EASTERN DISTRICT OF KENTUCKY

                               ASHLAND DIVISION








DEBTORS                                         CASE NO. 03-10995



                              MEMORANDUM OPINION


Lin Dale Gullett and Diana Marie Gullett (the “Debtors”) are be­fore the court on the Chapter 13 Plan that they filed in this case on June 18, 2004, as amended (the “Plan”), and Beverly M. Burden, the trustee of the Debtors’ estate (the “Trustee”), is before the court on the Trustee’s Report and Recommendation as to Confirmation that she filed on October 8, 2004. Hav­ing con­sidered the Plan and the Trustee’s report and recommendation and the briefs and arguments of counsel, the court con­cludes that confirmation should be denied and this case dis­missed.


Factual and Procedural Background

On November 10, 2003 the Debtors filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. Their Schedule I dis­closed aggregate net income of $4,274.77 per month, after deducting $878.47 per month in 401(k) retirement plan contributions. Their Sched­ule J disclosed total monthly expenses of $4,669.93 per month for their family of four. On February 13, 2004 the United States Trustee filed a motion to dismiss the case under § 707(b) of the Code as a “substantial abuse” of Chapter 7. The motion asserted that installment payments on a car of $526.81 per month and on a camper of $198.21 should be deducted from the monthly expenses because the collateral was to be surrendered, and that a $550.00 per month credit card pay­ment should also be deducted because that debt is dis­chargeable. The U.S. Trustee also contended that the 401(k) con­tributions should be added back into income because such funds con­stitute “disposable in­come” that would be payable to creditors under a Chapter 13 plan, but that, taking into account the negative tax consequences of the sus­pension of 401(k) contributions, income need only be increased by $579.79. The motion concluded that, with these ad­just­ments, the Debt­ors could pay all of their unsecured debts under a Chapter 13 plan with more than $350 per month left over.

In response to the U.S. Trustee’s motion, on May 7, 2004 the Debtors amended their Schedule J to add a home equity line of credit loan payment of $350.00 per month, increase the amount of the mortgage payment from $398.58 to $420.42 per month, increase the monthly med­ical expense from $165.00 to $185.00, and increase the food expense from $400.00 to $530.00 (purportedly because the Debtors forgot to in­clude their lunches). They also amended their statement of intention to indicate that they planned to retain the camper. On May 10, 2004 the Debtors filed proposed Stipulations acknowledging that the car loan and credit card payments should not have been included on Sched­ule J, but sug­gested that the $1,076.81 decrease in expenses was off­set by the ad­dition of the home equity loan payment and the increases in expenses set forth in the May 7 amendment (even though the addition and increases totaled only $521.84).

At the hearing on the U.S. Trustee’s motion on May 12, 2004 the parties announced that the motion would be resolved by the Debtors con­verting their Chapter 7 case to a case under Chapter 13 of the Bank­ruptcy Code. They filed a motion to that effect on June 14, 2004, and the motion was granted on July 7, 2004. The Debtors filed, with their motion to convert, an amendment to Schedule I reducing the 401(k) contributions by $191.62 per month and an amendment to the statement of intentions to indicate that the Debtors would surrender the camper after all. On June 18, 2004 the Debtors proposed a Chapter 13 Plan providing for payments to the Trustee of $700 per month for 36 months. On July 29, 2004 the Plan was amended to add four loans that “through inadvertence and error they failed to correctly list.” On September 22, 2004 the Debtors again amended the Plan to clarify the treatment of those loans.

On September 23, 2004 the Debtors filed another amendment to their Schedule I to delete the 401(k) contributions and thereby in­crease net income to $5,134.93. However, the Debtors also further amended Schedule J to further increase the mortgage payment from $420.42 to $455.00 per month, to increase the home maintenance expense by $20.00 per month, to further increase the food expense from $530.00 to $700.00 per month, to increase the monthly clothing expense from $100.00 to $170.00, to further increase medical and dental expenses from $185.00 to $200.00, to increase transportation expense from $250.00 to $280.00 per month, and to add an expense of $88.14 per month for “student loan” insurance. The Debtors also added the fol­lowing expenses, total­ing $722 per month: $100 for children’s band; $75 for school lunches; $40 for cell phone; $20 for propane cooking gas; $20 for Ms. Gullett’s uniforms; $105 for daughter’s braces; $40 for nursing continuing edu­cation; $45 for haircuts; $52 for pet ex­pense; $100 for Christmas and birthday gifts for the children; and $125 for cheerleading expenses. On the other hand, the electricity and heating fuel expense was re­duced from $390.00 per month to $200.00 per month, the amount for recre­ation, clubs, and entertainment was reduced from $240.00 to $75.00 per month, the $10.00 per month amount for char­itable contri­butions was eliminated, the auto insurance expense was reduced from $210.00 to $135.00 per month, the $9.00 per month expense for mal­practice liability insur­ance was deleted, and the automobile tax ex­pense was reduced from $232.37 to $80.00.

