THOMAS PERKINS, Bankruptcy Judge
Before the Court is the motion filed by Nancy J. Gargula, the United States Trustee (U.S. TRUSTEE) for Region 10, to dismiss the Chapter 7 case filed by the Debtors, Erik and Korrin Daubman (collectively "DEBTORS" or individually "ERIK" or "KORRIN"), pursuant to Section 707(b) of the Bankruptcy Code.
The DEBTORS filed a Chapter 7 petition in bankruptcy on November 7, 2002. At that time, the DEBTORS anticipated the birth of their first child later that month. In their bankruptcy schedules, the DEBTORS list their home valued at $80,000.00, subject to a mortgage of $76,563.04. In addition to exempt personal property consisting of household goods and furnishings valued at $635.00, checking and savings accounts of $175.00, miscellaneous wearing apparel of $100.00, and an individual retirement account of $400.00, the DEBTORS list two 2002 vehicles having a combined value of $32,000.00. Their Ford Taurus is subject to a secured claim of $20,000.00 and their Monte Carlo is subject to a secured claim of $25,700.00. On their Statement of Intention, the DEBTORS indicated they would be reaffirming both debts, as well as the mortgage on their residence. The DEBTORS listed total unsecured debt of $31,924.34, of which $29,683.78 represents credit card purchases on eighteen separate accounts.
According to the Statement of Affairs, the DEBTORS' combined income in 2000 was $41,432.00 and $70,459.00 in 2001.
Schedule I filed by the DEBTORS discloses that ERIK is employed as a technician at an environmental testing firm, earning net monthly income of $1,314.60. KORRIN is employed as a phone operator earning a net monthly income of $2,664.62, making their combined net monthly income $3,979.22. Schedule J, filed with the petition, listed monthly expenses totaling $2,946.00, including $400.00 for food and $150.00 for clothing. Monthly payments on the DEBTORS' vehicles are $438.00 and $523.00. The DEBTORS' budget did not include any amount for day care. Based on the disposable monthly income of over $1,000.00, the U.S. TRUSTEE filed a motion to dismiss pursuant to Section 707(b), contending that the DEBTORS could pay all of their creditors in 31 months. In response to the motion, the DEBTORS amended Schedule J to increase their monthly expenditures for food to $800.00 and for clothing to $300.00, and to include a day care expense of $400.00. As a result, the DEBTORS' net disposable monthly income shown on the amended schedule decreased to $58.22. A hearing was held on May 8, 2003.
The DEBTORS also increased their laundry and dry cleaning expense from $25.00 to $50.00.
In support of her contention that the DEBTORS' Chapter 7 petition represents a substantial abuse, the U.S. TRUSTEE offered four scenarios. Each of the four computations utilizes an adjustment to the expenses shown on the DEBTORS' amended Schedule J, reducing the DEBTORS' food expense from $800.00 to $500.00 and their clothing expense from $300.00 to $150.00, for a total of $3,571.00. The first, described by the U.S. TRUSTEE as based on the DEBTORS' own numbers, deducts the adjusted expenses from the DEBTORS' net monthly income of $3,979.22 shown on Schedule I, resulting in disposable income of $408.22. Utilizing that figure, the DEBTORS could pay unsecured creditors 46.3% under a three-year plan.
$408.22 x 36 = $14,694.92 ÷ $31,724.34 = 46.3%.
The second analysis put forth by the U.S. TRUSTEE utilizes the income shown on the DEBTORS' 2002 W-2 tax statements, annualized to yield a combined net monthly income of $4,531.63. After subtracting for expenses, the monthly disposable income of $960.63 would pay creditors 109.0% over a three-year plan.
The U.S. TRUSTEE'S computation, not challenged by the DEBTORS, is as follows: ERIK KORRIN Gross Wages $21,180.55 $50,728.96 Fed Income Tax (1,251.65) (6,313.63) Illinois Tax (634.79) (1,493.35) Social Security (1,313.00) (3,145.20) Medicare (307.07) (735.57) After Tax Income $17,674.04 $39,041.21 No adjustments to ERIK'S after tax income are necessary and his adjusted monthly income of $1,472.84 is derived by dividing the above figure by 12. After converting KORRIN'S 2002 after tax income to a monthly figure of $3,253.43, the U.S. TRUSTEE deducts $160.64 for insurance and $34.00 for union dues, to arrive at an adjusted net income of $3,058.79 for KORRIN and a combined monthly net income of $4,531.63.
