agree that the Debtors' debts are "primarily consumer debts."
The UST argues that abuse is shown in this case based on both § 707(b)(2) and § 707(b)(3). The Court will begin by considering the presumption of abuse under § 707(b)(2).
Under § 707(b)(2)(A)(i), whether a presumption of abuse arises depends on the results of a complex formula commonly referred to as "the means test." The means test and the provisions now in § 707(b)(2) were added by the 2005 amendments to the Bankruptcy Code, known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA").
The Supreme Court recently described the means test this way:
Ransom v. FIA Card Servs., N.A, ___ U.S. ___, 131 S.Ct. 716, 721, 178 L.Ed.2d 603 (2011)(italics in original). In Chapter 7 cases, the means test is "used as a screening mechanism to determine whether a Chapter 7 proceeding is appropriate." Id. at 722 n. 1.
The Sixth Circuit has described the means test and the calculations to determine whether the presumption of abuse arises:
The centerpiece of the Act is the imposition of a "means test" for Chapter 7 filers, which requires would-be debtors to demonstrate financial eligibility to avoid the presumption that their bankruptcy filing is an abuse of the bankruptcy proceedings. By its terms, the BAPCPA authorizes a bankruptcy court to dismiss a debtor's petition filed under Chapter 7 or, with the debtor's consent, to convert such a petition to Chapter 13 "if it finds that the granting of relief would be an abuse of the provisions of [Chapter 7]." 11 U.S.C. § 707(b)(1). Under this test, the first step instructs the bankruptcy court to compare the debtor's annualized current monthly income to the median family income of a similarly sized family in the debtor's state of residence. If the debtor's current monthly income is equal to or below the median, then the presumption of abuse does not arise. 11 U.S.C. § 707(b)(7). If, however, it exceeds the median, the Act directs the court to recalculate the debtor's income by deducting certain necessary expenses specified by the statute. Id. § 707(b)(2)(A)(ii). These reductions are derived from the national and local standards contained in the Internal Revenue Sendee's Financial Analysis Handbook. Id.; see INTERNAL REVENUE SERV., INTERNAL REVENUE MANUAL, FINANCIAL ANALYSIS HANDBOOK ("IRS Handbook"), available at http://www.irs.gov/irm/part5/ch15s01.html.
Because of these deductions, eligibility under the new regime is calculated at least in part based on the state and county where the debtor resides. The housing expense deduction, for example, is governed by the county where the debtor resides. Id. § 5.15.1.7(4)(A). [Footnote 2: The BAPCPA also permits a debtor to deduct additional expenses
Schultz v. United States, 529 F.3d 343, 347 (6th Cir.2008).
If the result of the means test is that the presumption of abuse arises, the debtor may attempt to rebut that presumption, but only under the detailed rules set forth in § 707(b)(2)(B). To summarize these statutory provisions, a debtor may only rebut the presumption of abuse by establishing, under oath and with "a detailed explanation" and supporting documentation, all of the following:
See 11 U.S.C. § 707(b)(2)(B)(i)-(iv).
In this case, the Debtors admit that the presumption of abuse arises under § 707(b)(2), but they contend that they have rebutted that presumption. The UST disputes the numbers entered by the Debtors on several lines of their means test form, and disputes that Debtors have rebutted the presumption of abuse. The Court will discuss the points of dispute, one by one.
In this case, the Debtors initially filed their means test form, Official Form 22A, and then amended that form once, before the UST filed his Motion.
The Debtors' means test form shows a total "Current Monthly Income for [purposes of the] § 707(b)(7)" exclusion (the "initial CMI"), on line 12, of $11,545.39. This is comprised of an initial CMI for Columbo Maura of $5,965.50 plus an initial CMI for Lisa Maura of $5,579.89.
In Part V of the means test form, lines 19A through 47, the Debtors listed numerous items of monthly expenses, totaling $11,243.76. Subtracting that monthly expense total from Debtors' monthly initial CMI ($11,545.39), left a positive balance of $301.63 per month. This number appears on line 50, and is called the "[m]onthly disposable income under § 707(b)(2)" (referred to below as the "line 50 amount"). When multiplied by 60, that amount equals $18,097.80 (line 51). Because that number exceeds $11,725.00, the presumption of abuse arises under § 707(b)(2) (see lines 51, 52).
