court concluding that to allow a movant to include the outcome of future events as part of the means test would eliminate the distinction between the presumption of abuse test in § 707(b)(2) and the totality of the circumstances test in § 707(b)(3)
How later courts described this case
- court concluding that to allow a movant to include the outcome of future events as part of the means test would eliminate the distinction between the presumption of abuse test in § 707(b)(2) and the totality of the circumstances test in § 707(b)(3)
- concluding that dismissal under § 707(b
- “We find considerable merit in the reasoning of Buchferer.”
- concluding that dismissal under § 707(b) is permissive, not mandatory, but that the discretion to deny a motion to dismiss notwithstanding presumed abuse “should not be exercised lightly.”
Written by the judges who cited it.
The opinion
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
Tn re: ) Chapter 7
Kevin and Freida Livingston, Case No, 21-10879 (LSS)
Re: D.I. 22
Debtors. )
td
OPINION
Before the court is a motion by the United States Trustee (“UST”) to dismiss the
chapter 7 bankruptcy case filed by Kevin and Freida Livingston (“Debtors”). The UST
moves under Bankruptcy Code § 707(b)(1) and (b)(3)(B) arguing that the case should be
dismissed because the presumption of abuse arises under the Means Test (defined below), or
alternatively, based on the totality of the circumstances because Debtors can pay a good
portion of their unsecured debt over time. Simply put, the UST argues the case must be
dismissed if Debtors are unwilling to convert their case to one under chapter 13.
After an evidentiary hearing, I have determined that the presumption of abuse does
not exist, that even if it did, special circumstances exist to rebut the presumption and the
totality of the circumstances does not watrant dismissal. Finally, I would exercise my
discretion not to dismiss in any event. Accordingly, for the reasons set forth below, the
motion to dismiss is denied.
Procedural Background
On May 31, 2021, Debtors filed a voluntary petition under chapter 7 of the United
States Bankruptcy Code.' Along with their petition, Debtors filed their Schedules,
! UST Exh. 1 (Voluntary Petition for Individuals Filing for Bankruptcy); D.I. 1.
Statement of Financial Affairs, and various other documents, including their Statement of
Current Monthly Income (Official Form 122A-1) and Means Test Calculation (Official
Form 122A-2).” Jeffrey Burtch was appointed the chapter 7 trustee and conducted a section
341 meeting of creditors over two days.’ Thereafter, Mr. Burtch abandoned certain property
and filed a Report of No Distribution.’ After the section 341 meeting, Debtors filed their
Amended Schedules D and E/F as well as an amended Official Form 122A-1 and amended
Official Form 122A-2.°
On August 16,:2021, the UST filed his Motion to Dismiss.° Debtors filed their
opposition to the Motion to Dismiss.’ On September 29, 2021, I conducted an evidentiary
hearing and heard argument. The matter is ripe for decision.
Findings of Fact®
A. General Background
Mr. Livingston is a United States Air Force reservist and has worked for the past 21
years at the Dover Air Force base as an aircraft maintenance technician for wartime
preparation. He can be deployed anywhere at any time and can be called upon to fly into
hostile areas to deliver troops and cargo. Mr. Livingston’s civilian job requires that he
2 Td.
3 DL. 14.
4 DI. 15, 16.
5 17; UST Exh. 2 (Amended Schedules); D.I. 17.
6 United States Trustee’s Motion to Dismiss the Debtors’ Chapter 7 Case Pursuant to 11 U.S.C.
§§ 707(b)(2) or (b)(3), D.I. 22.
? Debtors’ Response to United States Trustee’s Motion to Dismiss, □□□ 28.
§ This Opinion constitutes findings of fact and conclusions of law in accordance with Federal Rule
of Civil Procedure 52 made applicable in contested matters by Federal Rules of Bankruptcy
Procedure 7052 and 9014(c). These findings of fact draw on the trial testimony and the ten exhibits
admitted at trial. ‘The nine exhibits offered by the United States Trustee are referred to as “UST
Exh.” and the one exhibit offered by Debtors is referred to as “Debtor Exh. 1.”
maintain both his status as an Air Force reservist and his high-level security clearance. Per
United States Air Force policy, Mr. Livingston will be forced to retire as a reservist on April
13, 2023; he will therefore also be out of a job. At that time, his income will be cut in half.
Mrs. Livingston has worked as an office assistance with Hearing Consultants of DE for the
past three and a half years. Her work hours were recently reduced from 40 hours a week to
approximately 21 hours.
The filing of this petition was prompted by Mr. Livingston’s routine Air Force
security review. During that review, the Livingstons’ indebtedness was flagged as a security
threat. Mr. Livingston’s security manager suggested that the best way to resolve the issue
was to file for bankruptcy protection. Mr. Livingston was given 60 days to resolve the
situation.
B. Income and Major Monthly Expenses
Debtors’ combined monthly income, as adjusted downward by the UST for purposes
of this Motion to Dismiss, is $9,142.12.? The Livingstons own three vehicles, a 2015 Chevy
Colorado with 79,000 miles on it, a 2016 Chevy Cruze with 46,000 miles on it, and a four-
wheel drive 2017 Jeep Wrangler with 52,000 miles on it."" The Chevy Colorado is Mr.
Livingston’s main car. To purchase this vehicle, Mr. Livingston borrowed from his federal
Thrift Savings Plan (“TSP”), to which Mr. Livingston contributes on a pre-tax basis," The
loan was issued on February 20, 2019 in the amount of $34,667.24 (“TSP Loan”). As of
December 31, 2020, the ending principal balance was $26,667.24." A bi-monthly payment
Denis J. Cooke, the Trustee’s Bankruptcy Auditor reviewed Debtors’ pay-stubs and determined
that Debtors’ current monthly income is only $9,142.12.
1 UST Exh. 1.
‘| UST Exh. 7 (Thrift Savings Plan 2020 Annual Statement).
2 The Schedules list the TSP Loan as a secured debt in the amount of $26,620.40 secured by
coliateral of $102,978.38. UST Exh. 2.
of $340.06 (or $680.12 monthly) is automatically deducted from Mr. Livingston’s paycheck
to repay the TSP Loan.” In order to obtain the TSP Loan, Mr. Livingston was required to
sign documentation and agree to the automatic deduction from his paycheck.
The Jeep Wrangler was purchased in September 2020 and serves as Mrs,
Livingston’s main car. She chose a Jeep Wrangler because she wanted a dependable, four-
wheel drive car to handle snowy winters. The monthly payment for the Jeep Wrangler is
$896,12 per month.'* This was the best monthly payment she could get for a Jeep Wrangler,
which includes interest of 22.99%. Mrs. Livingston did not consider other vehicle options.
The Chevy Cruze is also financed and has a monthly payment of $325.05." Itisa
“back-up” vehicle, which Mr. Livingston has not driven for about a year. The car is
occasionally used by the Livingstons’ 22-year old granddaughter, but it is not her main car.’®
It is also used by Mrs. Livingston to drive her elderly mother to the doctor as her mother has
difficulty getting into the Jeep Wrangler and Chevy Colorado. The need to transport her
mother to doctor appointments was not known at the time the Jeep Wrangler was
purchased.
The Livingstons pay $103 monthly for internet access and $315.28 monthly for cell
phone service, which includes $65 for the cost of the phone. Mr, Livingston is not supplied
a phone by his employer. They do not have a landline. Mr. Livingston’s job requires that
he have special, secure high-speed internet and ceil phone service. The documentation
supporting these expenses are contained in the Livingtons’ bank statements."
14 UST Exh. 2
Td.
16 The Livingstons’ granddaughter currently lives with them. She had her own car until it was
totaled in January 2021.
