ERIC L. FRANK, Bankruptcy Judge.
The United States Trustee ("the UST") has filed a motion ("the Motion") seeking dismissal of the chapter 7 bankruptcy case of Debtor Susan Harmon ("the Debtor") on the ground that the grant of bankruptcy relief would be an "abuse" of the Bankruptcy Code within the meaning of 11 U.S.C. § 707(b)(1).
The controversy centers on the UST's contention that in her "Chapter 7 Statement of Current Monthly Income And Means Test Calculation" (Official Form B22A), the Debtor improperly listed two expense deductions:
There is no dispute that if these expense deductions are disallowed, a presumption of abuse has arisen under § 707(b)(2)(A). The UST further contends that the Debtor has not rebutted that presumption under § 707(b)(2)(B) and therefore, the case should be dismissed.
The Debtor does not question the UST's arithmetic calculation, but argues that the expense deductions are proper and that no presumption of abuse has arisen. In the alternative, she argues that even if the presumption has arisen, she has rebutted it because "special circumstances" exists justifying her deduction of the disputed expenses. See 11 U.S.C. § 707(b)(2)(B).
As explained below, I conclude:
Therefore, I will grant the Motion.
The Debtor commenced this bankruptcy case on June 30, 2010. The § 341 meeting of creditors was held and concluded on August 10, 2010. On August 19, 2010, the UST filed a Statement of Presumed Abuse. See 11 U.S.C. § 704(b)(1)(A).
(Doc. # 16).
On September 17, 2010, the UST timely filed the Motion.
I held and concluded a hearing in this contested matter on November 24, 2010. Thereafter, both sides submitted a memorandum of law in support of their respective positions, the last of which was filed on December 20, 2010.
The Debtor is a single individual with no dependents. She owns no real estate. Exclusive of her interests in two retirement plans, the value of her personal property totals approximately $23,000.00, $20,000 of which is the value of her 2010 Subaru Forester. The Debtor has minimal equity in the automobile as it serves as collateral for a loan with a balance of approximately $19,500.00.
On her Schedule F, the Debtor listed four credit card debts totaling $71,689.70. In addition, on Schedule E, the Debtor listed as a priority debt a "school loan" of $38,000.00 owed to American Education Services. But see 11 U.S.C. § 507(a) (listing ten categories of priority debts, none of which refer to student loans). She has no secured debts other than the automobile loan mentioned above. The student loan has been in pay status since December 2008. (Ex. D-1, ¶ 4). The Debtor has approximately eight more years of payments before the loan will be repaid. (Id.). Her monthly payment on the loan is $565.64. She concedes that repayment of the student loan would not impose an "undue hardship" on her within the meaning of 11 U.S.C. § 523(a)(8) and therefore, that the student loan is a nondischargeable debt in this bankruptcy case. (Id. at ¶ 18).
The Debtor's income is derived both from employment and a U.S. Air Force pension. Her primary employment is as an information technology technician with the Commonwealth of Pennsylvania. She also works part-time at a second job. She works approximately 47 ½ per week.
On bankruptcy Schedule I, the Debtor listed her net monthly employment income after taxes as $2,936.98 and her monthly pension as $561.50, for a total monthly income of $3,498.48. On her Schedule J, she listed her total monthly expenses as $3,456.01, which includes a monthly rental payment of $981.00 for her residence and the $565.64 monthly student loan payment.
Section 707(b) of the Bankruptcy Code was amended dramatically by Congress in
11 U.S.C. § 707(b)(1) (emphasis added). Section 707(b) then sets out a complicated process, commonly referred to as the "means test," for ascertaining whether, initially a "presumption of abuse" exists and then, ultimately, whether "abuse" exists. See 11 U.S.C. § 707(b)(2).
The statutory means test methodology is memorialized in Official Form B22A promulgated by the Supreme Court and titled "Chapter 7 Statement of Current Monthly Income And Means Test Calculation" (hereafter, "Form B22A"). The rules of court mandate that each chapter 7 debtor complete and file Form B22A. See Fed. R. Bankr.P. 1007(b)(4).
In general terms,
In addition, pursuant to 11 U.S.C. § 707(b)(3), if a presumption of abuse does not arise or is rebutted, a court may dismiss a chapter 7 case (or convert it to chapter 11 or chapter 13 with the debtor's consent) for abuse based on either the debtor's bad faith in filing the bankruptcy petition or the totality of the circumstances.
