JOSEPH N. CALLAWAY, Bankruptcy Judge.
The matters
Bernice Trevone Harris-Townes (the "Daughter Debtor") filed a voluntary petition for relief under chapter 13 of the United States Bankruptcy Code on December 1, 2015. Her schedules and claims filed show $38,155.10 in secured debts, $1,366.08 in unsecured priority claims, and general unsecured claims of $34,259.94, of which $30,902.38 is listed as non-dischargeable student loan debt. On her Schedule I, the Daughter Debtor lists a monthly contribution of $987.50 from her mother as part of her monthly income. With her petition, she also filed Official Forms 122C-1 and 122C-2 (the "Forms"),
Janice Elaine Harris (the "Mother Debtor"), who is the mother of the Daughter Debtor, also filed a voluntary petition for relief under chapter 13 of the United States Bankruptcy Code on December 1, 2015. Her schedules and claims filed show $31,329.28 in secured debts, $12,275.35 in unsecured priority claims, and $40,349.69 in general unsecured claims. On her Schedule I, she lists a monthly contribution of $987.50 from the Daughter Debtor as part of her income. With her petition for relief, the Mother Debtor filed an Official Form 22C-1 and also listed a household size of two. She calculated her current monthly income to be $3,076.80, resulting in an annualized income of $36,921.60, which is below median for a household size of one or two in North Carolina. Accordingly, her applicable commitment period is three years.
The Daughter Debtor and Mother Debtor (together, the "Debtors") reside together in a shared house or apartment. Reportedly, they signed a lease as equal co-tenants, although no authenticated lease document was presented at the hearing. The Daughter Debtor testified that they have maintained this living arrangement for at least fifteen months, as the Mother Debtor has suffered various health problems and frequently requires physical assistance from her. The Debtors testified that each met their own general expenses, but that they split joint expenses relating to the living arrangement equally. If one of the Debtors paid a bill stemming from the joint living arrangement such as a monthly lease or utility payment, the other reimbursed the payor as soon as practicable. The Debtors own and use separate cars, but they share an automobile insurance policy with each paying one half of the premium.
The Debtors do not jointly own any assets. The Debtors occasionally borrow the other's car, but each separately covers her own vehicle repair and operating expenses. Furniture and other household items are also owned separately.
Each Debtor is responsible for her own individually incurred expenses or debts, such as medical bills and personal loans. Each Debtor maintains her own separate stream of income and they do not co-mingle funds.
The Debtors argue that because of their shared roof, and one-half each payment of expenses associated with living together such as the lease and utilities, their financial lives are so mutually dependent and intertwined that they constitute and maintain a two-person "single economic unit" household. As a result, both assert a "household-size" of two in their two respective chapter 13 cases. The practical result of their position is an assertion of four dependents in two cases even though only two persons actually live and breathe in the household.
The Trustee contends that even with the joint living arrangement, a household size of one only is presented in each case for a total of two persons in two cases. He contends that allowing both Debtors to claim a household size of two results in an "absurdity under the means test" by generating a double counting of persons actually present. The Trustee further asserts that revision of the Forms reflecting a corrective reduction of household size to one in each case is required before either may proceed to plan confirmation. The respective Debtors' proposed chapter 13 plans remain unconfirmed pending the outcome of this matter.
The issue for consideration by the court is whether the Mother Debtor and Daughter Debtor constitute a two-person household for purposes of 11 U.S.C. § 1325(b) allowable in two cases for a total of four dependents. Because the Mother Debtor's monthly income is below the applicable median income figure, the use of two deductions instead of one might not affect the ultimate distribution to unsecured creditors in her case. However, due to an above-median income, allowing the Daughter Debtor to claim deductions for two people significantly reduces the projected available disposable income available in her case, thereby materially affecting the percentage of claim return payable to unsecured creditors over the required sixty month life of her chapter 13 plan.
The Bankruptcy Code requires that a chapter 13 plan be proposed in good faith. 11 U.S.C. § 1325(a)(3). A chapter 13 debtor must first determine whether his or her monthly income, when annualized, equals an amount greater or less than the median income for his or her locality. If a debtor's annual income is above the local median figure, he or she must then calculate the resultant projected available "disposable income." The term "disposable income" is defined as "current monthly income . . . less amounts reasonably necessary to be expended . . . for the maintenance or support of the debtor or a dependent. . . ." 11 U.S.C. § 1325(b)(2)(A)(i) (emphasis added). Current monthly income is calculated by using a debtor's wage history or other income sources. The term "amounts reasonably necessary to be expended" is explained in the next subsection, as § 1325(b)(3) directs an above-median chapter 13 debtor back to § 707(b)(2)(A) and (B). In short, a qualifying chapter 13 proposed plan is calculated through the "means test" contained in the Bankruptcy Code. 11 U.S.C. §§ 707(b)(2)(A) and (B). Once a chapter 13 debtor determines disposable income, he or she must then apply the particular applicable commitment period of either three or five years by multiplying that amount by twelve and comparing it with the median income for his or her locality. 11 U.S.C. § 1325(b)(4).