17 Debtors’ Exh. 1 (Dover FCU Bank Statements October 2020 through March 2021).
As of the Petition Date, neither Mrs. Livingston’s wages nor Mr. Livingston’s wages
were being garnished. Mrs, Livingston’s wages were garnished in October and November,
2020.8 Mr. Livingston’s wages also were garnished in October and November, 2020.”
'8 UST Exh. 6 (Earnings Statements from Hearing Consultants of DE for Mrs. Livingston) with pay
dates and reflecting garnishments as follows:
Pay Date Garnishment Year to Date Garnishment
10/09/20 $162.04 $1,039.36
10/23/20 $172.77 $1,212.13
11/06/20 $167.74 $1,379.67
11/19/20 $149.84 $1,529.71
12/04/20 $0.00 $1,529.71
12/18/20 $0.00 $1,529.71 (regular pay)
12/18/20 $0.00 $1,529.71 (Christmas Bonus)
12/30/20 $0.00 $1,529.71
01/15/21 No line for garnishment
01/29/21 No line for garnishment
02/12/21 No line for garnishment
02/28/21 No line for garnishment
03/12/21 No line for garnishment
03/26/21 No line for garnishment
04/09/21 No line for garnishment
07/02/21 No line for garnishment
‘There was testimony that Mrs. Livingston’s wages were being garnished as of the Petition Date and
the underlying debt was paid off postpetition. This does not comport with Mrs. Livingston’s pay
stubs.
9 UST Exh. 5 (Civilian Leave and Earnings Statement LES for Mr. Livingston) with pay dates and
reflecting garnishments as follows:
Pay Date Garnishment Year to Date Garnishment
10/02/20* No line for garnishment
10/16/20* No line for garnishment
10/30/20* = $216.71 $216.71
11/13/20* = $291.71 $508.42
11/27/20 $249.64 $1049.77
12/11/20 $0.00 $1049.77
12/24/20 $0.00 $1,049.77
01/08/21 No line for garnishment
01/22/21 No line for garnishment
02/05/21 No line for garnishment
02/19/21 No line for garnishment
03/05/21 No line for garnishment
03/19/21 No line for garnishment
04/02/21 No line for garnishment
04/16/21 No line for garnishment
07/09/21 No line for garnishment
C. Total Unsecured Nonpriority Debt
On their Amended Schedule F, Debtors scheduled non-priority unsecured debt of
$72,253.80. The entries at 4.1 (ACI in the amount of $9,577.02) and 4.2 (Ally Financial in
the amount of $9,577.02) are duplicative and relate to the repossession of a Kia. The entries
at 4.21 (Radius Global Solutions LLC in the amount tof $17,315.76) and 4.22 (Regional
Acceptance Company in the amount of $17,315) are duplicative and relate to the
repossession of a Silverado. The entries at 4.7 (Doroshow, Pasquale, Krawitz & Bhaya in
the amount of $400) and 4.5 (Cash Central in the amount of $1,673.03) were paid off
postpetition.”
The Parties’ Positions
The UST contends that Debtors have improperly performed the Means Test
calculation. The UST presented the Declaration”! and testimony of Denis J. Cooke, a
Bankruptcy Auditor for the Office of the United States Trustee, Region 3, District of
Delaware in which Mr. Cooke explains adjustments he believes need to be made to Debtors’
Official Form 122A-2 in order to arrive at the proper figures. At the hearing, he walked
through these adjustments and a spreadsheet depicting a comparison of Debtors’
calculations, his adjustments and his re-calculation of the Means Test.” Based on Mr.
The earnings statements in 2020 with an * contain a line item labeled “Allotment, SV” with no
current deduction and a year to date deduction of $1456.00. There is no indication what this
allotment was for.
20 UST Exh. 2. The UST did not challenge the amount of unsecured debt in the Motion to Dismiss.
This information comes from the cross-examination at trial.
4 UST Exh. 3 (Declaration of Denis J. Cooke, Bankruptcy Auditor, in Support of the Motion of the
United States Trustee to Dismiss the Debtor’s [sic] Chapter 7 Case Under 11 U.S.C. §§ 707(b)(2) or
7FOT(D}3)).
2 UST Ex. 4. Mr. Cooke’s testimony was very helpful in aiding my understanding of the UST’s
position. Much of it, however, was not factual. Some was clearly legal in nature; other testimony
was based on Mr. Cooke’s own experience with his TSP Joan.
Cooke’s analysis and calculations, the UST argues that a presumption of abuse arises im this
case under § 707(b)(2)(A), Alternatively, the UST contends that an abuse arises under the
totality of the circumstances test of § 707(b)(3)(B) by focusing largely on Debtors’ ability to
repay their debt. The UST does not contend that the petition was filed in bad faith for
purposes of § 707(b)(3)(A).
Debtors take issue with many of the adjustments Mr. Cooke makes to their Means
Test calculation, In particular, they contend that the garnishments, vehicle deductions and
one of the TSP Loan deductions is permissible. They further contend that their chapter 7
filing is permissible because of special circumstances.” Finally, Debtors argue that the
totality of the circumstances weighs in their favor.
JURISDICTION
Original and exclusive jurisidiction exists over this bankruptcy case and therefore the
Motion to Dismiss by virtue of 28 U.S.C. § 1334(a).
DISCUSSION
L The UST has not met his Burden to Show that the Presumption of Abuse
Arises
Section 707(b)(L) provides that the court may dismiss a chapter 7 case filed by an
individual debtor whose debts are primarily consumer debts if the court finds “that the
granting of relief would be an abuse of the provisions of this chapter.” Section 707(b)(2)
provides for circumstances under which a presumption of abuse exists: “[t]he court shall
presume abuse exists if the debtor’s current monthly income reduced by [permitted.
23 While Debtors did not reflect special circumstances on Official Form 122-A2 (presumably
because they did not need to as their calculations show no presumption of abuse), Debtors did raise
special circumstances in Debtors’ Response and at trial.
deductions] and multiplied by 60 is not less than the lesser of (I) 25 percent of the debtor’s
nonpriority unsecured claims in the case, or $8,175, whichever is greater; or (II) $13,650.”
The permitted deductions related to monthly expenses are enumerated in detailed, precise
terms in subsection (2)(A)(ii).2> Subsection (2)(A)(iii) dictates how secured debt is handled
in the abuse determination.” This calculation, embodied in Official Form 122A-2 is
colloquially called the means test (“Means Test”) and it has been characterized as
mechanical or formulaic.
The Means Test is intended to be a static snapshot of a debtor’s finances at the time
of filing”’ albeit with certain aspects of that snapshot encompassing the six-month
prepetition period.“ The Means Test is not intended to be a true measure of a debtor’s
4 U.S.C. § 707(D)2)AIG.
2 11 U.S.C. § 707(b)2(A)GDAM The debtor’s monthly expenses shail 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. In addition, the
debtor’s monthly expenses shali include the debtor’s reasonably necessary expenses incurred to
maintain the safety of the debtor and the family of the debtor from family violence as identified
under section 302 of the Family Violence Prevention and Services Act [42 USCS § 10402], or other
applicable Federal law.”).
26 41 U.S.C. § 707(by\(2)(A) (iii) (The debtor’s average monthly payments on account of secured debts
shall be calculated as the sum of—
(1) the total of all amounts scheduled as contractually due to secured creditors in each month of the
60 months following the date of the filing of the petition; and
(ID) any additional payments to secured creditors necessary for the debtor, in filing a plan under
chapter 13 of this title [11 USCS §§ 1301 et seq.], 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.”).
27 In ve Smale 390 B.R. 111, 119 (Bankr. D. Del. 2008) (court concluding that to allow a movant to
include the outcome of future events as part of the means test would eliminate the distinction
between the presumption of abuse test in § 707(b)(2) and the totality of the circumstances test in
§ 707(b)(3)).
7 11 U.S.C. § LOLCOA), 0.37 infra.
financial position. As detailed in the statute, some monthly expenses are based on or
capped by the National Standards and Local Standards while others are based on a debtor's
actual monthly expenses.”” The Supreme Court recognizes the Means Test as a
“standardized formula” that “eliminates case-by-case determinations” in favor of a bright
line metric.*°
If a presumption of abuse arises under § 707(b)(2), it may be rebutted by
demonstrating special circumstances, such as a serious medical condition or order to active
duty service in the Armed Forces. Debtors must support an assertion of special
circumstances by documentation and a detailed explanation of the special circumstances
that make such expenses or adjustment to income necessary. Debtors must also
demonstrate that such expense or adjustment, itself, is reasonable as well as the lack ofa
reasonable alternative.*!
