Judge Somers

07-10902 Jones (Doc. # 77)

In Re Jones, 07-10902 (Bankr. D. Kan. Sep. 29, 2008) Doc. # 77

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Case: 07-10902 Doc #: 77 Filed: 09/26/2008

SIGNED this 26 day of September, 2008.

Page 1 of 11

Dale L. Somers

Opinion Designated for Electronic Use, But Not for Print Publication

In re:


This matter came before the Court on August 5, 2008, for a trial on the Chapter 13
Trustee’s objection to the Debtors’ plan on the ground their postpetition commencement
of retirement contributions showed they had not proposed the plan in good faith, as
required by § 1325(a)(3). The Debtors appeared in person and by counsel James P.

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Rupper. The Trustee appeared by counsel Christopher T. Micale. The Court heard
testimony and received other evidence, heard the arguments of counsel, and is now ready
to rule.

The Debtors filed a Chapter 7 petition to commence this case, but the United
States Trustee investigated their finances and, after belatedly receiving documentation
from them, determined the presumption arose under § 707(b) that granting the Debtors
relief would be an abuse of the provisions of Chapter 7. Rather than contest that
conclusion, the Debtors agreed to convert their case to Chapter 13, although it took them
a couple of months to do so. Simultaneous with the conversion, having learned her
employer was changing its retirement plan so it would match contributions she made but
otherwise make no contributions to the plan, the Debtor-wife began contributing to the
retirement plan. The Chapter 13 Trustee objected that action showed the Debtors were
not proposing their plan in good faith, so it could not be confirmed. A short time before
the trial on that objection, the Trustee learned the Debtors had been making payments on
a car loan and on a student loan debt directly to the creditors instead of paying them
through the Trustee. In fact, they paid off the car loan before the trial. The Debtors are
also making payments on a second mortgage on their home that will be paid off in about
March of 2009. After considering the circumstances of this case, the Court concludes the
postpetition commencement of retirements contributions, standing alone, does not
establish that the Debtors have not proposed their plan in good faith, but further
concludes their present plan cannot be confirmed.


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The Debtors filed a Chapter 7 bankruptcy petition in April 2007. The Debtor-
husband (“Husband”) is a bus driver and the Debtor-wife (“Wife”) is a registered nurse,
and they have no dependents. In August 2008, the Husband testified he would turn 58
years old later that month, and the Wife testified she was already 58. The Husband has
high blood pressure, borderline high cholesterol, and sleep apnea; he is also overweight.
He takes a prescription drug for the high blood pressure, and has had some treatment for
his sleep apnea. By the time of the trial, however, these conditions had not affected his
earning capacity. The Wife has diabetes, high blood pressure, high cholesterol, and
arthritis. She takes an oral medication and injected insulin for her diabetes. She also had
one of her knees replaced during 2007 due to arthritis, and needs to have the other one
replaced, too. Despite her knee replacement, the earned income the Debtors reported on
their 2007 federal tax return was only about $1,000 less than they reported on their 2006

The Debtors did not report in their original bankruptcy schedules that the Wife had
an interest in a pension plan established by her employer. At that time, the employer was
paying money into the Wife’s account under the plan even if she did not. The Debtors’
report of their income and expenses on Schedules I and J filed with their Chapter 7
petition showed the Wife was not then contributing any of her salary to the plan.

Along with their bankruptcy petition, the Debtors filed a Form B22A, “Chapter 7
Statement of Current Monthly Income and Means-Test Calculation.” On it, they reported


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their income for the six-month period ending before April 2007 was above the median for
a family of two in Kansas, and they calculated their monthly disposable income under
§ 707(b)(2) of the Bankruptcy Code to be $42.83. The United States Trustee’s office had
some questions about their calculation, and requested documentation of various items.
The UST filed a motion to compel the Debtors to supply the documentation, and later
obtained agreed extensions of its deadlines to move for dismissal for abuse under
§ 707(b) and to object to discharge under § 727 before the Debtors supplied the needed
information. After receiving the materials, the UST made various adjustments to the
Debtors’ calculation on Form B22A, and concluded they had almost $540 in monthly
disposable income, meaning a presumption of abuse arose in their case under § 707(b).