Debtors' means test form acknowledged that the presumption of abuse arises, but Debtors attempted to rebut that presumption by pointing to an additional monthly expense that they listed in Part VII of the means test form, labeled "Additional Expense Claims." In that Part VII, on line 56, which is labeled "Other Expenses," Debtors listed an expense for "Catholic School for Children" in the amount of $900.00 per month. Debtors argue that because of this expense, they have rebutted the § 707(b)(2) presumption of abuse.
In order to rebut the presumption, Debtors must demonstrate that their claimed additional monthly expense is of the type that may be considered under the "special circumstances" provision in § 707(b)(2)(B)(i); and if so, that when the additional expense amount is subtracted from Debtors' line 50 amount, it changes that amount to a level at which the presumption of abuse no longer arises. See 11 U.S.C. § 707(b)(2)(B)(i)-(iv).
As applied to the numbers on Debtors' means test form in this case, this means that Debtors must show a "special circumstances" expense that when subtracted from Debtors' line 50 amount of $301.63, results in a monthly number of $195.41 or less. (The latter number is derived by dividing $11,725.00 by 60). See 11 U.S.C. §§ 707(b)(2)(A)(i)(II), 707(b)(2)(B)(iv)(II). If Debtors fail to prove this, then they have failed to rebut the presumption of abuse under § 707(b)(2).
If Debtors do prove this, then a further calculation may be needed before they can be found to have rebutted the presumption. Line 55 of the means test form refers to this as the "[secondary presumption determination."
Thus, if all of the numbers in Debtors' mean test form are accurate and appropriate — something the UST disputes — Debtors cannot rebut the presumption of abuse unless they first prove "special circumstances" expenses of at least $106.22 per month ($301.63 minus $195.41 = $106.22). And if they succeed in proving this, Debtors then must prove that they also pass the secondary presumption determination, described above.
Debtors argue that they have met their burden of proof, based among other things on the $900.00 per month Catholic school tuition expense. If this expense is allowed in full as a "special circumstance," it would reduce Debtors' $301.63 monthly disposable income to below zero, and this would rebut the presumption of abuse. (In this event, the secondary presumption determination described above would not apply.)
The UST argues that the Debtors' Catholic school tuition expense cannot be considered a "special circumstances" expense, and therefore cannot rebut the presumption of abuse. And the UST argues that several of the other numbers in Debtors' means test form are not correct or appropriate. When these numbers are adjusted appropriately, the UST argues, the Debtors fail to rebut the presumption of abuse, even if the Catholic school tuition is allowed in full as a "special circumstances" expense.
The Court will now consider the means test numbers in dispute, including the Catholic school tuition item.
While it is not entirely clear, in closing argument after the evidentiary hearing, the UST appears to have argued that Lisa Maura's initial CMI amount, stated as $5,579.89 per month on line 3 of Debtors' means test form, is understated. The UST seems to have argued that the correct amount for this item is $5,886.40 per month, i.e., $306.51 per month higher than Debtors' means test form states.
On Line 22A of their means test form, Debtors listed a monthly expense of $882.00 for the item called "Local standards: transportation; vehicle operation/public transportation expense." The statutory basis for this category of expense deduction (the "IRS Local Transportation Expense") is in the first sentence of 11 U.S.C. § 707(b)(2)(A)(ii)(I), which states:
(emphasis added). This lengthy statutory sentence refers to three categories of expenses published by the Internal Revenue Service (the "IRS"): the "National Standards," the "Local Standards," and the "Other Necessary Expenses." The IRS Local Transportation Expense is one of the expense categories contained in the IRS Local Standards. The Local Standards are published on a website maintained by the IRS, and they also are reproduced on a UST website.
In claiming a monthly amount of $882.00 for this expense category, Debtors have claimed an operating expense for each of three cars that they own,
Debtors argue that the IRS Local Standards allow for a Transportation Expense higher than the Two Cars/$588.00 amount, in cases where the debtor's necessary transportation expenses are in fact higher. And Debtors argue that their expenses are higher. Debtors rely on certain provisions in the IRS's "Collection Financial Standards." As the Supreme Court has noted, the Collection Financial Standards are "the IRS's explanatory guidelines to the National and Local Standards." See Ransom v. FIA Card Sews., N.A., 131 S.Ct. at 726.