Even if an abuse of presumption exists and it is not rebutted by special
circumstances, a court is not required to dismiss the chapter 7 case. Section 707(b)(2) is
discretionary (“the court may dismiss a case”) not mandatory.”
29 11 U.S.C. § 707(b)(2)(AGDD (“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... .”}. Subsections (ii)(I1T)-{V) also list other expenses that may be deductible, but
are not implicated in this dispute.
3° Ransom v. FIA Card Services, N.A., 562 U.S. 61, 78 (2011).
3 11 U.S.C § 707(b\(2)(B)G), (id.
2 See fulsome discussion in In re Mravik, 399 B.R. 202 (Bankr, E.D, Wis, 2008) (concluding that
dismissal under § 707(b) is permissive, not mandatory, but that the discretion to deny a motion to
dismiss notwithstanding presumed abuse “should not be exercised lightly.”); but see In re Haman, 366
B.R. 307, 311 (Bankr. D. Del. 2007) (if the presumption of abuse arises and is not rebutted by special
circumstances, court has no discretion and must dismiss case; arguably dicta as there is no
discussion of the use of the word “may” in the statute and the court finds special circumstances in
any event).
A. Burden of Proof
In the Motion to Dismiss, the UST asserts that Debtors have the burden of proof to
demonstrate special circumstances sufficient to rebut a presumption of abuse.** The UST
further argues that the standard to rebut the presumption is “extremely high, placing it
effectively off limits for most debtors.”** Debtors do not dispute that they have the burden
of proof to demonstrate special circumstances (which they argue they have met), but
disagree with the characterization of the standard. I agree that Debtors have the burden to
show special circumstances to rebut a presumption of abuse once it is established. I need
not characterize this burden; it is spelled out in the statute itself.
In contrast, the UST did not cite to any case law setting forth the burden of proof (or
characterizing it) with respect to the Means Test, itself. Implicit in the absence of a stated
standard is the acknowledgement that the movant, here the UST, has the burden of proof on
his Motion to Dismiss.*° In the absence of any argument to the contrary, I conclude that the
UST has the burden of proof/persuasion to show that the presumption of abuse exists.”°
33 Motion to Dismiss { 19 citing In re Harmon, 446 B.R. 721, 727 (Bankr. M.D. Pa. 2008).
34 Td. citing In re Martin, 505 B.R. 517, 521 (Bankr. S.D. lowa 2014).
3 The implicit recognition of the burden of proof is also evidence by the fact that the UST submitted
the Cooke Declaration contemporanteously with the Motion to Dismiss and presented Mr, Cooke as
a witness at the hearing.
36 See e.g, In re Beard, 605 B.R. 868, 873 (Bankr. E.D. Ark. 2019) (“party bringing the action for
dismissal carries the burden of proof.”). My independent research shows that some courts have
concluded that the movant has the burden of proof on a motion to dismiss with one qualification—
that the debtor has the burden of proof with respect to “other necessary expenses.” See e.g. In re
Ervin, Case No. 15-70467, 2016 WL 721043 * 9 (Bankr. W.D. Va. Feb. 23, 2016). The rationale is
that with respect to Other Necessary Expenses (i) the information is more readily available to the
debtor and this category deals with factual issues unique to the debtor and (ii) debtors have an
incentive to make these expenses as large as possible. In re Meade, 420 B.R. 291, 303 (Bankr. W.D.
Va. 2009). The Meade court also compares “other necessary expenses” to “special circumstances”
and as in the nature of an affirmative defense. id. The qualification taken by the Ervin and Meade
Courts, while perhaps practical, does not find its basis in the Code. Rather, it blurs the clear line of
demarcation between subsections A and B of the Means Test. Subsection A permits a debtor to
deduct three types of expenses: applicable monthly expenses specified in the National Standards,
applicable monthly expenses specified in the Local Standards, and actual monthly expenses for the
10
B. Debtors’ Total Current Monthly Income/Lines 2 and 11
The first part of the Means Test is a determination of Debtors’ current monthly
income. Debtors listed this amount at $10,415.00. Mr. Cooke reviewed Debtors’ pay-stubs
and determined that Debtors’ current monthly income is only $9,142.12. I will accept Mr.
Cooke’s number, which Debtors do not contest.*” This equates to an Annualized Current
Monthly Income of $109,705.44, which is above the Applicable Median Family Income of
$78,813.00.
C. Debtors’ Total Nonpriority Unsecured Debt
The UST has met its burden to show that Debtors’ total nonpriority debt is not
$72,253.80 as reflected on Debtors’ Amended Schedule F. It is undisputed that there are
duplicative entries for debt related to the Kia and the Silverado. So, $26,892.78 must be
subtracted from Debtors’ scheduled amount. But, I will not deduct the debt that was paid
off postpetition. As discussed infra, the Means Test is a snapshot in time as of the filing of
the petition. It would be inappropriate, therefore, to exclude debt voluntarily paid
postpetition. Making the necessary adjustment for the duplicative entires results in total
categories specified as Other Necessary Expenses, each as issued by the Internal Revenue Service.
Subsection B permits a debtor to rebut the result reached by the application of the standards set forth
in subsection A. Further, as shown by this case, the UST may challenge deductions in all categories,
i cannot conclude in this matter that in each instance information is more readily available to
Debtors than to the movant.
#7 Mr. Cooke testified that the relevant period for review of income and pay stubs is November 2020
through April 2021 (the six months prior to the filing of the voluntary petition). See also 11 U.S.C.
§ 101(10A), which provides, in relevant part, that the term “current monthly income”
(A) means the average monthly income from all sources that the debtor receives (or in a joint
case the debtor and the debtor's spouse receive) without regard to whether such income is
taxable income, derived during the 6-month period ending on—
(i) the last day of the calendar month immediately preceding the date of the commencement
of the case if the debtor files the schedule of current income required by section
521(a)(1)(B) Gi); or
(ii) the date on which current income is determined by the court for purposes of this title if
the debtor does not file the schedule of current income required by section
\(B)Gi}.. . .
11
nonpriority debt of $45,361.02 for purposes of the Means Test. Twenty-five percent of that
number is $11,340.26,
D. Permitted Expense Deductions—National and Local Standards
Section 707(b)(2)(A)(ii)() enumerates the monthly expenses that may be deducted
from a debtor’s current monthly income:
The debtor’s monthly expenses shall be the debtor’s applicable monthly
expense amount 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 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.
* * * Tn 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.
Section 5.15.1 of the Internal Revenue Code’s Financial Analysis Handbook
(“Handbook”)* contains the referenced National Standards (5.15,1.9), Local Standards
(5.15.1.10) and “Other Expenses” (5.15.1.11).” I will address the contested expenses in
turn.
38 The Handbook can be accessed at http://www.LR.S.gov/irm/part5/ch15s01 html # d0e175877.
‘The Handbook lists fifteen categories of expenses which may be considered necessary under
certain circumstances, IRM §5.15.1.11. It does not use the defined term “Other Necessary
Expenses.” But, the Handbook explains: “Other expenses may be necessary or conditional. Other
necessary expenses meet the necessary expense test and normally are allowed. The amount allowed
must be reasonable considering the taxpayer’s individual facts and circumstances. Other
Conditional Expenses may not meet the necessary expense test, but may be allowable based on the
circumstances of an individual case.” Id, While I cite the Handbook when useful, only the tables
are incorporated in § 707. The instructions in the Handbook are helpful guidance to the extent they
are not contrary to the Code. Ransom v. FIA Card Services, N.A., 562 U.S. 61, 73 (2011) (Section 707
does not incorporate or import the explanatory guidance set forth in the IRS Collection Financial
Standards and such guidelines cannot control where they are at odds with the Code.). Nevertheless,
the guidelines may be consulted, as appropriate.
