James F. Cleaver and Meredith A. Cleaver

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
JAMES F. CLEAVER and
MEREDITH A. CLEAVER,
Debtors. 	No. 13-09-14164 SR
MEMORANDUM OPINION SUSTAINING
TRUSTEE’S OBJECTION TO CONFIRMATION
This matter came before the Court to consider confirmation
of Debtors’ First Amended Plan (“Plan”) (doc 16) and the
Trustee’s objection thereto (doc 20). 	Debtors appear through
their attorney Eric Dixon. 	Trustee Kelley Skehen is self-
represented. 	This is a core proceeding. 	28 U.S.C. §
157(b)(2)(L). 	For the reasons set forth below, the Court
sustains the Trustee’s objection to confirmation and will grant
the Debtors three weeks to file amendments and a new plan.
INTRODUCTION
When Congress amended the bankruptcy laws in 2005, it
intended to require debtors to pay some or all of the debt owed
to their unsecured creditors if they had the ability to do so.
“The heart of the bill's consumer bankruptcy reforms consists of
the implementation of an income/expense screening mechanism
(‘needs-based bankruptcy relief’ or ‘means testing’), which is
intended to ensure that debtors repay creditors the maximum they
can afford.” 	H.R. Rep. No. 109-31(I), 2005 U.S.C.C.A.N. 88, 89.
Congress also demonstrated a determination to replace judicial
discretion with precise rules-based calculations. 	In re Brady,
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361 B.R. 765, 772 (Bankr. D. N.J. 2007). 	“Section 707(b)(2),
commonly known 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.” 	In re Lasowski,
575 F.3d 815, 818 (8 th Cir. 2009)(citing Coop v. Frederickson (In
re Frederickson), 545 F.3d 652, 658 (8 th Cir. 2008), cert.
denied, 129 S.Ct. 1630 (2009)). 	See also Marianne B. Culhane and
Michaela M. White, Catching Can-Pay Debtors: Is the Means Test
the Only Way?, 13 Am. Bankr. Inst. L. Rev. 665, 679-80 (2005):
Congress, wisely or not, has replaced the standard of
substantial abuse with a rule on ability to pay--the
highly detailed and hard-edged means test--in an
attempt to reduce judicial discretion. First, the means
test deprives judges of discretion on what counts as
income, specifically overruling cases holding Social
Security payments to be disposable income, despite
their exemption under federal law. 	Next, the means
test picks Census Bureau income medians, rather than
relying on judicial views of how much income should
subject a debtor to special scrutiny. Third, the means
test adopts IRS allowances to fix exact dollar
deductions in very important categories, rather than
letting judges decide what is reasonable. In other
categories, where the debtor's actual expenses are
used, sometimes they are limited by “reasonable” or
“necessary,” as with cure payments, and sometimes not,
as with secured debt pure and simple. 	Fourth, the
means test includes special deductions not on the IRS
CFS list, deductions which clearly overrule prior case
law disallowing such expenses as care for disabled and
elderly household members, and some private school
expenses. 	Finally, the means test sets specific dollar
amounts as triggers for the presumption of abuse, in
place of various court-developed tests. Congress
adopted rules, not discretionary standards, to govern
ability to pay. Those rules are uniform and
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predictable, as Congress intended. They communicate to
debtors and other parties in interest what is expected.
(Footnotes omitted.)
CONFIRMATION
Section 1325 of the Bankruptcy Code governs
confirmation of a chapter 13 plan. 	Section 1325(b)(1)
provides as follows:
If the trustee or the holder of an allowed unsecured
claim objects to the confirmation of the plan, then the
court may not approve the plan unless, as of the
effective date of the plan-
(A) the value of the property to be distributed under
the plan on account of such claim is not less than the
amount of such claim; or
(B) the plan provides that all of the debtor's
projected disposable income to be received in the
applicable commitment period beginning on the date that
the first payment is due under the plan will be applied
to make payments to unsecured creditors under the plan.
11 U.S.C. § 1325(b)(1).
Section 1325(b)(2), in turn, explains how to determine
“disposable income” under section 1325(b)(1)(B).
Section 1325(b)(2) provides, in relevant part:
For purposes of this subsection, the term “disposable
income” means current monthly income received by the
debtor (other than child support payments, foster care
payments, or disability payments for a dependent child
made in accordance with applicable nonbankruptcy law to
the extent reasonably necessary to be expended for such
child) less amounts reasonably necessary to be
expended-
(A)(I) for the maintenance or support of the debtor or
a dependent of the debtor, or for a domestic support
obligation, that first becomes payable after the date
the petition is filed.