In one of their briefs, the Debtors cite the Collection Financial Standards, and put their argument this way:
Before discussing Debtors' primary argument about Line 22A, the Court will briefly address one of the Debtors' other arguments in the above-quoted passage. Even if Debtors were correct in their argument that personal property taxes on their vehicles are additional expenses that Debtors can add to their Line 22A transportation expense, or include in Line 25 of the means test form, the argument is unavailing in this case, because Debtors presented no evidence that they pay any personal property taxes on any of their vehicles.
In considering Debtors' primary argument, based on the Collection Financial Standards, the Court must begin with what the Supreme Court said about the Collection Financial Standards in Ransom. While Bankruptcy Code § 707(b)(2)(A)(ii)(I), quoted above, adopts the IRS's National Standards and Local Standards, the Supreme Court held that "the statute does not incorporate the IRS's guidelines." See Ransom, 131 S.Ct. at 726. The Supreme Court's reference here to the IRS guidelines included the IRS's Collection Financial Standards. The Court discussed the limited use that courts may make of these IRS guidelines, in deciding what expenses are allowable in the § 707(b)(2) context. The Court explained:
131 S.Ct. at 726 & n. 7.
From this passage in Ransom, the Court draws the following conclusions about the IRS guidelines, including the IRS Collection Financial Standards:
The problem with the Debtors' argument, and their reliance on the IRS guidelines, is that they are inconsistent with the language of § 707(b)(2)(A)(ii)(I). That section, quoted above, says in pertinent part that the expenses to be included in the means test "shall be the debtor's applicable monthly
In this case, therefore, Debtors may deduct a line 22A expense amount for the maximum "Two Cars" amount of $588.00, and no more, because they operate two cars or more. That is the Local Standards expense amount that is "applicable" to the Debtors, rather than the lower "One Car" amount, because the Debtors actually operate two cars or more. See Ransom, 131 S.Ct. at 724 (an expense amount specified in the IRS Local Standards is "applicable" to a debtor if the debtor actually has expenses in that category of the Local Standards;
The Debtors' argument, that they can take a vehicle operating expense amount higher than the "Two Cars" amount of $588.00, finds no support in the IRS Local Standards themselves. Debtors cite as support only the IRS Collection Financial Standards. To the extent those Collection Financial Standards support the Debtors' argument, however, they cannot control. This is because (1) as discussed above, Ransom held that Bankruptcy Code § 707(b)(2)(A)(ii)(I) "does not `incorporat[e]' or otherwise `impor[t]'" the Collection Financial Standards; and (2) for the reasons discussed above, the Debtor's' argument is, to borrow a phrase from Ransom, "at odds with the statutory language" of§ 707(b)(2)(A)(ii)(I).
The Debtors have cited no case that supports their argument about the Line 22A expense. But there is now at least one published case that does support Debtors' argument. In In re Johnson, 454 B.R. 882 (Bankr.M.D.Fla.2011) the Chapter 7 debtor owned three cars, and claimed a Line 22A vehicle operating expense for all three cars. The debtor claimed the Local Standards amount of $239.00 per vehicle for the two newest of his cars, as permitted by the IRS Local Standards applicable to the region and date of that bankruptcy case, plus a Line 22A operating expense amount of $200.00 for the third car. In seeking dismissal of the case, the United States Trustee argued that the debtor could not claim an operating expense for the third car. See Johnson, 454 B.R. at 884-85. The United States Trustee moved for summary judgment on its motion to dismiss. The bankruptcy court denied that motion. The court relied on language in the IRS guidelines, including the Collection Financial Standards and the IRS's Internal Revenue Manual, to hold that a Debtor may claim an operating expense for a third car, if the third car "is reasonably necessary for the care and support of the Debtor and the Debtor's dependents." See id. at 894.
This Court respectfully disagrees with the Johnson case, for the reasons stated above. And the Court agrees with the approach taken by the bankruptcy court in another case, In re VanDyke, 450 B.R. 836 (Bankr.C.D.Ill.2011). In VanDyke, the Chapter 13 debtor claimed an operating expense for two cars she owned, as permitted by the IRS Local Standards, plus an extra $200 monthly operating expense on one of the cars — referred to by the court as an "old-car" deduction. The debtor relied on language in the IRS Internal Revenue Manual. The VanDyke court disallowed the $200 expense, holding that the debtor was limited to the operating expense amounts stated in the IRS Local Standards.