12
@ Taxes/ Line 16
Debtors listed their taxes at $1,712. Based on his review of Debtors’ pay stubs, Mr.
Cooke adjusted Debtors’ taxes upwards to $1,899.80. I will accept Mr. Cooke’s number,
which Debtors do not contest.
(ii) Involuntary payroll deductions/ Lines 17 (Wage Garnishment and TSP Loan)
On Official Form 122A-2, Debtors deducted $1,624.81 on Line 17, involuntary
payroll deductions. According to Mr. Cooke, the $1,624,81 figure consists of health care
expenses, retirement contributions, retirement savings, union dues, wage garnishments and
the repayment of the TSP Loan.” The UST argues that the wage garnishments and TSP
Loan. are not properly included in this category.
(a) The Wage Garnishments are Deductible
The sole basis on which the UST argues that the Means Test does not permit a
deduction for the garnishment of Mr. or Mrs. Livingston’s wages is that the garnishments
had ceased by the Petition Date. This is true. But, the evidence shows that Mrs.
Livingston’s wages were garnished for a portion of the appliable prepetition period
Averaging the monthly garnishment of Mrs. Livingston’s paycheck over that period results
in a deduction of $52.92 per month. Mr. Livingston’s wages were also garnished during the
relevant six month-period. Averaging his monthly garnishment over that period results in a
40 Debtors denied that their Involuntary Deductions were overstated and maintain that both the
repayment of the TSP Loan and the wage garnishments should be included in Line 17. Debtors did
not dispute Mr. Cooke’s statement that the TSP Loan repayment is $680.12 per month and the wage
garnishment included in Line 17 is $540.89 per month. See Debtors’ Response to United States
Trustee’s Motion to Dismiss, D.I. 28.
13
deduction of $90.22 per month. Combined, then, $143.15 should be included as a
deductible expense on Line 17."
(6) The TSP Loan is Not Properly Deducted on Line 17”
Debtors included their repayment of the TSP Loan in Line 17. On the surface, the
inclusion seems appropriate as the TSP Loan fits the plain English definition of an
involuntary deduction from Mr. Livingston’s paycheck. As Mr. Livingston testified, when
he took out the TSP Loan, he had no options in terms of repayment. A deduction from his
paycheck was mandated.
Notwithstanding the mandatory nature of the deduction, repayment of a TSP Loan
is not properly included in this category. Both the Official Form 122 A-2 and the Handbook
provide that an Involuntary Deduction is “necessary” “if it is a requirement of the job, e.g.
union dues, uniforms, work'shoes.” Repayment of the TSP Loan does not fit neatly into
this category. While repayment of the TSP Loan may be mandatory, taking out the loan in
the first instance cannot be appropriately labeled a requirement of the job.
After considering the parties’ positions, the deduction for the TSP Loan is not
permitted, The proper expenses deducted in the Involuntary payroll category total
$595.56.
4 Mr. Cooke testified that if garnishments were included on Line 17 the amount would be $80 per
month. He did not testify on how he arrived at the number. My calculations are based on the total
garnishments for the period of November 2020 to April 2021 as reflected in Debtors’ respective pay
stubs spread over that six month period.
® will address the deductibility of the TSP Loan as a secured debt later in this opinion.
43 Turther, because I conclude that the TSP Loan is a debt (see infra), it is not properly deducted here
because it is not an expense.
14
(iii) Vehicle 2- Net Ownership or Lease Expense/Line 13()
On Official Form 122A-2, Debtors deduct vehicle ownership expenses for the Jeep
Wranger and the Chevy Cruze. The UST objects to the deduction for the expense related to
the Chevy Cruze on the basis that it is an “expense of a third car.”
Debtors are not attempting to deduct the ownership expense of three cars, rather they
have chosen two of their three vehicles to include for the ownership expense. The form
instructs debtors to use the Local Standard for the ownership cost for their area, and then
deduct the monthly payments on debt secured by their vehicle to arrive at a net vehicle
Jownership] expense.’ Debtors’ mathematical calculations for the listed vehicles are
correct.
The UST cites no cases for the proposition that a debtor with more than two cars
must choose to use their “main” cars in caiculating the vehicle ownership expense
deduction. Indeed, the instructions offer no advice on how to select among vehicles that a
debtor owns. The only restriction is that the expense cannot be taken on more than two
vehicles. With no authority cited, and an ability to deduct this expense for up to (but no
more than) two vehicles, I conclude that the UST has not met its burden of proof to show
that Debtors’ deduction for the Chevy Cruze is inappropriate.” The deduction of $207.96 is
permitted.
“4 11 U.S.C. § 707(b)(2)(A)G)(D instructs Debtors to deduct their “applicable monthly [automobile]
expense amounts specified under the. National Standards and Local Standards . . . [however|
notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not
include any payments for debts.” The tables in the Standards allow for, and calculate, the regional
standard costs for one car for each filing taxpayer.
4S See In ve Stallings, 2009 Bankr. LEXIS 1187 * 6 (Bankr. E.D.N.C. May 4, 2009) (Debtors alfocated
their four cars between vehicle ownership expense and secured debt so as to maximize the
deductions from their current monthly income. Court held that debtors “were not required to list
their expenses in a way that maximizes their disposable income.”).
15
(iv) Optional telephone services/ Line 23
Telephone service above and beyond basic telephone and internet service are
specifically recognized as deductible for purposes of the Means Test.*° Debtors deducted
$400 for such services. The UST argues that this deduction is not proper because Debtors
did not provide support for these expenses, which the UST contends are basic and routine.
He bases this argument in part on the inclusion of the $400 expense on Line 6c of
Schedule J.
Mr. Livingston’s status as a reservist and job as an Air Force technician requires him
to be reachable at any time and in any place. While the testimony could have been more
detailed, his position requires a special high-level secure phone and internet line.
Accordingly, this $400 monthly expense, supported by both the testimony of Mrs.
Livingston and the Livingstons’ monthly bank statements, is a permissible deduction. The
UST has not met his burden of proof to show what portion of the monthly bill is for basic
telephone and internet. Further, the UST has not cited to any authority that concludes that
Line 6 on Schedule J includes only basic utilities, or that it did here. Accordingly, the
deduction on Line 23 of $400 is properly taken.”
46 See Form 122A-2 Line 23.
47 While the UST may have asked Debtors for further support for this expense, there is no record
that the UST' sent a formal document request which went unanswered. Given that it is apparent that
the charges exceed basic telephone and internet, it was incumbent on the UST to provide
information as to what portion of the $400 was for basic services and internet. See eg. Beard, 605
B.R. at n.10 (failure of UST to issue discovery or seek court’s assistance in obtaining documents,
among other things, did not excuse UST analyist from calculating debtor’s current monthly income
based on six months of financial information, rather than the five months of financial information
debtor provided.).
16
E. Permitted Additional Expense Deductions
Debtors listed deductions of $1,025.70 in health insurance expense and $44.00 for
additional clothing expense. The UST challenges $446.87 of the health msurance expense
and all of the clothing expense alleging no documentation was provided to substantiate
these items.
The UST has sustained his burden here. Mr. Cooke testified that based on Mr.
Livingston’s pay stubs, the Livingstons’ health insurance expense is $578.83 and he
accounted for both dental and vision insurance in another expense line item. On cross-
examination, neither Debtor was able to explain the additional $446.87 in health insurance
expense nor can any additional amounts be discerned from the Livingstons’ paystubs.
Similarly, while Mrs. Livingston did testify that certain entries reflected in Debtors’ bank
statements may constitute clothing expenses, she did not provide sufficient testimony or
documentation regarding excess clothing expenses.
The correct amount of Additional Expense deductions is $578.83.
Permitted Deductions for Debt Payments
As part of the Means Test, Debtors can deduct monthly payments on account of
secured debts.” On Official Form 122A-2, Debtors deducted the monthly payments on the
Jeep Wranger [$896.12], the Chevy Cruze [$325.04] and the TSP Loan [$681.12]. The UST
objects to $363.12 of the deduction taken on the Jeep Wrangler asserting that this is above
the IRS standard of $533. The UST objects to the deduction for the Chevy Cruze in total,
arguing that it is a third car and is “considered an excessive expense for the benefit of a
nondependent granddaughter.” Finally, the UST objects to the deduction of the monthly
4 41 U.S.C. § 707(b\2)(AV(A), (iti).