11 U.S.C. § 1325(b)(2).
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To establish some structure to the lengthy and
complicated statutory provisions for determining
“projected disposable income” and the applicable
“commitment period” in chapter 13 cases, the Judicial
Conference of the United States has adopted Official
Bankruptcy Form 22C, entitled the “Chapter 13 Statement
of Current Monthly Income and Calculation of Commitment
Period and Disposable Income.” 	Part I of this form
involves a calculation of “current monthly income,” as
defined in 11 U.S.C. § 101(10A). 	Unless there are
certain factors, not applicable here, the current
monthly income is the debtor's monthly disposable
income, shown on Line 59 of the form. 	Multiplying this
amount by the number of months in the commitment period
gives the total required to be distributed to unsecured
creditors under the plan. 	11 U.S.C. § 1325(b)(1)(B).
In re Bermann, 399 B.R. 213, 215 (Bankr. E.D. Wis. 2009).
If the debtors’ income exceeds their state’s median income,
they must compute allowable living expenses under 11 U.S.C. §
707(b)(2)(A) and (B). 	11 U.S.C. § 1325(b)(3). 	And, their
commitment period must be 60 months. 	11 U.S.C. § 1325(b)(4).
Part IV of the form, which is applicable to
above-median income filers, requires that the filer set
forth the permissible deductions from income under
Standards set by the Internal Revenue Service. Part V,
relying upon the gross income and deductions from
income amounts contained in Parts I and IV,
respectively, seeks to define “disposable income” for
above-median income filers for the purpose of 11 U.S.C.
§ 1325(b)(2). 	Part VI provides the place for listing
any additional living expenses claimed to be allowable
under § 707(b)(2)(A)(ii)(I).
For purposes of section 1325(b)(3), the relevant
provision of section 707(b)(2)(A)(ii)(I) provides:
The debtor's monthly expenses shall be the debtor's
applicable monthly expense amounts specified under the
National Standards and Local Standards, and the
debtor's actual monthly expenses for the categories
specified as Other Necessary Expenses issued by the
Internal Revenue Service for the area in which the
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debtor resides, as in effect on the date of the order
for relief ... for the debtor....
11 U.S.C. § 707(b)(2)(A)(ii)(I).
Berman, 399 B.R. at 215-16.
DISCUSSION
The Trustee and Debtors computed identical current monthly
income of $8,387.11. 	The Debtors annualized current monthly
income is $100,645.32, which exceeds the New Mexico median income
for a 3 person household ($53,018.00). 	Therefore, their
“applicable commitment period” is 60 months. 	11 U.S.C. §
1325(b)(4). 	And, they must compute allowable living expenses
under 11 U.S.C. § 707(b)(2)(A) and (B). 	11 U.S.C. § 1325(b)(3).
The Trustee objected because 1) the Plan does not contribute
income tax refunds, if any, to the Plan; 2) the Plan proposes to
pay Ford Motor Credit directly outside the Plan; 3) the Plan
fails to calculate disposable income in ¶ 7.2; 4) the Plan fails
to increase payments after payment in full of retirement loans;
5) the Plan fails to treat a secured debt of High Plains FCU and
6) Debtors’ Form 22C has five incorrect entries. 	Each will be
discussed.
INCOME TAX REFUNDS
Debtors’ Plan does not provide for payment of income tax
refunds. 	Plan, ¶ 1.2 (doc 16). 	“In the Chapter 13 context,
income tax refunds are disposable income.” 	In re Juarez, ___
B.R. ___, 2009 WL 2922802 at *2 (Bankr. D. N.M. 2009)(citing
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Midkiff v. Stewart (In re Midkiff), 342 F.3d 1194, 1202 n. 4
(10 th Cir. 2003)). 	By not providing for tax refunds, the Debtors
are not contributing all projected disposable income as required
by the disposable income test. 	See 11 U.S.C. § 1325(b)(1)(B).
The Trustee’s objection on this ground is well taken.
FORD MOTOR CREDIT
Trustee withdrew this objection at confirmation.
DISPOSABLE INCOME
Trustee’s objection is that the Plan, ¶ 7.2 is blank. 	This
should state the minimum amount of payments required to satisfy
the disposable income test. 	This objection is well taken because
creditors and the trustee need to know the minimum amount the
plan must pay to meet this requirement.
RETIREMENT LOAN PAYMENTS
At trial, Debtors testified that they have two retirement
loans that are paid $67.49 semi-monthly. 	Under 11 U.S.C. §
1324(f) any amounts required to repay qualified retirement loans
“shall not constitute ‘disposable income’ under section 1325.”