On October 13, 2004 the court conducted a hearing on confirmation of the Plan, at which counsel for the Trustee asserted that confir­ma­tion should be denied and the case dismissed because the case con­sti­tutes an “egregious case of budget manipulation.” The Trustee ack­now­ledged that, if the court rejects this contention, the Plan would be confirmable. In response to the court’s inquiry, the Trustee’s at­torney took the position that, under the circumstances, the Debtors are not entitled to relief under Chapter 13 or Chapter 7 of the Code. The Debtors offered no evidence in support of the expenses asserted in their most recent Schedule J or otherwise in support of confirmation of their Plan.

On October 18, 2004 the Debtors again amended the Plan to extend the term of the plan from 36 months to 48 months. On October 22, 2004 the Debtors filed a brief, which stated – contrary to the record – that the Plan had been amended to increase the payment to the Trustee from $700 per month to $800 per month. The Debtors admitted that “this is not a full 100% Plan,” but declared their belief that the Plan “is a reasonable proposal which will substantially satisfy a high per­cent­age of the unsecured debt.” The Trustee filed a reply and the court took this matter under submission on November 1, 2004.


Legal Discussion

A bankruptcy court may not confirm a Chapter 13 plan unless it was “proposed in good faith and not by any means forbidden by law.” 11 U.S.C. § 1325(a)(3). Moreover, upon objection by a trustee, the court may not confirm a plan unless all unsecured claims are to be paid in full or “the plan provides that all of the debtor’s projected dis­pos­a­ble income to be received in the three-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan.” Id. § 1325(b)(1). The interplay of these two provision mandates the conclusion that the Plan may not be confirmed in this case.

The importance of filing accurate schedules at the outset of the case cannot be overemphasized. “The veracity of the statements filled out by the debtor is essential to the successful administration of the Bankruptcy Code.” Job v. Calder (In re Calder), 93 B.R. 734, 738 (Bankr. D. Utah 1988), aff’d, 907 F.2d 953 (10th Cir. 1990) (citing Chalik v. Moorefie­ld (In re Chalik), 748 F.2d 616, 618 (11th Cir. 1984)); accord, e.g., Bailey v. Ogden (In re Ogden), 251 B.R. 441 (Table), 1999 WL 282732, at **14 (B.A.P. 10th Cir. Apr. 30, 1999). “[T]he petition, including schedules and statements, must be accurate and reliable, without the necessity of digging out and conducting independent exam­inations to get the facts.” Mertz v. Rott, 955 F.2d 596, 598 (8th Cir. 1992); accord, e.g., Ogden, 1999 WL 282732, at **14; Camacho v. Martin (In re Martin), 88 B.R. 319, 323 (D. Colo. 1988). “To a substantial extent, the trustee’s ability to perform the duties set forth in 11 U.S.C. § 704 depends on the accuracy and com­pleteness of the debtor’s disclosures.” In re Colvin, 288 B.R. 477, 481 (Bankr. E.D. Mich. 2003).

Thus, although Rule 1009(a) of the Federal Rules of Bankruptcy Procedure pro­vides that schedules “may be amended by the debtor as a matter of course at any time before the case is closed,” the Sixth Circuit has held: “If, however, there is evidence of a debtor’s bad faith or fraudulent concealment of an asset, a court may refuse a debt­or’s proposed amendment.” In re Millsaps, 774 F.2d 1163 (Table), 1985 WL 13737, at **1 (6th Cir. 1985); accord, e.g., Kaelin v.Bassett (In re Kaelin), 308 F.3d 885, 889 (8th Cir. 2002); Osborn v. Durant Bank & Trust Co. (In re Osborn), 24 F.3d 1199, 1206 (10th Cir. 1994); In re Yonikus, 996 F.2d 866, 872 (7th Cir. 1993); Stinson v. Williams­son (In re Williamson), 804 F.2d 1355, 1358 (5th Cir. 1986); Lucius v. Mc­Lemore, 741 F.2d 125, 127 (6th Cir. 1984); Doan v. Hudgins (In re Doan), 672 F.2d 831, 833 (11th Cir. 1982). The importance of accurate schedules cannot be overstated:

The operation of the bankruptcy system depends on honest reporting. If debtors could omit assets at will, with the only penalty that they had to file an amended claim once caught, cheating would be altogether attractive.


In re Yonikus, 996 F.2d at 872 (quoting Payne v. Wood, 775 F.2d 202, 205 (7th Cir. 1985)).