$4,531.63 — $3,571 = $960.63 x 36 = 34,582.68 ÷ $31,724.34 = 109.0%.
The third computation submitted by the U.S. TRUSTEE takes into consideration KORRIN'S reduction in income resulting from the birth of their son. No adjustment is made to ERIK'S earnings because all of the conditions of his employment remain the same. From the information contained on KORRIN'S earnings statement for the month of April, the U.S. TRUSTEE converts the year-to-date earnings to a net monthly income of $2,338.13. Adding that figure to ERIK'S net monthly income of $1,472.84, and deducting the adjusted expenses, the disposable income of $239.97 would result in a distribution of 27.2% to unsecured creditors under a three-year plan.
Allowing for deductions of $1,444.98 for federal taxes, $1,012.12 for FICA, and $376.04 for state taxes from KORRIN'S 2002 year to date income of $13,230.27, the U.S. TRUSTEE arrives at a figure of $10,397.13, covering 9 pay periods.
$2,338.13 + $1,472.84 = $3,810.97 — $3,571.00 = $239.97 x 36 = $8,638.92 ÷ $31,724.34 = 27.2%.
Premised upon KORRIN'S resumption of her full-time employment, the fourth computation is based only upon her April earnings statement showing a net monthly income of $2,770.12, yielding a combined net monthly income of $4,242.96 and a disposable monthly income of $671.96, after deducting monthly expenses. Under a three-year plan, the unsecured creditors would receive a distribution of 76.3%.
$2,770.12 + $1,472.84 = $4,242.96 — $3,571.00 = $671.96.
$671.96 x 36 = $24,190.56 ÷ $31,724.34 = 76.3%.
From the four alternatives, the U.S. TRUSTEE selects the second and the fourth proposals as the best indicators of the DEBTORS' ability to fund a Chapter 13 plan.
At trial, KORRIN testified that she and ERIK were married four years ago and that they purchased their two bedroom home two years ago for $77,500.00. In support of their amended budget, KORRIN explained that their original budget, prepared prior to their son's birth, was the product of naivety and understated both their food and clothing expenses. KORRIN testified that the increased food expense included formula, diapers and cereal for her son. She testified that she and her husband never eat out, shop at a discount food center and take their lunches to work. The DEBTORS take no vacations and do not have fancy clothes or expensive jewelry. The increased clothing costs were attributed entirely to their son, who changes sizes every couple of months.
The original Schedule J omitted day care expenses entirely. The U.S. TRUSTEE has no objection to a deduction in the amount of $400.00 for those expenses.
KORRIN testified that during 2002 she received monthly bonuses ranging from $50.00 to $300.00. In her estimation, the bonuses for that year totaled $2,000.00 to $3,000.00. During the first half of 2003, she only received one monthly bonus in the amount of $48.00, before the program was eliminated. On two occasions she has been sent home by her employer, without pay, due to a slow down in the company's business, and her employer has indicated that practice will continue and that lay-offs are possible. KORRIN testified that she will now be required to work some evenings and on Saturdays, and that in doing so she may incur additional child care expenses because ERIK is on call twenty-four hours a day during the summertime.
KORRIN testified on cross-examination that the DEBTORS' credit card debt has always been significant. In 1999, while employed as a truck driver, ERIK was involved in an accident and suffered a head injury. During the six months when he was unemployed, the DEBTORS used their credit cards to meet their living expenses. From that point forward, the DEBTORS were only able to make the minimum payments required to be made on the accounts. In August of that year, ERIK received a second ticket for driving under the influence, which resulted in the loss of his employment. Prior to that incident, ERIK had been earning approximately what KORRIN earns at present. KORRIN was then being paid a salary equivalent to ERIK'S current income. Given the transposition of their incomes, the DEBTORS' combined income has remained unchanged, with the exception of the time when ERIK was unemployed.