See In re Glisson, ___ B.R. ___, 2009 WL 5322426 at *2 (Bankr.
S.D. Ga. 2009). The Trustee seeks an increase in plan payments
once the retirement loans are repaid. 	This objection is well
taken. 	See Lasowski, 575 F.3d at 820.
The Court notes, however, that Debtors did not deduct the
loan payments on their Form 22C line 55. 	Debtors should amend
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Form 22C to take this deduction and amend their plan to provide
for increased payments when the retirement loans are repaid.
HIGH PLAINS FCU
Trustee withdrew this objection at confirmation because the
collateral had been repossessed prepetition.
FORM 22C
The Trustee also objected to five expense entries on
Debtors’ Form 22C. 	They are 1) line 33 for “court-ordered
payments”; 2) line 37 for “telecommunication services”; 3) line
43 for “educational expenses for dependent children under 18"; 4)
line 44 for “additional food and clothing expense”; and 5) line
47(d) for the average monthly payment to Saxon Mortgage Service,
Inc. 	The Debtors’ Form 22C computes monthly disposable income of
$535.61. 	The Trustee’s version of Form 22C computes monthly
disposable income of $1,900.61. 	To resolve this discrepancy the
Court will examine each expense item to which the Trustee has
objected.
COURT ORDERED PAYMENTS
The Debtors list $528.44 as an expense for court ordered
payments. 	Their statement of financial affairs, question 4,
states that the Debtors were being garnished $528.44 per pay
period. 	This debt is a pre-petition unsecured debt that will be
discharged. 	It does not continue after the bankruptcy filing.
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These types of payments are not deductible on Form 22C. 	11
U.S.C. § 707(b)(2)(A)(ii)(I):
The debtor's monthly expenses shall be the debtor's
applicable monthly expense amounts specified under the
National Standards and Local Standards, and the
debtor's actual monthly expenses for the categories
specified as Other Necessary Expenses issued by the
Internal Revenue Service for the area in which the
debtor resides, as in effect on the date of the order
for relief, for the debtor, the dependents of the
debtor, and the spouse of the debtor in a joint case,
if the spouse is not otherwise a dependent. Such
expenses shall include reasonably necessary health
insurance, disability insurance, and health savings
account expenses for the debtor, the spouse of the
debtor, or the dependents of the debtor.
Notwithstanding any other provision of this clause, the
monthly expenses of the debtor shall not include any
payments for debts.
(Emphasis added). 	See also In re Law, 2008 WL 1867971 at *13 n.
70 (Bankr. D. Kan. 2008):
The Court also notes that even if this were a
court-ordered wage garnishment for the collection of an
unsecured debt, such as a money judgment for
non-payment of a credit card, allowing its deduction on
Line 33 would totally undermine one purpose of
bankruptcy-equal distribution of debtor's assets among
the same class of creditors. Would Debtor argue that if
he had a court ordered garnishment for an unsecured
Capital One judgment, he could deduct that garnishment
from Line 33, and just keep that amount each month? Or
would he argue that Capital One, in this hypothetical,
would be entitled to receive repayment of 100% of its
unsecured debt while all other unsecured creditors
received some lesser amount? Line 33 was meant to apply
to those court ordered payments that will be an ongoing
obligation, such as for child support, and the Court
can see no policy reason why a wage garnishment for an
unsecured debt, even if court-ordered, would be
appropriately deducted.
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1The IRS Local Standards for housing and utilities include
telephone and cell phone. Internal Revenue Manual, §
5.15.1.7(4)(A). 	In re O’Connor, 2008 WL 4516374 at *14 (Bankr.
D. Mont. 2008). 	(The Internal Revenue Manual is available at:
http://www.irs.gov/irm/index.html ). Allowing telephone expense
on line 37 would double count that expense.
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The Trustee’s objection to line 33 is well taken. 	Debtors should
amend line 33 to be zero.
TELECOMMUNICATIONS SERVICES
The Debtors list $189.00 as an expense for
telecommunications services. 	Form 22C’s instruction for line 37
states “Enter the total average monthly amount that you actually
pay for telecommunication services other than your basic home
telephone and cell phone service - such as pagers, call waiting,
caller id, special long distance, or internet service - to the
extent necessary for your health and welfare or that of your
dependents.” 1 	Exhibit 2 is a copy of the Debtors’ cable bill.
It shows that they have “bundled” phone, internet and cable
services. 	The figure on Form 22C is the total. 	The Court finds
that it should deduct that part attributable to basic telephone
service, in the amount of $36.75. 	Debtors should amend line 37
to be $152.00.