17
payments on the TSP Loan arguing that it is both double counted (because of the deduction
in Line 17) and the TSP Loan is not a debt. The UST further argues that if the TSP Loan is
not repaid, “the Debtor would only be liable for payment of the income tax on any capital
gain.”
(i) The Jeep Wrangler
Section 707(b)(2)(A)(iii) permits a debtor to deduct the “scheduled contractual
amount” of his secured debt. The UST seeks to cap the debt for the Jeep Wrangler at $533,
the amount of the IRS Local Standard used in the Vehicle Ownership expense calculation in
Line 13. The UST’s position is contrary to the express language of the statute. The statute
provides for deduction of payments on all secured debt at the contractual amount. There is
no reference to any cap—statutory or otherwise. And, there is no reference to the IRS Local
Standard. Further, the UST has not cited any authority for this position. The UST has not
met its burden of proof on this expense, accordingly, Debtors are entitled to deduct the full
payment for the Jeep Wrangler. □
(ii) The Chevy Cruze
In his recalculation, the UST eliminates the deduction for the Chevy Cruze, again
arguing that it is a “third car” used by Debtors’ granddaughter and is an “excessive
expense.” First, the evidence is to the contrary. The Chevy Cruze was not bought for the
granddaughter who now only uses it occasionally because her own car was totaled. Second,
and more importantly, the statute does not limit the number of cars that can be deducted as
secured debt. Even Official Form 122-A contemplates that a debtor may have more than
18
two vehicles and deduct each one of them.” So, even if this is a “third car,” the deduction
here is appropriate. Once, again, the UST has cited no authority for this position. The UST
has not met its burden of proof on this expense, accordingly, Debtors are entitled to deduct
the payment for the Chevy Cruze.
(tii) The TSP Loan
The UST asserts in the Motion to Dismiss that the TSP Loan is not deductible as a
secured debt. The UST avers that a TSP loan is both voluntary and not secured, but rather
a repayment of a debtor’s own funds. The UST also avers that nonpayment of the TSP
Loan will “only” result in Debtors becoming lable for payment of the income tax on any
taxable gain.” Recognizing that he had not cited any legal authority for these propositions
in the Motion to Dismiss, during argument, the UST directed me to Jn re Montalto."
In Montalto, the court joins the majority in ruling that a 401(k) loan repayment is not
repayment of a debt within the meaning of the Code.” The first case in the long string cite
for this position is the Ninth Circuit’s Egebjerg opinion.”? Fgebjerg is directly on point as the
See Lines 33b and 33c with spaces for “Loans on your first two vehicles” and Line 33d with more
spaces for other secured debts. See also6 COLLIER ON BANKRUPTCY 707.04[3][c] (16th ed.
2019).
Motion to Dismiss 4, The averment that Debtors’ nonpayment of the TSP Loan will result in
payment only on capital gains appears to be incorrect because Mr. Livingston’s contributions to the
TSP were made on a pre-tax basis. If repayments are not made, the TSP Loan will be treated as a
taxable distribution, with a possible 10% penalty for an early distribution.
https://www.tsp.gov/publications/tspbk04.pdf. Because the UST’s statement in the Motion to
Dismiss was based on Mr. Cooke’s testimony, it may be that Mr. Cooke’s own contributions to the
TSP are made on a post-tax basis (i.e. Ikke a Roth IRA).
| In ve Montalto, 537 B.R. 147 (Bankr. E.D.N.Y. 2015).
2 Id. at 159 (collecting cases). The court further holds that a 401(k) loan repayment is not a proper
expense deduction (e.g. as an involuntary deduction) because while Congress chose to exclude
401(k) loan repayments from chapter 13 disposable income, it declined to allow this type of expense
as a deduction in a chapter 7 case. The court notes, as discussed supra, that the Means Test is a
specific formula and courts may not choose to vary that formula. The court did, however, leave
open the possibility that a 401(k) loan repayment may qualify as a “special circumstance.”
3 In ve Egebjerg, 574 F.3d 1045, 1049 (9™ Cir, 2009).
19
issue determined was whether a debtor’s repayment of a 401(k) loan constitutes a monthly
payment on account of secured debt or an other necessary expense for purposes of the
Means Test. The Ninth Circuit starts with the definitions of “debt” and “claim” finding
them to be co-extensive and concluding that a retirement plan loan constitutes a “debt” only
if the plan administrator has a “‘claim’ for repayment.” The court reasons that the debtor’s
loan obligation is “a debt to himself” and that the plan administrator would have no
personal recourse against the debtor for failure to make loan payments. The court
concludes, therefore, that while a deemed distribution caused by the failure to repay a
401(k) loan will have tax consequences to the debtor, it does not create a debtor-creditor
relationship.”
This lack of personal recourse against the debtor is also the basis of the Second
Circuit's Villarie decision, which appears to be the foundational decision for subsequent
court rulings that a loan from a retirement plan is not a “debt.” In Vellarie, the New York
Employees’ Retirement System—i.e., the plan—brought an adversary proceeding seeking a
declaration: (i) that the debtor’s loan from the plan could not be discharged in a chapter 7
case and and (ii) that the plan could resume withholding loan repayments from the debtor’s
The Ninth Circuit also supports its decision by two statutory cannons. First, it recognizes the pre-
BAPCPA cases holding that retirement loans are not “debt” and that Congress did not expressly
change this in BAPCPA. Second, the Court notes the extensive changes in BAPCPA made to
chapter 13 with respect to retirement loan contributions and loan repayments. Id. at 574. However,
in certain sections of the Code amended by BAPCPA, Congress appears to have consciously
determined not to address the pre-BAPCPA caselaw by taking a “functional approach” to the
retirement debt issue. 4 COLLIER ON BANKRUPTCY F 523.26 (16th 2021)(recognizing the debate
about whether loans from retirement plans constitute debt and stating “[i]n enacting section
523(a)(18), Congress has not unequivocally settled the conceptual issue but, instead, has taken a
functional approach. Regardless of whether a debtor’s obligation to repay a loan from the covered
retirement plans or accounts is a debt within the meaning of the Code, the obligation is non
dischargeable.”).
Inve Villarie, 648 F.2d 810 (2d Cir, 1981).
20
paycheck. On the facts before it, the Second Circuit (reversing the bankruptcy court)
concluded that a loan from a retirement plan could not be discharged, while also permitting
the resumption of the payroll deduction. Nowhere in the decision, however, does the Second
Circuit state that the loan was not a debt.
This line of cases has been called into question by Professor Laura Bartel in her
persuasive article, Pension Plan Loans and Means Testing — The Pernicious Endurance of Villarie.”°
Professor Bartel argues that Vil/larie was wrongly decided at the time, was expanded without
basis by its progeny, but regardless, ignored the Supreme Court’s decision in Johnson” and
was effectively overruled by BAPCPA.®
In Johnson the issue before the Supreme Court was whether a mortgage lien could be
included in a chapter 13 plan after the underlying personal obligation had been discharged
in a previous chapter 7 proceeding. Conducting a statutory analysis, the Court concluded
that the holder of a mortgage interest that survives a discharge of a debtor’s personal liability
has a “right to payment” or a “right to an equitable remedy” upon default and therefore has
a “claim” as that term is defined in the Code. In arriving at its conclusion, the Court
specifically recognizes that nonrecourse obligations and in rem remedies can form the basis
for a claim, pointing to § 102(2) (establishing rules of construction) which provides that the
°° Laura B. Bartell, Pension Plan Loans and Means Testing - The Pernicious Endurance of Villarte,
87 AM. BANKR. L.J. 89 (2013).
37 Johnson v. Home Loan, 501 U.S. 78, 111 S.Ct. 2150 (1991).
58 For an extensive examination of the relevant provisions of the Code to the question of whether a
loan from the New York City Retirement Code is debt in the context of chapter 13 see In re Buchferer,
216 B.R. 332 (Bankr. E.D.N.Y. 1997) (also discussed by Bartel); see also In ve MacDonald, 222 B.R.
69, 76 (Bankr. E.D. Pa. 1998) (“We find considerable merit in the reasoning of Buchferer.”); In re
Dubbin, Adv. Pro. No. 21-1004, 2021 WL 3476959 (Bankr. D. N.M. Aug. 6, 2021) (denying a
motion to dismiss and finding that a chapter 7 trustee stated a claim for both a fraudulent
conveyance and a preference in seeking to avoid prepetition payments to a 401(k) profit sharing
pian).
