UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
COVINGTON DIVISION
IN RE:
MELINDA S. BECK CHAPTER 7
DEBTOR
CASE NO. 07-21172
AND
ROBIN HELEN RUST CHAPTER 7
DEBTOR CASE NO. 07-21066
MEMORANDUM OPINION AND ORDER
These matters having come before the court upon two U.S. Trustee’s Motions to Dismiss Case Pursuant to 11 U.S.C. § 707(b)(2) and (b)(3), and the court having heard the matters on November 13, 2007, and further briefing by both parties having been provided, the court issues this Memorandum Opinion and Order.
These matters are submitted to the court on the issue of whether the debtors may claim a deduction on Line 42 of Form B22A, the “Means Test”, for mortgage payments contractually due when the debtors have indicated an intent to surrender the collateral. These matters have been consolidated due to the fact that the same legal issue is present in both cases. The legal issue is a matter of first impression for this court.
This court has jurisdiction over these matters pursuant to 28 U.S.C. § 1334(a) and (b), 28 U.S.C. § 157(a) and (b)(1), and 28 U.S.C. § 151. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (B).
FACTS. The facts have been stipulated to by the parties:
1. On July 18, 2007, Robin Rust commenced her case by filing a voluntary petition for relief under chapter 7 of the Bankruptcy Code. On July 31, 2007, Melinda Beck commenced her case by filing a voluntary petition for relief under chapter 7 of the Bankruptcy Code.
2. Robin Rust reported annualized current monthly income in the amount of $82,182.00 on her Form B22A, Line 13. Robin Rust also claimed $155.00 on Line 43 regarding arrearages on secured claims. Melinda Beck reported annualized current monthly income in the amount of $80,592.84 on her Form B22A, Line 13. The applicable state family income for a family of two is $41,560.00. Accordingly, both debtors’ current monthly income exceeds the applicable state median income amount.
3. The debtors both claimed secured payments for mortgages on residences that have been surrendered on Line 42 of their Form B22A, the “Means Test.”
4. If the secured payments are determined to not be allowed, then the cases are presumed abusive under 11 U.S.C. § 707(b)(2). If the secured payments are determined to be allowed, then the case is not presumed abusive for Robin Rust, though for Melinda Beck there are other issues which may determine the presumption of abuse.
LAW. 11 U.S.C § 707(b)(2)(A)(iii) provides: “The debtor’s average monthly payments on account of secured debts shall be calculated as the sum of – (I) the total of all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the petition; and (II) any additional payments to secured creditors necessary for the debtor, in filing a plan under chapter 13 of this title, to maintain possession of the debtor’s primary residence, motor vehicle, or other property necessary for the support of the debtor and the debtor’s dependents, that serves as collateral for secured debts; divided by 60.”
At issue here is whether the debtors qualify for an expense allowance for average monthly future payments on account of secured debts under subsection (I), and as pertains to Robin Rust, under subsection (II) amounts necessary to cure default and maintain possession of the residence if the debtor was filing a chapter 13 plan.
The U.S. Trustee urges this court to adopt a line of cases concluding that where a debtor has surrendered or intends to surrender the collateral, the debtor may not deduct the monthly amounts owed on the secured obligations. See In re Skaggs, 349 B.R. 594 (Bankr. E.D. Mo. 2006); In re Harris, 353 B.R. 304 (Bankr. E.D. Okla. 2006); and In re Ray, 362 B.R. 680 (Bankr. D.S.C. 2007).
The U.S. Trustee argues that the “Means Test” is a forward looking calculation and cites In re Ray, 362 B.R. 680 at 685: “It therefore seems that the better construction of ‘scheduled as contractually due’ would consider the debtors’ intention to surrender the collateral and make no future payments to the creditor. This construction would not support deduction of average secured credit payments on debt secured by collateral that the debtor proposes to surrender. This construction is also in keeping with the overall purpose of establishing a formula that will give rise to a meaningful presumption of abuse or not. In considering whether debtors are abusing chapter 7 it is proper to construe the statute in such a way as to determine whether they have an ability to repay their general unsecured creditors once they have carried out their stated intentions.”
The debtors urge the court to adopt what appears to be the majority line of cases concluding that debtors are allowed deduction of expense amounts for secured debts notwithstanding that the debtor has surrendered, or has indicated an intent to surrender, the collateral on those debts. See In re Walker, 2006 WL 1314125; In re Mundy, 363 B.R. 407, 413 (Bankr. M.D. Pa. March 1, 2007); In re Hardwick, 352 B.R. 867 (Bankr. D. Minn. 2006); In re Sorrell, 359 B.R. 167 (Bankr. S.D. Oh. 2007); and In re Hoerlein, 2007 Bankr. LEXIS 1043 (Bankr. S.D. Oh. 2007).
The debtors argue that the plain meaning of the phrase scheduled as contractually due to secured creditors in each month of the 60 months following the date of the petition allows a debtor to take a deduction for collateral he or she intends to surrender, because despite the surrender of the collateral the payments remain scheduled as contractually due. See In re Sorrell, 359 B.R. 167 at 186.
Apparently a majority of bankruptcy courts agree with the debtors. Neither party has presented the court with any circuit court authority, bankruptcy appellate panel authority, or district court authority. The court has found one district court opinion affirming a bankruptcy court allowing the deduction. This court agrees with the analysis of that district court and the majority of bankruptcy courts that have ruled on this issue.
“In addition, the deduction of secured debt on property that the debtor intends to surrender does not undercut the goal of having debtors with disposable income pay their debts if they can: although the debtor may intend to surrender the collateral underlying her secured payments, they still need to procure new housing arrangements, which will lead to the incurring of some level of additional expense not calculated in the means test. . . The deduction of monthly payments on property that the debtor intends to surrender also ensures efficiency in the bankruptcy process. . . The Trustee’s elevation of one legislative purpose - - having debtors who can pay do so - - above another - - the standardized application of the means test - - is not supported by the plain language of the statute or its overall context.” In re Randle, 2007 WL 2668727 (N.D. Ill).
Any concerns that the U.S. Trustee has regarding the potential for debtors to incur large amounts of secured debt simply to pass the means test may be addressed by 11 U.S.C. § 727(b)(3). If a particular debtor’s surrender of a particular piece of collateral would result in an abuse, the U.S. Trustee may proceed under 11 U.S.C. § 727(b)(3).
For the above reasons, IT IS HEREBY ORDERED that the U.S. Trustee’s Motion to Dismiss Case Pursuant to 11 U.S.C. § 707(b)(2) is hereby OVERRULED as to Robin Rust. If the U.S. Trustee wishes to proceed with its Motion to Dismiss under 11 U.S.C. § 707(b)(3) as to Robin Rust, the U.S. Trustee will need to notice the matter for hearing pursuant to that section. The U.S. Trustee’s Motion to Dismiss Case Pursuant to 11 U.S.C. § 707(b)(2) is hereby OVERRULED as to Melinda Beck as regards to the deduction on Line 42. If the U.S. Trustee wishes to pursue other issues under § 707(b)(2) against Melinda Beck, or pursue with its Motion to Dismiss under 11 U.S.C. § 707(b)(3) as to Melinda Beck, the U.S. Trustee will need to notice those matters for hearing pursuant to those specific sections.
COPIES TO:
U.S. Trustee
Michael Baker, Esq.
Craig Kendrick, Esq.
Melinda S. Beck