WILLIAM T. THURMAN, Bankruptcy Chief Judge.
The matter before the Court is the confirmation of the Debtor's Chapter 13 Plan ("Plan") dated July 17, 2012. The Court conducted an initial plan confirmation hearing on October 19, 2012. The Court heard oral argument from Geoffrey L. Chesnut on behalf of Kathy Lynn Kofford (the "Debtor") and from Kellie K. Nielsen on behalf of the Chapter 13 Trustee, Kevin R. Anderson (the "Trustee"). At the conclusion of the hearing, the Court took the matter under advisement.
The Trustee objected to the Plan on September 14, 2012 and filed a continuing objection on October 10, 2012 asserting that the Debtor is not complying with the disposable income requirements of 11 U.S.C. § 1325(b)
The Court has carefully considered the parties' briefs and memoranda, the statutory authority, and case law and has conducted its own independent research of the law. The Court issues the following Memorandum Decision, which constitutes the Court's findings of fact and conclusions of law under Federal Rule of Civil Procedure 52, made applicable to this proceeding by Federal Rules of Bankruptcy Procedure 9014 and 7052.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. This matter is a core proceeding under 28 U.S.C. § 157(a)(2)(L). Venue is properly laid in this Court under 28 U.S.C. § 1408.
The Debtor filed a voluntary chapter 13 petition for relief on July 17, 2012. The same day, among other documents, the Debtor filed the Plan, Statement of Financial Affairs and Schedules, and Form 22C. The Trustee filed an objection to the Plan on September 14, 2012 and a continuing objection on October 10, 2012. On October 16, 2012, the Debtor filed Amended Schedules B and J, an Amended Form 22C, and a responsive brief to the Trustee's objection.
At the initial confirmation hearing held on October 19, 2012, the Court heard oral argument on the Trustee's remaining objections to the Plan. While the Trustee objected to several deductions on the Form 22C, the Trustee's oral argument focused on the Debtor's deduction on Line 55 for retirement loan payments. In addition, at the hearing and in the Trustee's briefing, the Trustee objected to the Debtor's plan because the Debtor has failed to provide for reallocation of funds to the Plan after the retirement loans are paid-off at dates certain in the Plan.
At the conclusion of the hearing, the Court took the Trustee's objection regarding the Debtor's retirement loan payments under advisement and set a briefing schedule for the parties. The Court continued the confirmation hearing to December 14, 2012. On October 31, 2012 the Trustee filed a Memorandum Brief and on November 9, 2012 the Debtor filed a Reply Memorandum.
The facts relevant to the Trustee's objection to confirmation of the Plan are undisputed. The Debtor's Schedule I, filed July 17, 2012 lists monthly income of $2,671.00. Among the monthly payroll deductions listed on Schedule I, the Debtor lists a "401k" deduction of $269.00 and a "401k Loan" deduction of $874. Schedule J, as amended on October 16, 2012, reflects a monthly net income of $161.00.
The Debtor filed an Amended Form 22C on October 16, 2012. The Form 22C reflects a six-month average monthly gross income of $4,982.03. The Debtor's annualized income is therefore $59,784.36 which exceeds the median family income for a household of one in Utah. Thus, the Debtor is an "above-median debtor" and her minimum commitment period is five years under § 1325(b)(4). On Line 55 of the Form 22C, the Debtor deducts $1,146.07 as "qualified retirement deductions" which represents the total amount of the monthly retirement loan payments in addition to the Debtor's average monthly retirement plan contributions. After entering the deductions on Form 22C, including the retirement loan payments and contributions discussed above, the Debtor's monthly disposable income is negative $156.86.
The Plan proposes a monthly payment of $161.00 in accordance with the Debtor's monthly net income reflected on Schedule I and J. Because the debtor is unable to repay all of her unsecured creditors in full, the Plan is a "base plan" and the Debtor must make monthly plan payments for at least 60 months. After payment in full of all other disbursements, the balance, if any, will be distributed to allowed nonpriority unsecured creditors.
The Debtor's pay advices reflect that the Debtor is contributing approximately $230.00 per month to a retirement plan and she is repaying approximately $947.00 per month on three retirement loans. Adopting the nomenclature for the retirement loans as the Trustee refers to them in his Memorandum Brief, the chart below summarizes the balance, monthly payment, and estimated payoff date for each of Debtor's retirement loans.
Based on these figures, the Trustee estimates that the Debtor will make a total retirement contribution, including retirement loan payments, of $11,391.00 during the first year of the Plan and $29,046.00 over the Plan's five-year commitment period.
The Trustee objects to confirmation of the Plan under § 1325(b) because the Debtor is deducting the full amount of her monthly retirement loan payments on Line 55 of Form 22C rather than prorating the payments over the 60-month plan term. The Trustee's position is that prorating the retirement loan payments over the 60-month plan term will ensure that the Debtor is not improperly understating the required return to creditors because the retirement loans will mature at dates certain during the 60-month term. According to the Trustee's calculations, the Debtor's $1,146.07 deduction on Line 55 of Form 22C should be reduced to a deduction of $462.31.
The Debtor contends that under § 1322(f), amounts required to pay retirement loans are not disposable income and that she is entitled her to deduct the full amount of her monthly retirement loan payments on Line 55. The Debtor argues that proration of the retirement loan payments over the 60-month term of the plan would impermissibly violate § 1322(f) by materially altering the terms of the loans and that the instructions of Line 55 authorize the Debtor to deduct the full amount she pays each month to retirement loans when it refers to entering the "monthly total." In addition, the Debtor contends that she would not have the "excess" funds the Trustee asserts are available at the conclusion of the amortization analysis.