450 B.R. at 841-42 (emphasis added) (footnotes and citations omitted).
For the reasons stated above, the Court concludes that Debtors' Line 22A deduction for the vehicle operating expense cannot exceed $588.00. The $882.00 the Debtors claimed on Line 22A, therefore, must be reduced by $294.00.
On Line 26 of their means test form, Debtors list a monthly expense of $393.00 for the item called "Other Necessary Expenses: involuntary deductions for employment." The instructions on this line of the means test form state the following: "Enter the total average monthly payroll deductions that are required for your employment, such as retirement contributions, union dues, and uniform costs.
For Debtor Columbo Maura: "401k loan" $75.00 "Wireless Modem" $42.00 For Debtor Lisa Maura: "403B" $150.00 "Retirement Loan # 1" $50.00 "Retirement Loan # 2" $74.00
These items actually total $391.00 per month, rather than the $393.00 that Debtors state on Line 26. The above numbers, and the descriptions of the items listed above, are taken from the Debtors' most recent amended Schedule I, which Debtors filed the same day they filed their most recent amended means test form.
It is undisputed that the $150.00 per month "403B" item listed above is for a voluntary contribution to Lisa Maura's retirement plan. It is clear that this payroll deduction by Lisa Maura is not required by her employer. As the last sentence of the instructions for Line 26 of the means test form states, in bold, "[d]o not include
The remaining items are deductions for the repayment of loans taken by Columbo Maura from his 401(k) plan and by Lisa Maura from her 403(b) retirement plan. The UST argues that none of these loan repayments are mandatory or involuntary deductions that are required for the Debtors' employment. As a result, the UST argues, these amounts are not properly included in Line 26 of the means test form.
The Court agrees with the UST. Many cases have held that a debtor's 401(k) loan repayments are not involuntary payroll deductions required for employment, and therefore are not properly included in Line 26. See, e.g., In re Egebjerg, 574 F.3d 1045, 1051 (9th Cir.2009); In re Koch, 408 B.R. 539, 543 (Bankr.S.D.Fla.2009); In re Barker, 2013 WL 796171, at *3, 4 (Bankr. N.D.Ohio 2013).
The payroll deductions for Columbo Maura's repayment of his 401(k) loan and for Lisa Maura's repayment of her two 403(b) loans are not required for either Debtor's employment, and thus are not permissible deductions on Line 26. It may be commonplace for such retirement plan loans to be repaid through periodic payroll deductions, and it may even be commonplace for employer retirement plans to require an employee to authorize such repayment through payroll deductions as a condition to obtaining a loan. But the Debtors have not presented any evidence of either of these things, or that either of these things is true with respect to their retirement plan loans.
And even if the Court assumes these things to be so, the Debtors presented no evidence that they cannot revoke or terminate any authorizations they previously gave for payroll deductions to repay these loans. To the contrary, the only evidence in the record on this subject indicates otherwise.
The Debtors presented no documentation or evidence on this subject regarding Columbo Maura's 401(k) loan. With respect to Lisa Maura's 403(b) loans, the only documentation presented is Debtors' Exhibit M, which consists of two loan agreements between Lisa Maura on the one hand and her employer's 403(b) retirement plan on the other hand. Each two-page document is entitled "Loan Note and Security Agreement." One has a "date of note" of November 26, 2008, while the other has a "date of note" of July 31, 2009. The more recent of these loan agreements expressly authorizes Lisa Maura's employer to withhold the required loan payments from her compensation, "on an equal BIWEEKLY installment basis."
Debtors argue that Lisa Maura's 403(b) voluntary contribution of $150.00 per month is necessary to take advantage of her employer's program of making matching contributions.
Finally, Debtors point out that if they did not make Lisa Maura's voluntary 403(b) contributions, or if they did not make their periodic retirement plan loan payments, they would suffer adverse tax consequences, thereby increasing their tax expense.
For these reasons, the Court agrees with the UST that the Debtors' permissible expense amount for Line 26 of the means test form is $42.00, not the $393.00 claimed by Debtors. This reduces the total amount of expense deductions the Debtors may take on their means test form by $351.00 per month.