EDUCATION EXPENSES
The Debtors list $137.50 as an expense for education
expenses. 	At trial, Debtors stated their son is in public school
and this figure represents costs associated with him being in the
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choir. 	“But educational expenses are deemed ‘necessary’ only if
the education producing the expenses ‘is required for a
physically or mentally challenged child and no public education
providing similar services is available,’ or if it is ‘for the
taxpayer and ... [is] required as [a] condition of employment.’”
In re Saffrin, 380 B.R. 191, 193 (Bankr. N.D. Ill. 2007)(citing
Internal Revenue Manual § 5.15.1.10 at ¶ 3). 	Despite the value
of this activity for the child’s education and character
development, unfortunately the Court does not have the discretion
to allow this expense.
ADDITIONAL FOOD AND CLOTHING EXPENSE
Line 24A of Form 22C is titled “National Standards: food,
apparel and services, housekeeping supplies, personal care, and
miscellaneous.” 	The Internal Revenue Manual § 5.15.1.7 at ¶ 1
and 3 states:
Allowable expenses include those expenses that meet the
necessary expense test. The necessary expense test is
defined as expenses that are necessary to provide for a
taxpayer's and his or her family's health and welfare
and/or production of income. The expenses must be
reasonable. The total necessary expenses establish the
minimum a taxpayer and family needs to live.
Food, Clothing and Other Items - These establish
reasonable amounts for five necessary expenses: food,
housekeeping supplies, apparel and services, personal
care products and services, and miscellaneous. These
standards come from the Bureau of Labor Statistics
(BLS) Consumer Expenditure Survey. Taxpayers are
allowed the total National Standards amount monthly for
their family size, without questioning the amounts they
actually spend.
Note:
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All five standards are included in one total national
standard expense.
11 U.S.C. § 727(b)(2)(A)(ii)(I) also provides: “In addition,
if it is demonstrated that it is reasonable and necessary, the
debtor's monthly expenses may also include an additional
allowance for food and clothing of up to 5 percent of the food
and clothing categories as specified by the National Standards
issued by the Internal Revenue Service.” 	Debtors did not prove
that the $42.00 listed on line 44 was reasonable and necessary.
The Debtors should amend line 44 to be zero.
SAXON MORTGAGE PAYMENT
Form 22C allows a deduction for contractual payments on
secured debts in the 60 months following the bankruptcy. 	11
U.S.C. § 707(b)(2)(A)(iii). 	Debtors had a $7,190.54 arrearage on
their home mortgage when they filed their Chapter 13. 	See Proof
of Claim 13. 	Debtors testified that they had an agreement with
the lender to catch up on the arrears by paying $1,328.06
monthly, which included the current payment and part of the
arrearage. 	The proof of claim attachment shows a contractual
payment due of $700.36. 	Ms. Cleaver testified that the actual
current payment, with insurance and taxes, is $775.00. 	Debtors
listed the payment amount at $1,328.06 on line 47 of Form 22C.
Form 22C also allows a deduction for curing arrears on a
primary residence by including, on line 48, 1/60th of the cure
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2Debtors computed this amount without the benefit of the
proof of claim. 	The actual arrearage amount divided by 60 is
$119.84. 	Debtors should amend line 48 of Form 22 to this amount.
3Line 47 should include taxes and insurance required by the
contract. 	Bermann, 399 B.R. at 218.
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amount. 	Debtors listed Saxon Mortgage on line 48 with a $70.54 2
cure amount. 	It should be obvious that Debtors cannot claim a
monthly payment of $1,328.06, a figure that would cure the
mortgage arrearages quickly, and claim a cure amount on line 48
for the same arrearage. 	And, because line 48 specifies how a
mortgage arrearage is cured, the cure amount cannot be factored
into line 47. 	Therefore, Debtors should amend line 47 to reflect
the actual payment of $775.00 3.
Finally, as a result of the above amendments the plan
payment will obviously change, which will result in a change in
line 50's average monthly administrative expense of the Chapter
13 case.
CONCLUSION
The Court will enter an Order denying confirmation of the
First Amended Plan and allowing the Debtors three weeks in which
they can amend their Form 22C and submit a Second Amended Plan in
conformity with this Opinion.
Honorable James S. Starzynski
United States Bankruptcy Judge
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Date Entered on Docket: 	March 22, 2010
Copies to:
Eric D Dixon
301 S Avenue A
Portales, NM 88130-6288
Kelley L. Skehen
625 Silver Avenue SW
Suite 350
Albuquerque, NM 87102-3111
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