The DEBTORS purchased their 2002 Taurus in April, 2002, replacing a Grand Am and raising their car payment from $384.00 to $430.00. Two months later, the DEBTORS traded in a 1999 Monte Carlo on a 2002 model, resulting in an increased car payment of $50.00.
ANALYSIS
The Bankruptcy Code establishes a presumption in favor of granting Chapter 7 relief. 11 U.S.C. § 3707(b). The presumption is not conclusive, however, and a debtor's right to seek a discharge will be forfeited if the granting of the discharge would represent a substantial abuse of Chapter 7. Id. Courts must be wary to base a determination of substantial abuse solely upon a debtor's ability to make a substantial payment. As this Court has previously noted, that practice would "ha[ve] the anomalous result of permitting abusers of consumer credit with large amounts of credit card and other consumer debts to take advantage of Chapter 7 without fear of being forced into Chapter 13, while denying to those with more frugal restraint, and less debt, the benefits of Chapter 7." In re Ditch, 2002 WL 32001245 (Bankr.C.D.Ill. 2002). A debtor's ability to fund a Chapter 13 plan is a primary factor, to be considered along with all relevant mitigating and aggravating factors present in a particular case.
In determining whether to grant dismissal of a Chapter 7 filing on the grounds of substantial abuse, the appropriate analysis is the totality of the circumstances. The following factors are considered in making such an evaluation:
1. Whether the bankruptcy petition was filed because of sudden illness, calamity, disability, or unemployment;
2. Whether the debtor incurred cash advances and made consumer purchases far in excess of his ability to repay;
3. Whether the debtor's schedules and statement of current income and expenses reasonably and accurately reflect his true financial condition;
4. Whether the debtor enjoys a stable source of future income;
5. Whether he is eligible for adjustment of his debts through Chapter 13;
6. Whether there are state remedies with the potential to ease his financial predicament;
7. The degree of relief obtainable through private negotiations;
8. Whether his expenses can be significantly reduced without depriving him of adequate food, clothing, shelter, and other necessities; and
9. Whether the petition was filed in good faith.
See, In re Green, 934 F.2d 568 (4th Cir. 1991) and In re Krohn, 886 F.2d 123 (6th Cir. 1989).
The first step in the analysis is to determine the DEBTORS' ability to fund a Chapter 13 plan and the initial determination in that process is the calculation of the DEBTORS' net monthly income. As set forth above, the U.S. TRUSTEE has advanced four separate computations, ranging from $3,810.97 to $4,531.63. The computations, prepared before trial and, therefore, not tied to the evidence received at trial, are of little assistance to the Court.
KORRIN testified that she makes $22.73 per hour. At 40 hours per week, she grosses $909.20 per week or $47,278.40 per year, which equates to $3,939.87 per month. KORRIN'S payroll deductions are $842.58 for payroll taxes and social security, $160.64 for insurance and $34.00 for union dues resulting in a net monthly income of $2,902.65. Based on his 2002 W-2 statement, ERIK earned $21,180.55 gross and $17,674.04 net, which yields a net monthly income of $1,472.84. Combined, the DEBTORS net $4,375.49 per month.
Contrary to the alternative income computation scenarios proposed by the U.S. TRUSTEE, the Court believes that a simple 40 hour per week computation is the best predictor of KORRIN'S expected future income.
The only expenses that the U.S. TRUSTEE quarrels with on amended Schedule J, are food of $800.00 and clothing of $300.00. KORRIN testified that these expense levels are attributable to their newborn son. The food expense includes diapers and the clothing expense is almost fully used for the baby. The Court finds that a reasonable amount for food, diapers and other consumables for a family of three, including a newborn, is $650.00 and $200.00 for clothing. Therefore, the allowable monthly expenses are $3,671.00 and the disposable income available to fund a Chapter 13 plan is $704.00. At a rate of $704.00 per month, over a three-year plan, the sum of $22,096.00 would be available to pay unsecured creditors. This would pay 69% of the total unsecured claim amount of $31,724.34.