The next area of dispute concerns Line 34 of the means test, which is for "Health Insurance, Disability Insurance, and Health Savings Account Expenses." On Line 34(c), Debtors listed an expense amount of $347.00 per month for "Health Savings Account." This expense, when added to the expense Debtors listed on Line 34(a) for "Health Insurance" of
It is undisputed that the Debtors each have health savings accounts through their employment; that Debtor Columbo Maura contributes $121.00 per month to his account; and that Debtor Lisa Maura contributes $226.00 per month to her account. These contributions are done through payroll deductions, and total $347.00 per month.
As discussed below, Debtors do not really dispute this. And the Court agrees with the UST. The instructions right above Line 34 on the means test form, which labels that section of the form "Subpart B: Additional Living Expense Deductions," correctly state in bold:
Thus, it is not an impermissible duplication for Debtors to have included the $456.00 per month cost of health insurance on Line 34(a) of the means test form, in addition to the $300.00 Line 19B amount for out-of-pocket health care expense. The same is not true, however, for the Line 34(c) expense for Debtors' health savings accounts. That is because the monthly amount that Debtors contribute to their health savings accounts is later reimbursed to them — in effect, spent by them — for out-of-pocket health care expenses. This is undisputed, and it is confirmed by the testimony of Lisa Maura, and by annual account statements from each of the Debtors' health savings accounts.
At the evidentiary hearing, Debtors did not actually dispute this. Instead, Debtors' counsel argued in closing argument only that if the Debtors reduced their health savings account contributions by $300.00, to only $47.00 per month, Debtors would have a higher tax liability, which then would increase their deduction for "Other Necessary Expenses: Taxes" on Line 25 of the means test form
For these reasons, the Court agrees with the UST that the Debtors' permissible expense amount for Line 34(c) must be reduced to $47.00 for a net reduction of $300.00 per month in expense deductions that Debtors may take on their means test form.
As discussed above, the total of the expense deductions that Debtors are allowed under § 707(b)(2), as shown by their means test form, must be reduced by the total amount of $945.00 per month. This is the sum of the reductions that the Court has found to be required for Lines 22A ($294.00), 26 ($351.00) and 34(c)($300.00).
This reduction in allowable expenses changes the total amount of expenses on Lines 47 and 49 of the means test form, from the $11,243.76 per month claimed by Debtors to $10,298.76. This, in turn, increases the Debtors'"[m]onthly disposable income under § 707(b)(2)" on Line 50 from $301.63 per month to $1,246.63 per month. When this number is multiplied by 60, the Line 51 amount — i.e., the "60 month disposable income under § 707(b)(2)" — increases from $18,097.80 to $74,797.80. This, of course, is much further above the $11,725.00 amount, above which the presumption of abuse arises.
As explained in more detail in part III. A.2.a of this opinion, in order to rebut the presumption of abuse, Debtors must show "special circumstances" of the type described in § 707(b)(2)(B), which justify adjustments to the Debtors' income or expenses, and the amount of which bring the Line 52 amount to below $11,725.00. Then, if applicable, Debtors must also pass the "secondary presumption determination," discussed in part III.A.2.a of this opinion.
To try to rebut the presumption of abuse, Debtors have argued two forms of alleged "special circumstances." First, Debtors point to their $900.00 per month expense to send their children to Catholic schools, rather than to public schools. Second, Debtors point to the fact that Lisa Maura has an obligation to repay student loans in the amount of $205.00 per month (loans that are generally nondischargeable under 11 U.S.C. § 523(a)(8)). The Court will now discuss these claimed special circumstances.
As noted in part III.A.1 of this opinion, the types of "special circumstances" that may be used by a debtor to rebut the § 707(b)(2) presumption of abuse are these:
11 U.S.C. § 707(b)(2)(B)(i). The phrase "special circumstances" is not defined in
374 B.R. at 381-83 (emphasis added) (footnotes and some citations omitted). A similar view was taken by the court in In re Burggraf, 436 B.R. 466, 471-72 (Bankr. N.D.Ohio 2010). Quoting in part from several other cases, the Burggraf court held that "special circumstances" "normally" require that the circumstances be "beyond the debtor's control," or otherwise be "highly unusual, and of the type not normally encountered by most debtors;" "extraordinary or exceptional;" and "unexpected or involuntary." See 436 B.R. at 472. The court explained:
In re Bnrggraf, 436 B.R. at 471-72 (emphasis added) (some citations omitted).