Based on this statutory framework, I turn to the dispute in this case.
The first issue is whether the presumption of abuse has arisen after allowable expenses are deducted from the Debtor's CMI.
On Form B22A, the Debtor listed her CMI as $4,881.64. The Debtor does not dispute that her CMI is "above median." See n.5, supra & accompanying text. However, she calculated her allowable expenses as totaling $4,862.20. In doing so, on Line 44 of Form B22A, she took her monthly student loan payment of $565.64 as an allowable expense for a payment of a prepetition priority claim. See 11 U.S.C. § 707(b)(2)(A)(iv). Based on her claimed expenses, the Debtor calculated her MDI as $19.44, an amount that does not give rise to a presumption of abuse.
The UST asserts that the Debtor improperly claimed the deduction for her
I conclude easily that the UST's objection to the Debtor's deduction of her monthly student loan payment is well taken. There is no mention of student loan debts in 11 U.S.C. § 507(a) and therefore, there is no statutory basis for treating such debts as priority debts under the Bankruptcy Code. As a result of the disallowance of the monthly student loan payment as an expense that may be deducted from the Debtor's CMI, a presumption of abuse has arisen in this case.
The key issue in this case is whether the Debtor's obligation to repay a nondischargeable student loan constitutes "special circumstances" under § 707(b)(2)(B). The presumption of abuse having arisen and therefore, a prima facie case of abuse under § 707(b)(2)(A) having been established, the Debtor bears the burden of proof, under § 707(b)(2)(B), of showing that "special circumstances" justify the expenses that the debtor has claimed. In re Womer, 427 B.R. 334, 336 (Bankr.M.D.Pa.2010); In re Williams, 424 B.R. 207, 211 (Bankr.W.D.Va.2010), aff'd 2010 WL 3292812 (W.D.Va. Aug. 19, 2010); In re Witek, 383 B.R. 323, 329 (Bankr. N.D.Ohio 2007); see also In re Meade, 420 B.R. 291, 303-04 (Bankr.W.D.Va.2009).
A debtor seeking to establish "special circumstances" under § 707(b)(2)(B) must satisfy both procedural and substantive requirements. The procedural requirements
In re Pageau, 383 B.R. 221, 225 (Bankr. D.N.H.2008) (citing Littman, 370 B.R. at 830); Haman, 366 B.R. 307, 312 (Bankr. D.Del.2007). The UST concedes that the Debtor has satisfied the procedural requirements for establishing "special circumstances." (UST Memorandum of Law at 11).
Substantively, § 707(b)(2)(B) requires that the "special circumstances" be sufficient to "justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative." 11 U.S.C. § 707(b)(2)(B)(i). The statute identifies two examples of "special circumstances:" a serious medical condition or a
Courts generally agree that the statute's examples of "special circumstances" are non-exclusive and merely illustrative. Pageau, 383 B.R. at 226; In re Lenton, 358 B.R. 651, 661 n. 22 (Bankr.E.D.Pa.2006), appeal dismissed, 2009 WL 1872667 (E.D.Pa. Jun. 29, 2009). However, courts are divided in their views regarding the scope of the "special circumstances" provision. One court has summarized the differing judicial viewpoints as follows:
In re Hammock, 436 B.R. 343, 354-55 (Bankr.E.D.N.C.2010) (most citations omitted).
The Debtor's position, that her nondischargeable obligation to repay her student loan constitutes "special circumstances," is supported by a line of bankruptcy court decisions. However, there is another line of cases that rejects the proposition that repayment of nondischargeable student loans may be treated as an allowable expense in calculating MDI. See Womer 427 B.R. at 336 (collecting both lines of cases).
In reported decisions involving student loans, courts have employed at least three different standards in analyzing whether "special circumstances" exist.
Some courts focus on the student loan's status as a nondischargeable debt and evaluate whether the debtor's ongoing, post-bankruptcy liability on the debt is per se "special circumstances" because the debtor has no alternative but to pay the debt. See Siler, 426 B.R. at 174-75 (collecting cases on both sides of the issue).
Other courts consider the reasons why the debtor incurred the student loan debt, sometimes opining that repayment of a student loan constitutes "special circumstances" only if the loan was "incurred in pursuit of education and training that is necessitated by permanent injury, disability or an employer closing," as opposed to "[p]ayments on student loans, business loans or equipment loans, incurred solely to secure a more advantageous income or to enter a different vocation, [which] are not special circumstances." Pageau, 383 B.R. at 228 (Bankr.D.N.H.2008); accord Siler, 426 B.R. at 175; see generally In re Egebjerg, 574 F.3d 1045, 1053 (9th Cir. 2009) (repayment of 401k loan taken out to repay debts was not "special circumstances" or life altering circumstance of kind referenced in statute).
