Courts Must Independently Review Chapter 13 Debtors’ Budgets and Plans to Make Sure they are Repaying Creditors the Maximum Amount they Can Afford

Courts Must Independently Review Chapter 13 Debtors’ Budgets and Plans to Make Sure they are Repaying Creditors the Maximum Amount they Can Afford

The Debtor filed a Chapter 13 bankruptcy case on December 31, 2016. The most recent plan  was filed on February 21, 2017. The plan is supported by an amended budget  filed on March 14, 2017. No parties in interest objected to the plan. On March 17, 2017, a proceeding memo was entered by the Chapter 13 Trustee stating the following: “[c]onfirmation hearing not held. Plan confirmed on consent docket.”

Procedures for the confirmation of Chapter 13 plans are set forth in this Court’s Standing Order Adopting Mandatory Form Chapter 13 Plan Effective August 1, 2015. That Standing Order provides the following:

Plans or plan modifications that appear to the court to meet all statutory tests for confirmation and to which no objections to confirmation have been filed may be confirmed on the consent docket without actual presentation. Cases in which plans are confirmed or modified on the consent docket may be read into the record at the confirmation hearing, may be posted on the court’s or trustee’s website any time prior to the scheduled confirmation hearing date, or maybe listed on the hearing docket. It is the duty of the debtor’s attorney, the trustee, or parties in interest to inform the court of any existing bar to confirmation. Cases with pending objections will not be placed on a consent docket. Deficiencies in the plan noted by the trustee at the § 341 meeting must be cured in a manner which is evident upon review of the case file or the plan will not be scheduled on a consent docket.

Accordingly, unopposed Chapter 13 plans which the Chapter 13 Trustee recommends for confirmation are struck from the docket.1 Thereafter, the Trustee uploads a confirmation order and the Court conducts an in camera review of the debtor’s Chapter 13 plan and schedules. Given the Supreme Court’s ruling in United Student Aid Funds, Inc. v. Espinoza, 559 U.S. 260 (2010), this Court has an independent duty to review all Chapter 13 plans. An important holding in that case was “whether or not an objection is presently lodged in this case, the Court retains the authority to review [the Chapter 13] plan and deny confirmation if it fails to comply with the confirmation Standards of the Code.” Id. Once the Court has conducted its review, it will sign the order confirming the Chapter 13 plan if it has no independent concerns or objections. Where it appears the confirmation standards may not have been met, the Court will typically set the case for an evidentiary hearing or may deny confirmation outright.

The Court had its own independent concerns regarding confirmation of the debtor’s plan. So, after it’s in camera review, the Court entered an order setting a hearing  which stated the following:

Hearing is set on the debtors Chapter 13 Plan (ECF #15) at 9:30 a.m. on April 19, 2017. Pursuant to 11 U.S.C. § 1325(b)(3), the Code provides that above median income debtors are only allowed to deduct amounts reasonably necessary to be expended by applying the mathematical “abuse” test in 11 U.S.C. § 707(b)(2)(A) and (B). Under the “abuse” test, above median income debtors expenses are limited, in certain categories, to amounts set forth in the National and Local Standards. Debtor’s expenses exceed the National and Local Standards in various categories. Hearing will be held to determine if the plan is confirmable pursuant to 11 USC §§ 1322 and 1325.

Thereafter, in anticipation of the hearing, the debtor filed an Amended Schedule J. This amendment included additional disclosures, but none of the debtor’s previously disclosed expenses were impacted.

The debtor is married and has a non-filing spouse. Her original schedules reflect she maintains a household of two, which consists of the debtor and her husband. However, her latest amended Schedule J reflects that her twenty-seven year old daughter, who was recently diagnosed with Crohn’s disease, is temporarily living with her. The daughter moved in with the debtor just two weeks prior to the bankruptcy filing, and the debtor does not disclose her as a dependent in the bankruptcy schedules. Debtor’s counsel conceded at the hearing that the correct family size sshould be two. The Court assumes debtor’s counsel does not believe the daughter’s temporary living arrangements with the debtor impacts the means test calculation.

The debtor has proposed a Chapter 13 plan calling for plan payments of $310.00 per month for 52 months, and then $825.22 per month for the final eight months. While no evidence was introduced regarding the increase in the plan payment, the Court assumes the non-filing spouse’s car payment for his 2012 Ford Truck ends in month 52 and those funds would become available for the higher plan payment. The debtor is above median income and her applicable commitment period is 60 months; accordingly, this debtor must propose a 60 month plan. The proposed plan is a “pot” plan, with unsecured non-priority creditors receiving an estimated 21% of their claims. The total proposed pot is $9,500.00.

The debtor’s Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period, together with the Chapter 13 Calculation of Your Disposable Income, discloses the following: a family size of two, average monthly income for the debtor of $2,582.85, and average monthly income for the non-filing spouse of $3,445.20.

Some of the important issues the Court must address in this matter include the interplay between the “mechanical” calculation in the means test and confirmation of the debtor’s Chapter 13 plan, the balancing of the debtor’s expenses under the means test, and this Court’s authority to sua sponte raise an objection to the debtor’s budget, particularly when it concerns a specific line item expense. Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), disposable income was defined in 11 U.S.C. § 1325(b)(2) as “income which is received by the debtor and which is not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor.” A debtor was then required to pay that disposable income for not less than 36 months (unless unsecured creditors were paid in full sooner), but not more than 60 months. BAPCPA changed the definition of “disposable income” and instituted a “means test” referenced in 11 U.S.C. § 1325(b)(2), which partly incorporates 11 U.S.C. § 707(b)(2). Specifically, 11 U.S.C. § 707(b)(2)(A)(ii)-(iv) describes certain monthly expenses which “shall be the debtor’s applicable monthly expenses” for an above median income debtor.

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