21
phrase “claim against the debtor” includes “claims against property of the debtor.”
Similarly, the Court points to § 502(b)(1)® for the proposition that if an objection is filed a
court “must allow a claim if it is enforceable against either the debtor or his property.”
Applying the holding of Johnson and the relevant defined terms leads to the
conclusion that a retirement loan is a debt as that term is used in the Means Test. Under the
Means Test, a debtor is permitted to deduct from current monthly income “the debtor’s
average monthly payments on account of secured debts,” which is calculated as the sum of
“the total of all amounts scheduled as contractually due to secured creditors... .”° A
“creditor” is an entity that has a claim against a debtor,” and also includes a claim against
property of the debtor.“ A “claim” is a “right to payment” or a “right to an equitable
remedy”® which the Supreme Court has held includes rights of holders of nonrecourse debt
to their collateral. Finally, the Code recognizes that a claim is secured claim to the extent of
the amount subject to setoff.©
5? U.S.C, § 102(2) provides in relevant part: “In this titlh—{2) ‘claim against the debtor’ includes
claim agaist property of the debtor.”
6 {1 U.S.C. § 502(b)(1) provides:
Except as provided in subsections (e)(2), (0, (2), (h) and Gi) of this section, if such objection to a
claim is made, the court, after notice and a hearing, shall determine the amount of such claim in
lawful currency of the United States as of the date of the filing of the petition, and shall allow such
claim in such amount, except to the extent that —
(1} such claim is unenforceable against the debtor and property of the debtor under any
agreement or applicable law for a reason other than because such claim is contingent or
unmatured;....
Johnson, 111 S.Ct. at 2155 (“Thus, §502(b)(1) contemplates circumstances in which a ‘claim,’ like
the mortgage lien that passes through a Chapter 7 proceeding, may consists of nothing more than an
obligation against the debtor’s property.”)
11 U.S.C. § 707(b\2)(A)GiI).
8 Id, § 101(10)
8 Td, § 102(2).
6 Id. § 101(5).
6 Id. § 506(a)(1).
22
As applied to retirement loans, generically speaking, (i) the “creditor” is the
retirement plan (acting through a plan administrator), (ii) the “claim” is the right against
property of the debtor, i.e. the debtor’s 401(k) account, (iii) and that claim is “secured” by
the Plan’s right to setoff the loan against a debtor’s retirement account. The repayment of a
loan against a 401(k) retirement account, therefore, is a “secured debt” for purposes of the
Means Test.
The UST’s only argument was the compelling simplistic one accepted by the
majority of courts that Mr. Livingston simply borrowed money from himself. While that
argument has intuitive appeal,” it ignores the entire structure of ERISA qualified plans,
which are subject to heavy regulation under the Internal Revenue Code.°* An ERISA plan
is a separate entity run by one or more fiduciaries who administer and manage the plan.”
The plan is the lender, not the participant.” The plan must charge a reasonable rate of
67 The argument seems to be that repaying a loan to oneself is preferring oneself over “real
creditors,” something that should not be countenanced. In BAPCPA, however, Congress expressly
created preferential treatment for contributions to ERISA plans and repayment of ERISA loans
when it legislated that a chapter 13 plan may not materially alter the terms of a loan made under
ERISA nor shall such loan repayments constitute “disposable income” under § 1325. See Bartel,
section IV (The BAPCPA Amendments) at * 109-112,
Bartel * 91-95; See, generally, FAQs about Retirement Plans and ERISA, U.S. Department of
Labor, Employee Benefits Security Administration (“FAQs”) found at
https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-
center/fags/retirement-plans-and-erisa-for-workers.pdf. See also Dubbin 2021 WL 3476959 *2 listing
statutory requirements for ERISA plans.
® Bartel, * 91; FAQs 10.
Does your plan have to identify those responsible for operating the plan?
In every retirement plan, there are individuals or groups of people who use their own judgment or
discretion in administering and managing the plan or who have the power to or actually control the
plan’s assets. These individuals or groups are called plan fiduciaries. Fiduciary status is based on
the functions that the person performs for the plan, not just the person’s title. A plan must name at
least one fiduciary in the written plan document, or through a process described in the plan, as
having control over the plan’s operations. ‘This fiduciary can be identified by office or by name. For
some plans, it may be an administrative committee or the company’s board of directors. Usually, a
plan’s fiduciaries will include the trustee, investment managers, and the plan administrator. The
plan administrator is usually the best starting point for questions you might have about the plan.
7 Bartel * 92.
23
interest and the loan must be adequately secured.” A partcipant’s failure to repay a loan in
accordance with ERISA requirements may redound not only to the detriment of the
borrower, but also to the detriment of the plan.”
The UST did not distinguish between a private 401(k) ERISA plan and the federal
TSP at issue here. The Federal Retirement Thrift Investment Board, which administers the
TSP, describes it as “a tax-deferred defined contribution plan similar to private sector 401(k)
plans which provide Federal employees the opportunity to save for additional retirement
security.””> The TSP has a four person Board as well as an Executive Director and a
fourteen member advisory council.” It has pooled investments reflected in a choice of
Lifecycle and individual funds.” And, it, too, is subject to extensive regulation including
requirements for obtaining loans.”
I will not easily ignore such a heavily regulated federal scheme which dictates the
separateness of the plan from the beneficiary. As the Dubbin Court states:
Even if the debtor could trace the borrowed funds back to her pension plan
account, taking out a pension plan loan is a far cry from “borrowing your own
money.” Borrowing your own money means taking cash from your Christmas
fund envelope to pay for an unanticipated car repair, while promising yourself
that you will pay back the Christmas fund with your next paycheck. With a
Bartel * 94-95; FAQs 8.
Can you borrow from your 401(k) plan account?
401(k) plans are permitted to — but not required to — offer loans to participants. The loans must
charge a reasonable rate of interest and be adequately secured. ‘The plan must include a procedure
for applying for the loans and the plan’s policy for granting them. Loan amounts are limited to the
lesser of 50 percent of your account balance or $50,000 and must be repaid within 5 years (unless the
loan is used to purchase a principal residence).
Bartel * 95 (failure to comply with ail loan requirements can threaten the plan’s qualified status).
33 Ex, 7 (2020 Annual Statement) directs participants to obtain information from the Federal
Retirement Thrift Investment Board at www. firtib.gov.
See □□□□□□□□□□□□□□□□□□□□□□□□□□□□□ html.
% See tsp.gov/fund-performance/.
% Title 5 Code of Federal Regulations Part 1655 (Loan Program), Recently, Congress permitted the
Federal Retirement Thrift Investment Board to create special loan rules for TSP participants affected
by COVID-19. See Bulletin found at tsp.gov/bulletins/20-3/.
24
pension plan loan, in contrast, the participant must first give money to the
pension pian fiduciary, who invests it subject to complex laws and regulations.
The resulting investment is held by the plan trustee in a pooled trust fund. The
participant has an account, with a balance equal to her contributions, any
employer contributions, and investment gains or losses. In the event of an
unanticipated car repair (to use the same example), the participant must apply
for a pension plan loan, qualify, sign a promissory note, agree to repayment
and wage withholding terms, and pay interest. Only then will the
participant/borrower be able to get the loan from the fiduciary and pay the
repair bill.