The Court agrees with the strict view of "special circumstances," as set forth in the Lightsey and Burggraf cases, as being most faithful to the statutory language in § 707(b)(2)(B)(i), quoted above, and to the Congressional purpose in adding current § 707(b)(2) to the Bankruptcy Code in 2005, discussed in part III.A.1 of this opinion.
The evidence is undisputed that Lisa Maura is obligated to repay student loans, in the amount of $205.00 per month. In closing argument at the evidentiary hearing, Debtors' counsel acknowledged that "there's nowhere in the means test to account for that." But, Debtors' counsel suggested, this expense could be a "special circumstance" to help rebut the presumption of abuse.
The Court disagrees. The Court agrees with the cases holding that a debtor's obligation to make student loan debt payments is not a "special circumstance" of the type that qualifies under § 707(b)(2)(B). See, e.g., Burggraf, 436 B.R. at 472-74; Lightsey, 374 B.R. at 381-82 n. 3 (dictum).
Applying the standards of the Lightsey and Burggraf cases, discussed above, Lisa Maura's obligation to repay her student loan debt, at the rate of $205.00 per month, is not "unforeseeable" or "unexpected;" is not "beyond the control of the debtor" or "involuntary." Nor is it "highly unusual, and of the type not normally encountered by most debtors;" or "extraordinary or exceptional." Rather, like the student loan debt in the Burggraf case, Lisa Maura's student loan debt was incurred by her "in a deliberate manner;" and "among debtors who seek bankruptcy relief, student loans are commonplace. As a consequence, such loans hardly rise to the level of an unusual, extraordinary or exceptional
Nor does the fact that student loan debt is generally nondischargeable under 11 U.S.C. § 523(a)(8)
374 B.R. at 381-82 n. 3.
The Debtors' primary argument in attempting to rebut the presumption of abuse is that the $900.00 per month that Debtors spend to send their children to Catholic schools is a "special circumstance" under § 707(b)(2)(B). This $900.00 is the amount that was claimed by Debtors on their means test form, and in their most recent amended Schedule J.
Regardless of which monthly expense amount is used, $900.00 or $1,095.00, the Court agrees with the UST that this parochial school expense does not qualify as a "special circumstance" that may be used to help rebut the presumption of abuse. This is so for the following reasons.
First, to qualify as such "special circumstances," the statute requires that the circumstances "justify additional expenses... for which there is no reasonable alternative." 11 U.S.C. § 707(b)(2)(B)(i). Assuming that parochial school tuition may ever be considered "special circumstances" within the meaning of this statute, the Debtors in this case have failed to meet their burden of proving that "there is no reasonable alternative" to paying to send their children to Catholic schools. The LTST presented detailed, uncontradicted testimony from their expert witness, Paul Smith, which demonstrated that the Dearborn Public Schools, which Debtors' children could attend tuition-free, are clearly a reasonable alternative to the Catholic schools the Debtors' children attend, in
With respect to the religious aspects of their children's education in the Catholic schools, the Debtors' testimony established, without contradiction, that the Catholic schools offer religious education that the public schools do not and cannot offer, and that the Catholic schools also provided Catholic religious practices such as liturgies, prayers, and retreats that are not available in the public schools. Lisa Maura testified that she and her husband have decided that if they could not afford to send their children to Catholic schools, Lisa would quit her job and home-school her children, to provide their education, including their religious education.
The Court certainly does not question the Debtors' sincerity, nor their dedication to obtaining a Catholic education for their children. But even assuming that the Debtors' strong preference for their children to obtain a Catholic religious education can be considered "special circumstances" under § 707(b)(2)(B)(i), the Debtors have not met their burden of proving that "there is no reasonable alternative," by which the Debtors could obtain the reasonable equivalent of the Catholic religious education without incurring the expense of sending their children to Catholic schools. First, the evidence established that for all aspects of the Debtors' childrens' education except the religious aspect, sending the children to the Dearborn Public Schools is clearly a reasonable alternative to the Catholic schools. Second, with respect to the religious aspects of their childrens' education, the Debtors have failed to prove that there is no "reasonable alternative" to Catholic schools — for example, sending the children to the tuition-free Dearborn Public Schools and then home-schooling the children with respect to the religious aspects of the Catholic education that Debtors want for their children. Debtors have failed to prove that such limited home-schooling would require Lisa Maura to quit her job or significantly reduce her work hours and income.