The higher expenses that KORRIN testified are presently being incurred are attributable to the fact that their child is an infant, needing formula and diapers. The extra expenses will diminish as the child grows.
This figure reflectsdeductions of 6% to the standing trustee and $1,700.00 for the DEBTORS' attorney fees, and assumes no priority or secured claims paid through the plan.
The Court will now turn to the nine factors listed above. First, the DEBTORS filed bankruptcy because they could no longer service their debts because ERIK lost his job after a second DUI and lost about six months of work due to an injury. This factor weighs in favor of the DEBTORS.
Second, there was no evidence that the DEBTORS incurred cash advances, made luxury purchases, or made consumer purchases far in excess of their ability to repay. KORRIN'S testimony was unrebutted that they used credit cards for a time to pay their basic living expenses when ERIK was out of work. This does not evidence abuse.
Third, the schedules and statement of current income and expenses were reasonably accurate. This is not a case where the DEBTORS attempted to make their financial situation appear better or worse than it actually was. The expenses on Schedule J were amended after the U.S. TRUSTEE'S motion was filed. The U.S. TRUSTEE acknowledges, however, that the amendment was appropriate given the DEBTORS' failure to include expenses related to their baby on their original Schedule J. The expenses for food and clothing are higher than allowable, but KORRIN'S testimony was sincere that the claimed amounts were actually expended.
Fourth, both DEBTORS enjoy a stable source of future income, which actually militates against them for the purpose of the U.S. TRUSTEE'S motion. With a combined net income of approximately $4,000.00 per month, they are able to live comfortably and could, as indicated above, fund a three-year plan that pays 69% to unsecured creditors.
Fifth, the DEBTORS are certainly eligible for Chapter 13 relief. Sixth, the U.S. TRUSTEE has not suggested, and the Court is not aware, that there are any state remedies that would assist the DEBTORS in resolving their debt problems. Likewise, as to the seventh factor, it is unlikely that any relief could be obtained through private negotiations.
The eighth factor asks whether the DEBTORS' expenses can be significantly reduced without depriving them of basic necessities. The Court has already reduced the claimed expenses for food and clothing. The only other item that is susceptible to reduction would be the installment payments for their two cars. Both DEBTORS purchased new vehicles in early 2002. Neither the 2002 Ford Taurus nor the 2002 Chevrolet Monte Carlo are luxury automobiles, although they are late model vehicles. The combined monthly installment payments for these vehicles is $961.00. Both employed, there is no question that the DEBTORS each need a car. In evaluating whether the car expenses are excessive, it is also appropriate to look at the DEBTORS' budget as a whole. A review of amended Schedule J indicates that the other expenses listed, with the exception of food and clothing, are reasonable and several are somewhat lower than the Court regularly sees, as follows:
Utilities $117.00 Water and sewer 25.00 Telephone 30.00 Medical and dental 20.00 Transportation 100.00 Recreation, etc. 25.00 Charitable contributions 0.00 Viewing amended Schedule J as a whole, the Court finds that the DEBTORS have not inflated their expenses and, other than the reductions made in the food and clothing categories, there are no significant reductions to be made. Under these circumstances, the car payments, although somewhat high, are not so objectionable as to require the sale of one or both of the vehicles and replacement with older, used cars. Ninth, there is neither an allegation nor any evidence, that the petition was not filed in good faith, and the Court finds that it was.
This is a close case. The DEBTORS are able to pay 69% of their unsecured debts in a three-year Chapter 13 plan. This factor alone is not dispositive, however, and all but two of the other nine factors considered weigh in favor of the DEBTORS and against the U.S. TRUSTEE. Given the presumption in favor of allowing the DEBTORS to obtain bankruptcy relief under the Chapter they chose, the Court determines that the U.S. TRUSTEE'S motion should be denied. The DEBTORS may remain in and receive a discharge in this Chapter 7 case.
This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be entered.
ORDER
For the reasons stated in an Opinion filed this day, IT IS HEREBY ORDERED that the U.S. TRUSTEE'S Motion to Dismiss Pursuant to 11 U.S.C. § 707(b) is DENIED.