The two situations are not similar. Courts should not be so quick to collapse
the carefully constructed federal and state law framework for pension plans,
including pension plan loans, into the facile, incorrect description of
“borrowing her own money.”””
The UST did not ask me to recharacterize the TSP Loan or submit evidence supporting
recharacterization. Nor did I hear argument on whether recharacterization would be
appropriate given the bright line nature of the Means Test.
For these reasons, [ conclude that the TSP Loan is a secured debt that is properly
deducted from current monthly income as part of the Means Test.”
7 Dubbin, 2021 WL 3476959 at * 7.
78 Because many considerations with respect to repayments of loans from retirement plans were not
briefed or argued, I will certainly entertain a contrary view on any future motion to dismiss. In that
connection, I also note that the State of Delaware permits a participant in a retirement plan to
exempt assets held in or amounts payable under a retirement plan. 10 Del.C. § 4915(a). The State
also recognizes loans from retirement plans as “loans.” 10 Del.C. § 4915(e) (“A participant or
beneficiary of a retirement plan is not prohibited from granting a valid and enforceable security
interest in the participant’s or beneficiary’s interest under the retirement plan to secure a loan to the
participant or beneficiary from the plan, and the right to assets held in or to receive payments from
the plan is subject to execution and attachment for the satisfaction of the security interest or hen
eranted by the participant or beneficiary to secure the loan.”).
29
Conclusion on the Means Test
Using the updated number for Income of $9,142.14 and having determined the
proper expense deduction is $9,603.49 as follows:
Food, clothing and other expense $1,292.00
Health care (out of pocket) $136.00
Insurance and operating (Housing) $611.00
Vehicle Operation Expense $448.00
Vehicle Net Ownership Expense $207.96
‘Taxes $1,899.80
Involuntary Payroll Deductions $546.95
Life Insurance $49.94
Optional Telephone Service $400.00
Health Insurance $578.83
Debt Payment/Home Mortgage $1,483.12
Debt Payment/Jeep Wrangler $896.12
Debt Payment/Chevy Cruze $325.04
Debt Payment/TSP Loan $680.12
Debtors’ monthly disposable income is negative $412.74, or a 60-month disposable income
of negative $24,764.40. As such, a presumption of abuse does not exist.
Il. Assuming Arguendo a Presumption of Abuse Exists, the Presumption has
been Rebutted
If l am incorrect in my conclusion that the TSP Loan can be deducted as repayment
of a secured debt, a presumption of abuse exists as Debtors would have $218.77 in monthly
income, or a 60-month disposable income of $13,126.20, which is greater than 25% of their
26
unsecured debt, or $11,340.26. Notwithstanding, Debtors may rebut the presumption by
showing that an additional expense is appropriate based on special circumstances.
Initially, for a debtor to successfully demonstrate a special circumstance, he must
fulfill both the procedural and substantive requirements of § 707(b)(2)(B).” To satisfy the
procedural requirements, a debtor must “itemize each additional expense or adjustment of
income and... provide... (1) documentation for such expense or adjustment to income;
and (IJ) a detailed explanation of the special circumstances that make such expenses or
adjustment to income necessary and reasonable.”™ Additionally, a debtor must “attest
under oath to the accuracy of any information provided to demonstrate that additional
expenses or adjustments to income are required.””!
Next, the debtor must show that the additional expense or adjustment to income is
required by special circumstances. The statute contains two examples of special
circumstances—a serious medical condition and a call or order to active duty in the Armed
Forces. These examples are not exclusive. Further, special circumstances need not be
involuntary, The language of the statute was meant to be expansive, not limiting.” At
bottom, whether special circumstances exist must be decided on a case-by-case basis.
In Haman, Judge Shannon found that special circumstances existed when the
debtor’s son incurred student loan debt three years prior to the bankruptcy case, debtor was
a co-signor on the obligation, her son was unable to make the required. payments and the
debt was not dischargeable. In so finding, Judge Shannon concluded that the debtor had no
In se Haman, 366 B.R. 307, 312 (Bankr, D. Del. 2007).
© 11 U.S.C § 707 (b)(2\(B\ii).
81 11 U.S.C § 707 (b)(2)(B) Gay).
82 In ve Haman, 307 B.R. at 313-314 (analyzing the language of the statute, legislative history and
case law). See also In re Templeton, 365 B.R. 213, 216 (Bankr. W.D. Okla. 2007); In re Armstrong, No.
06-31414, 2007 Bankr. LEXIS 1812, at *6 (Bankr. N.D. Ohio May 24, 2007).
27
reasonable alternative but to incur the monthly expense because the only way to stop
making the payment was to pay off the obligation in full or for debtor’s son to resume the
monthly payments which was not a reasonable expectation because of his circumstances.*
In drawing his conclusions, Judge Shannon looked to In re Thompson™ and In re
Lenton,® both of which found a debtor had demonstrated, on the facts of each case, that
special circumstances permitted the payments on a 401(k) loan to be deducted as an expense
in the Means Test analysis. In Thompson, the bankruptcy court noted that the loan was not
made in contemplation of bankruptcy, but in an attempt to address a worsening financial
condition. In Lenton, the court found that the loans were incurred a year before bankruptcy
and used to pay credit card indebtedness reducing unsecured debt. In both cases, the court
concluded that the only way to terminate the debt was for debtor to quit his job or make a
payment in full. Deeming the first option “financially irresponsible” and the second option
impossible, the Thompson Court found “no reasonable alternative” as required by the
statute. The Lenton court concurred, and Judge Shannon found these same options in
Haman to support a finding of special circumstances there.
Here, the TSP Loan was issued on February 20, 2019, two years and three months
prior to the filing of the bankruptcy proceeding. Had Debtors not tapped Mr. Livingston’s
retirement fund to purchase the car, it is likely that they would have incurred secured debt
for the car, which would be fully deductible, without question, as a secured loan under the
8 Haman, 302 B.R. at 315, 318.
In re Thompson, 350 B.R. 770 (Bankr. N.D. Ohio 2006) rev'd Eisen v, Thompson, 370 BR. 762 (N.
D. Ohio 773). While the district court reversed. the bankruptcy court on its determination regarding
special circumstances (as well as its conclusion that the repayment of a loan from a retirement plan
is debt that can be deducted in the Means Test analysis), I find the bankruptcy court analysis more
persuasive across the board.
8 In ve Lenton, 358 B.R. 651 (Bankr. E.D. Pa. 2006).
28
Means Test. Moreover, as in Thompson, Lenton and Haman, there is no reasonable
alternative to repayment of the TSP Loan. Quitting Mr. Livingston’s job would be
financially irresponsible and there is no evidence in the record to suggest that the TSP Loan
can be repaid in full. Moreover, Mr. Livingston’s need to immediately address the security
clearance concern raised by his supervisor left the Livingstons no real options.
Under these circumstances, I find that Debtors have met their burden to show that
special circumstances exist such that the TSP Loan is deductible on this basis as well.”
I. The Totality of the Circumstances of Debtors’ Financial Situation do not
Demonstrate Abuse
The Trustee alternatively moves to dismiss Debtors’ case based on the totality of the
circumstances. A case may be dismissed if the totality of the debtor’s financial situation
demonstrates abuse.*? While many courts consider multi-factor tests,® the UST focuses on.
two grounds.
86 In Haman, Judge Shannon also considered and rejected an argument by the UST that the debtor
had a reasonable alternative — converting the case to a chapter 13, modifying the rights of the student
loan lender and making a pro rata distribution for the length of the chapter 13 plan. Judge Shannon
rejected the consideration of potential results under a hypothetical chapter [3 case in the special
circumstances analysis and found such an argument more properly in the domain of the totality of
the circumstances test. Jd. In so holding, he observed that only one court had considered this issue.
Because of my conclusion, I need not decide that issue here.