More fundamentally, the Court concludes that the Debtors' desire to send their children to Catholic schools, for the religious aspects of a Catholic education, does not qualify as "special circumstances
This conclusion is supported in at least two ways. First, it is supported by the fact that in § 707(b)(2)(A)(ii)(IV), Congress
11 U.S.C. § 707(b)(2)(A)(ii)(IV). This section indicates that Congress intended to provide only a limited amount which Chapter 7 debtors could claim as expenses, for purposes of § 707(b)(2), for the cost of private education. And the Debtors in this case have taken full advantage of this allowable expense, by claiming the maximum allowable expense for their two minor children, on Line 38 of the Debtors' mean test form, in the amount of $295.84 per month.
Second, the Court agrees with the reasoning of the courts that have held that the expense of debtors to pay parochial school tuition for their children is not a "reasonably necessary" expense, for purposes of determining whether a Chapter 13 plan offers to pay creditors all of the debtors' disposable income. The reasoning of these cases supports the Court's conclusion here, that such parochial school expense should not be deemed a "special circumstance that justifies" an "additional expense for which there is no reasonable alternative," under § 707(b)(2)(B)(i). See e.g., In re Watson, 403 F.3d 1, 8 (1st Cir.2005); In re Lynch, 299 B.R. 776, 779-80 (W.D.N.C.2003); In re Schott, No. 05-49765-293, 2007 WL 914043, at *3 (Bankr. E.D.Mo. March 23, 2007). In the Watson case, for example, the debtor testified much like the Debtors have testified in this case, that:
403 F.3d at 3. Nonetheless, the United States Court of Appeals for the First Circuit held that the debtors' expense of sending their children to Catholic school for religious reasons was not a reasonably necessary expense. The Watson court reasoned as follows, in that Chapter 13 case:
403 F.3d at 8.
For these reasons, the Court concludes that the Debtors cannot use any part of their Catholic school tuition expense to rebut the § 707(b)(2) presumption of abuse in this case.
Based on the foregoing, the Debtors have failed to rebut the presumption of abuse under § 707(b)(2).
Debtors argue that even if they have failed to rebut the presumption of abuse under § 707(b)(2), the Court has discretion not to dismiss their case. In support of this argument, Debtors cite the use of the word "may" in § 707(b)(1), and the case of In re Siler, 426 B.R. 167 (Bankr.W.D.N.C.2010).
If the presumption of abuse arises under § 707(b)(2), and is not rebutted, the Court must "find that the granting of relief would be an abuse of the provisions of [chapter 7]" within the meaning of § 707(b)(1). But as Debtors point out, the statute (quoted above) merely says that upon making such a finding, the Court "may" dismiss the case, not that it "shall" or "must" do so.
The words "may" and "shall" each appear many times in the Bankruptcy Code, but the Code does not explicitly define either word. Nor does the Code state any rules of construction for the word "may."
(Footnote and citations omitted).
Neither the Supreme Court nor the United States Court of Appeals for the Sixth Circuit has addressed this issue in
Some courts have construed § 707(b)(1) as mandating dismissal or conversion whenever the presumption of abuse arises and is not rebutted. These courts view the word "may" as only giving the court discretion as to which of the options expressly provided in the statute — dismissal or conversion (if the debtor consents to conversion) — is to be ordered. See, e.g., In re Woodruff, 416 B.R. 369, 373 (Bankr. D.Mass.2009) ("By explicitly providing in § 707(b)(2)(B)(i) that `[i]n any proceeding brought under this subsection, the presumption of abuse may only be rebutted by demonstrating special circumstances,' Congress evinced its intent to divest the bankruptcy courts of the discretion necessary to grant a Chapter 7 discharge to debtors whose case is found abusive under § 707(b)(2)."); Justice v. Advanced Control Solutions, Inc., No. 07-5231, 2008 WL 4368668, at *1, 5 (W.D.Ark. September 22, 2008) ("Indications of legislative intent, and obvious inferences shown to be drawn from the purpose of BAPCPA persuade the court that `may' in § 707(b) is used to indicate discretion only as far as deciding which two options should be exercised in a case where the presumption of abuse arises and is not rebutted."), aff'd, 639 F.3d 838 (8th Cir.2011); In re Witek, 383 B.R. 323 (Bankr.N.D.Ohio 2007) (concluding that court was required to dismiss case due to debtor's failure to rebut presumption of abuse, unless debtor converted case to Chapter 13); In re Haman, 366 B.R. 307 (Bankr.D.Del.2007) (the court "has no discretion and must dismiss the chapter 7 case" if presumption of abuse is not rebutted).