Although they should have done so from the outset, the Debtors certainly had every incentive to include all their monthly expenses when they amended Schedule J in response to the U.S. Trustee’s motion. Yet they again ask the court to recognize $1,149.75 per month in new or increased monthly expenditures added since the conversion of the case. While the net increase is only $548.35 due to the elimination or reduction of other expenses, the court finds suspect the addition of $550 in monthly expenses at the same time that $860 in net income was added. At the time of the hearing on the U.S. Trustee’s motion, the Debtors’ Schedules I and J (which they had already amended once) in­dicated that their disposable income was $1,025.95 per month (adjust­ing the schedules only to include the 401(k) contributions net of ad­verse tax consequences). Based on the U.S. Trustee’s analysis, that amount would be sufficient to pay a dividend on unsecured claims of approximately 78%. According to the Debtors’ latest amended schedules, their disposable income is only $756.29 per month, and of that sum the Debtors propose to remit $700.00 per month to the trustee resulting in a dividend of approxi­mately 53%. Absent evidence to the contrary, the conclusion that the Debtors have manipulated their budget to avoid pay­ing creditors is inescapable.

“Debtor’s amendment of the schedules when faced with the U.S. Trustee’s motion to dismiss also renders their veracity suspect.” In re Lee, 162 B.R. 31, 43 (Bankr. N.D. Ga. 1993). The court holds, there­­fore, that the most recent amendments to Schedules I and J were filed in bad faith and so will use, as the starting point for the § 1325(b) analysis, ­the income and expense information stated on the original Schedule I and on the amended Schedule J filed on May 7, 2004. Of course, the 401(k) contributions (net of adverse tax con­se­quences) must be added to the income figure, Behlke v. Eisen (In re Behlke), 358 F.3d 429, 435-36 (6th Cir. 2004), raising the Schedule I amount to $4,854.56. In addition, the most recent Schedule J indicates that the May 7 version overstated electricity and heating fuel expense by $190, clothing expense by $70, recreation expense by $165, car in­surance by $75, and automobile taxes by $152, so the adjusted Schedule J amount is $3,176.61. Accordingly, the court finds that the Debtors have disposable income available to fund a Chapter 13 plan in the amount of $1,677.95 per month. Over a 36-month period, a total of $60,406.20 would be received by the Trustee, while the Plan provides for a total of $33,600.00 (48 months at $700 per month) to be re­mitted to her. As the U.S. Trustee concluded months ago, the Debtors can easily afford to pay all unsecured debts (aggregating less than $50,000, including deficiency claims) in full, but the Debtors propose to pay only 53 cents on the dollar.

The Bankruptcy Code requires more than “a reasonable proposal which will substantially satisfy a high percentage of the unsecured debt”: it requires either payment of all unsecured debts in full or that creditors receive all disposable income for the first 36 months of the plan. 11 U.S.C. § 1325(b). The Debtors have not satisfied that requirement, so the Plan may not be confirmed. Moreover, their prac­tice of repeatedly amending their Schedules I and J just enough to get over the hurdle facing them at the time – whether it be a § 707(b) motion to dismiss or confirmation of their Plan – evidences a lack of good faith under the circumstances of this case. See In re Barrett, 964 F.2d 588, 591 (6th Cir. 1992) (citing In re Okoreeh-Baah, 836 F.2d 1030 (6th Cir. 1988); In re Caldwell, 851 F.2d 852 (6th Cir. 1988); In re Doersam, 849 F.2d 237 (6th Cir. 1988)). This, too, requires that the court deny confirmation:

Good faith is based on accurate information provided by the debtor in his schedules and proposed plan. While a debtor’s schedules call for an estimate, a deliberate at­tempt to either overstate or understate income and expenses is in contravention of evidence of good faith for the pur­pose of a chapter 13 case or confirmation of a chapter 13 plan pursuant to § 1325. . . . Knowing that his original and amended plans were premised on his distorted financial in­formation, his current plan is filed in bad faith and pro­hibited by law under § 1325(a)(3).


In re Terry, 279 B.R. 240, 249 (Bankr. W.D. Ark. 2002); accord, e.g., In re Famisaran, 224 B.R. 886, 892-93 (Bankr. N.D. Ill. 1998).

The court will, therefore, deny confirmation of the Plan pursuant to § 1325(a)(3) and (b) of the Bankruptcy Code. The Debtors’ conduct also constitutes unreasonable delay that is prejudicial to creditors and warrants the denial of any request for additional time to file another plan or to modify the Plan. Accordingly, the court will also dismiss this case pursuant to § 1307(c)(1) and (5) of the Code. While the dismissal will be without prejudice, the court cautions the Debt­ors that, in any future case, the Trustee and the court will closely scrutinize their schedules, Chapter 13 plan, and conduct, so the Debt­ors should not again seek bankruptcy relief unless and until they are prepared to make a diligent and honest effort to repay their debts and fulfill their other obligations to creditors, the Trustee, and the court.



For the foregoing reasons, the court will enter a separate order denying confirmation of the Plan and dismissing this case.


Copies to:


Bruce E. Blackburn, Esq.

Beverly M. Burden, Trustee