Finally, some courts, without considering the origins of the student loan debt, focus on the future and assess the likely consequences for the debtor if the student loan payment is not treated as a "special circumstance." See, e.g., In re Knight, 370 B.R. 429, 437-38 (Bankr.N.D.Ga.2007) ("A special circumstance is one that, if the debtor is not permitted to adjust her income or expenses accordingly, results in a demonstrable economic unfairness prejudicial to the debtor"); see also In re Beckett, 442 B.R. 638, 2010 WL 3894429, at *6 (Bankr.N.D.Ohio Sept.30, 2010) (in dictum, stating that court would deny motion to dismiss under § 707(b)(3) if "(1) there existed a large student-loan obligation which, given its nondischargeable character, would continue to increase in principal during the duration of a Chapter 13 plan; and (2) as compared to the student-loan obligations, the distribution to the debtor's other unsecured creditors would be minimal under a Chapter 13 plan"); Womer, 427 B.R. at 336 (determining student loan repayment was not a "special circumstance" because the debtor did not provide a "significant explanation as to how a nondischargeable student loan would have grave consequences going forward") (emphasis added).
I conclude that the first theory of "special circumstances" is overbroad and I reject it as a matter of law. Nondischargeability is a basic bankruptcy concept that encompasses a number of different types of debts. See 11 U.S.C. § 523(a). The concept of a "nondischargeable debt" is entirely distinct from the concept of a
The two other standards that have been articulated by the courts provide a far more plausible basis for deciding whether a debtor's student loan repayments constitute "special circumstances." However, I need not decide whether either or both of these rationales should serve as a test for "special circumstances" or, more generally, the statutory term's precise contours. Assuming arguendo that the second and/or the third standards state grounds for a finding of "special circumstances" under 11 U.S.C. § 707(b)(2)(B), the Debtor has not met her burden of proof under either one.
There is no evidence suggesting that the Debtor incurred the educational expenses due to some sort of life adversity such as a job loss or disability, as opposed to a motivation to "secure a more advantageous income or to enter a different vocation." Pageau, 383 B.R. at 228. Therefore, the Debtor cannot rebut the presumption under the second standard.
Nor has the Debtor demonstrated under the third rationale that "grave consequences," Womer, 427 B.R. at 336, would more likely than not result if the student loans were not treated as allowable expenses under § 707(b). Rather, the Debtor simply assumes that she has no alternative but to pay the student loan because it is nondischargeable.
I have independently considered the consequences of disallowing the monthly student loan payment as an allowable expense and I perceive two potential consequences if the student loan expense is disallowed. Obviously, the Debtor may choose to allow the case to be dismissed, in which case she will remain burdened by substantial credit card debt. However, there is an alternative that need not result in grave consequences: conversion to chapter 13, which would accord the Debtor significant relief with respect to the approximately $71,000.00 in unpaid credit card debt she has incurred, without resulting in any unreasonable burden on the Debtor relating to her student loan.
If this case were to proceed under chapter 13, given her monthly income and expense disclosures, the Debtor would likely propose a plan in which she would make plan payments to the chapter 13 trustee in an amount that approximates her student loan payment. If one assumes that all
Based on the foregoing, I conclude that the Debtor has not met her burden of proving that "special circumstances" exist warranting the allowance of her monthly student loan payment as an expense deduction under 11 U.S.C. § 707(b)(2)(B) and that she has not rebutted the presumption of abuse that has arisen in this case.
The Debtor appears to make one final argument. She implicitly contends that the chapter 13 scenario outlined in Part IV.C.3 above is inaccurate because, if she converted this case to chapter 13, she could propose a plan that provided for her to continue to pay her full monthly payment to American Education Services on account of her student loan. The Debtor suggests that "the unsecured creditors would receive nothing" under such a plan. (Debtor's Memorandum of Law at 4) (unpaginated). In effect, the Debtor suggests that the court look at the "big picture" in evaluating either "special circumstances" or abuse generally under § 707(b) and, based on the premise that the unsecured creditors would not obtain materially better treatment under chapter 13, determine that this chapter 7 case is not an abuse of the Bankruptcy Code.