To facilitate these calculations consistently, all chapter 13 debtors are required to submit
The terms "household" and "dependent" are not defined in the Bankruptcy Code. Consequently, courts have developed various approaches in bankruptcy cases to define the terms. In Johnson v. Zimmer, 686 F.3d 224, 226 (4th Cir. 2012), cert. denied, 133 S.Ct. 846, 184 L.Ed.2d 655 (2013), the United States Court of Appeals for the Fourth Circuit analyzed three different approaches to arrive at a "household size" properly under Bankruptcy Code § 1325(b): (1) the United States Census Bureau analysis of counting the number of "heads on beds" for all persons residing in a home regardless of economic impact; (2) the Internal Revenue Service definition of persons qualifying as dependents of the debtor for federal tax return treatment; and (3) the "economic unit" test that recognizes all individuals in a home, regardless of traditional familial relationship, that a "debtor financially supports and those who financially support the debtor." Johnson, 686 F.3d at 237.
After a detailed discussion of the three tests, the Fourth Circuit found the "economic unit" approach to be the most flexible in fitting the varying economic reality and living arrangements presented in society. Only the economic unit standard "recognizes that a debtor's `household' may include non-family members and individuals who could not be claimed as dependents on the debtor's federal income tax return, but who nonetheless directly impact the debtor's financial situation." Id. at 237. See also In re Morrison, 443 B.R. 378 (Bankr. M.D.N.C. 2011); In re Herbert, 405 B.R. 165 (Bankr. W.D.N.C. 2008); and In re Brown, Case No. 15-05477-5-JNC, 2016 WL 859279 (Bankr. E.D.N.C. March 4, 2016).
Citing Morrison, the Debtors in the instant cases argue that sharing a physical roof and equally splitting common household expenses such as rent and utilities are sufficient to meet the "single economic unit" standard. In Morrison, Judge Waldrep of the Middle District of North Carolina bankruptcy court enumerated seven succinct factors to be evaluated on a "case-by-case basis" to determine if two individuals constitute one economic unit, namely:
Morrison, 443 B.R. at 378.
The Morrison debtor resided in a condominium owned solely by her boyfriend, who did not file bankruptcy. While the non-debtor boyfriend made monthly mortgage payments on his condominium, the girlfriend-debtor apparently paid all other bills incurred by the two of them in the course of living together including utilities, food and other household expenses. They co-mingled and shared a "significant amount of their income and expense." The bankruptcy court held that the debtor and her boyfriend together were a two-person household and allowed the debtor to list and deduct the boyfriend as a dependent for disposable income and chapter 13 plan purposes.
In the present case, the Mother Debtor and Daughter Debtor each have their own income sources and maintain separate bank accounts. They do not share income or otherwise engage in financial intermingling. Each pays her own bills from the separate bank account. Neither supports the other. Although they "share" inseparable joint living expenses such as the lease and utilities, they do so in order to lower the net outlay required to maintain a roof over their heads. If one fully pays a joint expense, half of that payment is only a short-term loan as the payor is timely reimbursed by the other person for her corresponding half of the cost. The joint expenses are estimated at $1975.00 per month, which the Debtors attempt to address on the Forms by having each show receipt of $987.50 (being one-half of $1975.00) even though no such monthly checks are actually written or deposits made. By showing that each receives $987.50 from the other but by still reflecting full apartment expenses in their Forms, the fictional payment from each to the other is "merely a wash."
Also unlike the present cases, only one person was presented as a debtor in Morrison as the boyfriend did not file a chapter 13 bankruptcy petition. The debtor in that case did not list a doubling up of a household size of two twice on separate Forms 22C-1 and 22C-2 (now Forms 122C), as is the case here.
What the Debtors actually seek in the present two cases is to disguise a "heads-on-beds" test by calling the arrangement a "single economic unit." As the Fourth Circuit warned, "the heads-on-beds approach poses the risk of skewing the calculation by being over-inclusive and thus risks misrepresenting a debtor's ability to pay." Johnson, 686 F.3d at 239. By creating four dependents in the present cases where only two persons exist, the Debtors seek to "skew" the system just as the circuit court forecast.
The Trustee's position that the sum of persons claimed as dependents in related cases cannot exceed the actual live human beings present has the merit of reflecting reality. In Johnson, the appellate court sanctioned and approved a fractional person to reflect shared child custody arrangements, which is a common reality in many homes. The single economic unit test allows flexibility in household number analysis when needed to show the actual economic reality. However, the Debtors here would have us believe that what was true yesterday (one plus one equals two) is not true today because they assert one plus one equals four tomorrow. Perhaps such an absurd position works in a parallel universe, but here it can only be described as an attempt at impermissible case relativism that will not be allowed to stand.
The Trustee's Objections in both cases are
Accordingly, within fourteen (14) days of the date of this order, if they wish to remain in chapter 13, both the Daughter Debtor and Mother Debtor are required to amend their respective Forms 122C-1 and 122C-2, their chapter 13 plans and all other affected forms, to list a household size of one each and reflect their respective separate and actual income and expenses, including a proper allocation of shared costs. Subsequent timely objections of the Trustee to the amended filings are deemed reserved.