11 U.S.C § 707(b){3) states:
In considering under paragraph (1) whether the granting of relief would be an abuse of the
provisions of this chapter in a case in which the presumption in paragraph (2)(A)(@) does not arise or
is rebutted, the court shall consider—
(A) whether the debtor filed the petition in bad faith; or
(B) the totality of the circumstances (including whether the debtor seeks to reject a personal
services contract and the financial need for such rejection as sought by the debtor) of the debtor’s
financial situation demonstrates abuse.
88 See e.g. DeAngelis v. Shores (In re Shores), No. 1:09-bk-08905MDF, 2010 Bankr, LEXIS 4912, at *10-
11 (Bankr. M.D. Pa. Dec. 8, 2010) (considering: (1) whether the bankruptcy petition was filed
because of sudden illness, calamity, disability, or unemployment; (2) whether the debtor made
consumer purchases far in excess of his ability to repay; (3) whether the debtor’s proposed family
budget is excessive or unreasonable; (4) whether the debtor’s schedules and statements of current
income and expenditures reasonably and accurately reflect his true financial condition, (5) whether
the bankruptcy petition was filed in bad faith; (6) whether the debtor engaged in eve of bankruptcy
29
The UST’s primary argument is that “Debtors can pay a good portion, if not all, of
their unsecured debts over a reasonable period of time pursuant to a Chapter 13 plan.””
The factual predicate for the argument is Debtors’ Schedule I and J. As the UST correctly
notes, Schedules I and J reflect that the Livingstons’ joint monthly net wages total $5,205.36
and their expenses total $5,469.37 for a monthly net income of negative 264.01. The UST
takes issue with two of Debtors’ expenses: (i) the $325.04 for the Chevy Cruze, which the
UST again argues is for the benefit of Debtors’ granddaughter and (ii) the $400 expense for
what the UST argues is an unreasonable amount for cell phone service. Doing the math,
the UST contends that if these two expenses are removed, Debtors would have a suplus of
$461.03 per month, or $27,661.80 over 60 months which could be paid to creditors. The
UST also suggests that the purchase of the Jeep Wrangler “in the months” before the
bankruptcy filing is a separate basis for a finding of abuse. Debtors specifically deny these
allegations and the impropriety of any of their expenses or purchases.
As for the expenses, for the reasons set forth above, I have already determined that
the $400 expense for telephone and internet is a proper expense. As for the monthly
payment for the Chevy Cruze, once again, the evidence showed that it is not for the use of
Debtors’ granddaughter. Further, the UST did not argue that this car payment, in and of
purchases; (7) whether the debtor enjoys a stable source of future income; (8) whether he is eligible
for adjustment of his debts through chapter 13 of the Code; (9) whether there are state remedies with
the potential to ease his financial predicament; (10) the degree of relief obtainable through private
negotiations; and (11) whether the debtor’s expenses can be reduced significantly without depriving
him of adequate food, clothing, shelter, and other necessities.).
8 Motion to Dismiss 23. See also id. | 29 (‘The plain language of 11 U.S.C. § 707(b)(3)(B) requires
a court to consider the ‘totality of the circumstances... of the debtor’s financial situation.’ This
analysis includes a debtor's ability to repay his or her debts. As noted above, the Debtors here have
the ability to repay their unsecured creditors pursuant to Section 707(b)(3)(B), therefore any granting
of relief in this case should be found to be an abuse of the provisions of Chapter 7 based on the
totality of the circumstances of the Debtors’ financial situation.”)(citations omitted).
* UST Exh. 1 (Schedules I, J).
30
itself, is unreasonable. On the numbers, therefore, Debtors’ have a negative monthly
cashflow with no funds available for a distribution to creditors.*!
That leaves the purchase of the Jeep Wranger nine months prior to the bankruptcy
filing. Under the circumstances here, I do not find this to constitute an abuse. Mrs.
Livingston testified that she needs a four-wheel vehicle to get to work in the winter and that
she obtained the best monthly payment she could given their credit. She also testified that
she uses the Chevy Cruze (a non-four wheel vehicle) to take her mother to doctor
appointments. There is no suggestion that Debtors were contemplating bankruptcy when
this purchase was made or at any time prior to Mr. Livingston’s security review. Nor is
there evidence that Debtors contemplated the security clearance concern before it was
raised. And, while one could reasonably question the wisdom of this purchase, the UST
adduced no evidence that Debtors were generally making purchases in excess of their ability
to repay. I do not find that maintaining multiple vehicles, without more, constitutes abuse
sufficient to dismiss the case.”
As for the other factors courts consider, the UST did not move separately to dismiss
for bad faith and did not argue bad faith as a factor in the totality of the circumstances as to
Debtors’ financial condition. Further, Mr. Livingston faces mandatory retirement in April
of 2023 and Mrs. Livingston’s hours have been cut, so there is no guarantee that Debtors
will enjoy a stable source of income through the pendency of a chapter 13 case. And, except
% were not to permit the monthly payment for the Chevy Cruz, the monthly surplus would be
$61.03, or a 60 month availability of $3,661.80. This payout to creditors would be 8%, much less
than 25% benchmark for abuse. Further, according to the Schedules, the value of the Chevy Cruz is
less than the outstanding secured debt so there is no equity in the vehicle. The UST did not
challenge the valuation.
% ‘The UST did not cite any cases for the proposition that the maintenance of multiple vehicles is per
se an abuse.
31
as set forth above, the UST did not suggest, much less present evidence, that Debtors’
expenses could be reduced significantly without depriving them of shelter, food and basic
necessities.
In examining the totality of the circumstances of Debtors’ financial situation, I find
no support for a finding of abuse.
IV. For similar reasons, in the Use of My Discretion, I would Not Dismiss the
Case wader Section 707(b)
Finally, and alternatively, | would exercise my discretion not to dismiss this case.
Notwithstanding a presumption of abuse or even the totality of the circumstances of a
debtor’s financial situation, the Code provides a court discretion in determining whether a
case should be dismissed.” While this discretion should be used judiciously, based on the
confluence of facts here (discussed previously and below), dismissal is not warranted.
Initially, there is no evidence in the record that Debtors would have filed this
bankruptcy case if Mr. Livingston’s security clearance was not an issue. The unrebutted
evidence is that a routine security review by his supervisor was the precipitating factor for
this bankruptcy filing, Relatedly, a chapter 7 case will provide for an immediate discharge
of his debt addressing the security clearance concern. In a chapter 13 case, Debtors will not
receive a discharge until the completion of payments under a three or five year plan.
Jeopardizing Mr. Livingston’s livelihood does not benefit Debtors or their creditors.
Further, a conversion to a chapter 13 case would provide no benefit to creditors. Ina
chapter 13, amounts required to repay the TSP Loan are not “disposable income” for
% Compare § 707(b)(1\ “the court... may dismiss a case... . if it finds that the granting of relief would
be an abuse of the provisions of this title”) with § 707(b)(2)(A)@ (“in considering . . . whether the
eraning of relief would be an abuse . . . the court shall presume abuse exists if . . .”); In re Mravik, 399
B.R. 202, supra.
32
purposes of confirmation of a chapter 13 plan.** Moreover, if Debtor defaults on the TSP
Loan, he will be deemed to have received a distribution in an amount equal to the entire
outstanding balance of the loan at the time of the default. That immediate tax consequence
would likely be an administrative claim against the estate payable prior to payments to
unsecured creditors. Again, any chapter 13 plan proposed by Debtors would provide no
recovery for unsecured creditors.
Finally, the testimony was unrefuted that Debtors’ income is likely to be
substantially less in the not too distant future. Mrs. Livingston’s hours were recently cut in
half. And, Mr. Livingston will be forced to retire in April of 2023, At that time, his income
will be cut in half.
Dismissal under these circumstances does not function to correct any perceived
abuse—and there is none. Particularly given the need for Mr. Livingston to maintain his
security clearance, dismissal of this case is unwarranted.
Conclusion
For the foregoing reasons, the Motion to Dismiss is denied. An order will follow.
Dated: March 29, 2022 (Telefe CURA CEA
Laurie Selber Silverstein
United States Bankruptcy Judge
U.S.C. § 1322(H (“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 shail not constitute ‘disposable income’
under section 1325.”).
33