As is the case with virtually every other means test issue litigated since 2005, courts are divided on the general legal principle implicitly put forward by the Debtor—that a chapter 7 will not be an abuse if the likely chapter 13 alternative would yield little or no distribution to unsecured creditors.
The unstated premise in the Debtor's argument is that in a chapter 13 case, she will be permitted to keep paying her monthly student loan payment directly to American Education Services, leaving very little, if anything, available as a plan payment for the benefit of her other unsecured creditors. In other words, she assumes that she is entitled to discriminate against her other unsecured creditors by treating American Education Services more favorably in the plan. However, it is not clear, by any means, that such discrimination would be permissible under 11 U.S.C. § 1322(b)(1). See In re Orawsky, 387 B.R. 128 (Bankr.E.D.Pa.2008) (following In re Bentley, 266 B.R. 229 (1st Cir. BAP 2001) and holding that proposed chapter 13 plans that disfavor one class of creditors by deviating from certain core principles under chapter 13 and that are not offset by some benefit to disfavored class are more likely (though not necessarily) to be "unfair" under § 1322(b)(1) and not confirmable); see also In re Steele, 2010 WL 4791837, at *5 (Bankr.D.Wyo. Nov.18, 2010) (denying confirmation to plan that discriminated in favor of student loan debt, finding that debtors would be in much better position to pay student loan obligation upon exiting bankruptcy, without impacting other non-priority unsecured claim distribution). Contra Delbecq, 368 B.R. at 759-60.
The Debtor has not established that the type of discrimination that she contemplates would be tolerated were her case converted to chapter 13. In Orawsky, the discrimination in favor of the student loan creditor was permitted because the debtor established that, even with the discrimination, the disfavored class of unsecured creditors would receive better treatment under the plan than that mandated by the application of the chapter 13 means test. The Orawsky debtor had no minimum payment obligation to her general unsecured creditors based on the chapter 13 means test. Yet, she proposed to provide more than she was legally obligated to pay those creditors, provided that she also be permitted to treat her student loan more favorably by maintaining her regular monthly payment on that debt. Here, the Debtor does not make a similar showing. The application of the chapter 13 means test (excluding the student loan deductible expenses) undoubtedly would mandate a significant distribution to the Debtor's unsecured creditors, in the approximate amount of $30,000.00. See n.15 & accompanying text. The Debtor articulates no reason why all of her unsecured creditors
In short, the Debtor has not come forward with a convincing argument that a conversion to chapter 13 would provide no meaningful benefit to unsecured creditors. Therefore, the Debtor's last argument in response to the Motion fails.
For the reasons set forth above, the UST's Motion will be granted.
1. The Motion is
2. Unless the Debtor files a motion to convert this case from chapter 7 to chapter 13 or chapter 11
11 U.S.C. § 707(b)(2)(A)(i).
Courts construing "special circumstances" broadly may be treating § 707(b)(2)(B) as a legislative license to ameliorate the strict application of the means test when doing so would achieve the Code's fundamental mission of granting relief to honest and worthy debtors. For those courts, "special circumstances" is, in a sense, the statutory converse to the "good faith" doctrine in bankruptcy, pursuant to which courts avoid the perverse result of granting relief to a debtor who has acted in inequitably even though the debtor may satisfy all of the express statutory requirements of the Code. Courts construing "special circumstances" broadly do so based on the conviction that the bankruptcy court's role is to act as a court of equity, broadly exercising the discretion afforded it by the statute to achieve results in individual cases that are consistent with the statute's fundamental purposes.
Courts construing "special circumstances" narrowly do so based on: (a) an inference regarding legislative intent that they draw from the nature of the examples of "special circumstances" provided in the statute; (b) their perception that the 2005 amendments to the Bankruptcy Code were intended to curb some of the discretion previously afforded bankruptcy courts; and (c) a fundamental belief that "a bankruptcy judge should not invoke equitable principles when construing the Bankruptcy Code or Rules" because the court's "powers stem virtually exclusively from statutes." Alan M. Ahart, The Limited Scope of Implied Powers of a Bankruptcy Judge: a Statutory Court of Bankruptcy, Not a Court of Equity, 79 Am. Bankr. L.J. 1, 2 (2005).
The case before me does not require that I choose sides in this vigorous judicial debate.
The Debtor has not requested that I exercise any discretion that may I have, so I have no reason to determine whether such discretion exists, the scope of any such discretion or how it might be exercised in the circumstances presented here.