The meaning of "projected disposable income" lies at the heart of the dispute over whether the Debtor can deduct the full amount of her monthly retirement loan payments or must prorate those payments over the 60-month plan term. To confirm a chapter 13 plan, the Court must find that the proposed chapter 13 plan meets the requirements of § 1322 and § 1325(a). If the Trustee objects to confirmation of a chapter 13 plan, as is the case here, the Court cannot confirm the plan unless it satisfies § 1325(b)(1). Section 1325(b)(1) requires that:
Thus, the Court may not confirm a chapter 13 plan unless the Court finds that the debtor is contributing all of the debtor's projected disposable income to the plan for payment to unsecured creditors. While the Bankruptcy Code does not define the term "projected disposable income" used in § 1325(b)(1)(B), it does define the term "disposable income" in § 1325(b)(2):
If the debtor is an "above-median" debtor, meaning that the debtor's income exceeds the state's median income, the debtor must use § 707(b)(2)(A)-(B) to determine the "reasonably necessary expenses" allowed to be deducted from current monthly income under § 1325(b)(2). § 1325(b)(3). Section 707(b)(2), commonly referred to as the "means test," "sets out a structured method of calculating reasonably necessary expenses that is designed to reduce the discretion of bankruptcy courts and to ensure that debtors pay more to their unsecured creditors."
Line 55 of Form 22C allows debtors to deduct required repayments to retirement plan loans. The text of Line 55 instructs the debtor to "[e]nter the monthly total of (a) all amounts withheld by your employer from wages as contributions for qualified retirement plans, as specified in § 541(b)(7) and (b) all required repayments of loans from retirement plans, as specified in § 362(b)(19)." Section 362(b)(19) provides that the automatic stay does not apply to retirement loan payments withheld from a debtor's wages. For chapter 13 debtors, § 1322(f) provides that "[a] plan may not materially alter the terms of a loan described in section 362(b)(19) and any amounts required to repay such loan shall not constitute `disposable income' under section 1325."
The Debtor cites to
While the Tenth Circuit has not weighed in on this issue, other courts, including the Eighth and Fifth Circuit Courts of Appeals, have come to the conclusion opposite of
The Court finds the reasoning of
The Debtor further argues that if she must prorate her retirement loan payments over the 60-months of the Plan for the purposes of Line 55 of Form 22C, that her disposable income will be greatly inflated and will reflect a return higher than what she can afford. The Court would understand the Debtor's argument if the projected disposable income on Form 22C determined the plan payment. As noted by the Bankruptcy Court in
Thus, because the projected disposable income determines the required return to creditors and not necessarily the plan payment, the Court finds the Debtor's position unconvincing.
In addition to the fact that the Court finds that § 1322(f) does not "materially alter" the terms of the Debtor's retirement loan, the Court also finds support for its holding in the Supreme Court's interpretation of projected disposable income. In the 2010
Here, it is virtually certain that the Debtor's retirement loans will end in March 2013, April 2013, and May 2015 respectively. All of the termination dates fall within the 60-month plan term. To ignore this fact would not reflect the Debtor's true projected disposable income over the length of the Plan and in turn, would distort the Debtor's required return to unsecured creditors. Thus, the Court holds that the appropriate amount for the Debtor to deduct on Line 55 of Form 22C is the Debtor's retirement loan payments prorated over the 60-month commitment period.
The Trustee also asserts that the Debtor's failure to reallocate funds available after the repayment of the Debtor's retirement loans to payment of creditors is a failure to contribute all of her projected disposable income to the Plan and is evidence of the Debtor's lack of good faith. The Trustee argues that the Debtor should provide for increased plan payments after repayment of the Debtor's retirement loans to ensure that all of her projected disposable income is contributed to the plan for the benefit of creditors.
While the Debtor does not object to increasing the plan payment in some amount at the maturity of each retirement loan, she does object to a mechanical or automatic step-increase in plan payments at the maturity of each loan. The Debtor asserts that while her Schedules I and J reflect her financial circumstances as of the date of the petition, she may have future reductions in income due to her employer decreasing her work hours. Thus, the Debtor requests that a status review be conducted at the termination of each loan to determine what the Debtor may be able to reallocate based upon her finances as they exist at that time.
The Court does not agree with the Debtor that a status review at the end of each retirement loan is a feasible alternative to step-increases in plan payments which will result in additional income in the amount of the monthly loan payment. The retirement loans are certain to end at fixed dates throughout the 60-month plan term. While the Debtor anticipates future decreases in her wages, she does not provide the amount of such decreases or how her budget will change at that future point. Requiring step-increases in plan payments at the end of each of the Debtor's retirement loans comports with the holding of
The Trustee also argues that the Debtor's failure to reallocate retirement loan payments to the Plan once the retirement loans are paid-off at a date certain is evidence of the Debtor's lack of good faith under § 1325(a)(3). In the
The Court is persuaded that the Debtor's failure to provide for reallocation of funds once her retirement loans are paid indicates a lack of good faith in this case. While the Debtor seeks to use the extra funds as a cushion against future events, like a loss in income, those facts are not before the Court at this time and proactively absorbing the funds available once the retirement loans are repaid would not be fair to creditors.
Of course, the Debtor is free to file a motion to modify the plan at any time throughout the Plan's term if she deems it necessary given her employer's indication that the Debtor's work hours will be cut in the future. However, the facts currently before the Court indicate that it would be premature to require three separate status reviews at the end of each retirement loan because the Debtor might have different financial circumstances at that time.
Based on the foregoing, the Court concludes that the Plan should not be confirmed. A separate order denying confirmation will accompany this Memorandum Decision. This ruling is without prejudice to the Debtor seeking to modify the Plan consistent with the holdings of this Memorandum Decision, within 30 days of the entry of the order. If no modifications are made, the case will be dismissed.