Another line of cases take a more flexible approach. These cases hold that in the face of an unrebutted presumption of abuse under § 707(b)(2), the bankruptcy court has discretion to deny dismissal, and leave the case in Chapter 7, in unusual cases where that is necessary to avoid an "absurd result." The Siler case, cited by Debtors, is one such case, and there are a number of other such cases. See, e.g., In re Siler, 426 B.R. 167, 176 (Bankr. W.D.N.C.2010) (declining to dismiss Chapter 7 case based on a means test presumption of abuse when the debtor could not pay, and could not be required to pay, a dividend to unsecured creditors in a hypothetical chapter 13 case); In re Mravik, 399 B.R. 202, 210 (Bankr.E.D.Wis.2008) (holding that a court "has discretion to deny a motion to dismiss a Chapter 7 case that is presumed abusive under the means test, but would, in complete compliance with Chapter 13, produce no payments to creditors;" court extensively discussed the principle that "may" indicates discretion; the legislative history; and Congressional purpose in enacting BAPCPA); In re Skvorecz, 369 B.R. 638, 642 (Bankr.D.Colo. 2007) (plain statutory language of § 707(b)(1) is permissive); cf. In re Latone, No. 4:08-bk-0331-EWH, 2008 WL 5049460, at *1-3 (Bankr.D.Ariz. October 23, 2008) (relying" on reasoning in In re Skvorecz to deny a United States Trustee's motion to dismiss under the "totality of circumstances" test under § 707(b)(3)).
Even those courts that hold § 707(b)(1) to be permissive recognize the narrow scope of their discretion not to dismiss, in the face of an unrebutted presumption of abuse. In re Mravik, 399 B.R. at 210 (the exercise of limited discretion under § 707(b)(1) "should be exercised rigorously and sparingly") (quoting United States v. Rodgers, 461 U.S. 677, 711, 103 S.Ct. 2132, 76 L.Ed.2d 236 (1983)); In re Skvorecz, 369 B.R. at 644 n. 12 ("This [c]ourt does not read the `may' so as to afford a court carte blanche discretion to ignore the presumption of abuse and write section
The Court agrees with the cases, cited above, that conclude that § 707(b)(1) mandates dismissal or conversion whenever the presumption of abuse arises under § 707(b)(2) and is not rebutted. As noted above, when there is an unrebutted presumption of abuse under § 707(b)(2), the bankruptcy court is compelled to "find that the granting of relief would be an abuse of the provisions of [Chapter 7]" within the meaning of § 707(b)(1). In such a circumstance, the bankruptcy court's hands are tied. The Court simply cannot make such a finding and then leave a case to proceed in Chapter 7. That in itself would be an absurd result — finding an abuse but allowing the abuse to continue.
The Debtors' arguments as to why the Court should exercise its alleged discretion to decline to dismiss this case, despite the unrebutted presumption of abuse, really amount to a criticism of the whole § 707(b)(2) means-test concept. Whether such criticism is warranted is not for this Court to decide; the Court must apply the law that Congress enacted. As the Supreme Court observed in Ransom v. FIA Card Servs., N.A., ___ U.S. ___, 131 S.Ct. 716, 721, 178 L.Ed.2d 603 (2011), in responding to the debtor's argument that application of the means test produced an odd result in that case,
For the reasons stated above, the § 707(b)(2) presumption of abuse arises and Debtors have not rebutted it. Therefore, the Court must find, and does find, that "the granting of relief would be an abuse of the provisions of [Chapter 7]" in this case, within the meaning of § 707(b)(1). And as a result of this finding, the Court must either dismiss this Chapter 7 case or, if Debtors wish to convert to Chapter 13 or Chapter 11, permit Debtors to move for such conversion.