In about August 2007, the UST conferred with the Debtors’ attorney, who agreed
the Debtors would be unable to rebut the presumption of abuse and would convert their
case to Chapter 13. The UST sent the attorney an agreed motion to convert, but had to
wait a long time for the motion to be signed and returned. The motion was finally filed
on October 12, 2007, and an order converting the case was filed a few days later.

On October 23, 2007, the Debtors filed amended Schedules I and J, listing their
income and expenses, and a Form B22C, “Chapter 13 Statement of Current Monthly
Income and Calculation of Commitment Period and Disposable Income.” The Court has
compared the amended Schedules I and J to the original ones the Debtors filed, and
cannot find any difference between them. The Debtors did not report on the new
Schedules I and J that the Wife was contributing any money to her employer’s pension


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plan. On line 55 of the Form B22C, however, the Debtors reported that she was
contributing $220 per month to the plan. After initially disputing the amount of the
Debtors’ claimed charitable contributions, the Trustee has stipulated the Debtors give
$576.77 per month to charity, as they reported on line 45 of the Form B22C.

The Wife explained that in the latter part of 2007, her employer began telling its
employees it would be changing its retirement plan to one where it would match
contributions they made but would otherwise not contribute to the plan. The change
would take effect on April 1, 2008. The Debtors had not reported on their original
schedules that either of them had a retirement plan. The Husband said because they
didn’t put any money into the plan and didn’t know how much money was in it, they
didn’t realize it was an asset; instead, they just thought of it as their only hedge against
retirement, except for Social Security. As part of the change in the retirement plan, the
Wife learned her interest in the old plan was worth about $148,000, an amount that would
be rolled over into the new plan. She understood she was permitted to contribute up to
9% of her pay into the retirement plan. Her gross pay was reported to average about
$4,800 per month as of the time they filed for bankruptcy, so she would have been able to
contribute up to $430 per month. Apparently because she also routinely worked some
overtime, she thought she could contribute up to $300 per bi-weekly pay period, which
would be $645 per month. Instead of making the maximum contribution allowed, she
began contributing $220 per month about the time their case was converted to Chapter 13.
Based on their circumstances, the Debtors decided they needed to contribute to the plan if


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they were going to have any income after retiring.

The Debtors filed a Chapter 13 plan a couple of weeks after their case was
converted to that chapter. They proposed to pay $100 per month into their plan for the
sixty months it must run. The plan said they were current on both mortgages on their
home and would continue making postpetition payments directly to the creditors. The
payment on the second mortgage was $254.79 per month. The plan said the Debtors
would pay through the plan $1,885 they owed on a vehicle; their monthly payment on this
debt was $300. The plan was somewhat unclear how the Debtors proposed to treat their
student loan debt. It said: “Student loan creditors (on student loans that are not current)
being paid by the Trustee, shall be paid, pro rata, with other unsecured creditors unless
otherwise indicated,” and went on to explain that interest would continue to accrue
postpetition on student loan debts, and the Debtors would still owe any amount not paid
during the bankruptcy case unless they obtained a judgment declaring the debts to be
dischargeable. The plan did not indicate whether the Debtors were current on their
student loan debt or how the treatment of the debt would change if they were, nor was any
different treatment “otherwise indicated.” The Debtors’ monthly payment on their
student loan debt was $147.

After filing their plan and despite the plan’s provisions, the Debtors continued
making the $300 monthly payments on their vehicle directly to the secured creditor. That
debt was paid in full before the August 2008 hearing on the Trustee’s objection to their
plan. The Husband testified he was not aware their plan said those payments were to be


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made to the Trustee, due to failed communication between the Debtors and their attorney.
The payments were made through an on-going automatic deduction from their checking
account. They continued to make payments on their student loans directly to the creditor,
payments which also appear to have been made automatically from their checking
account. They have continued making their second mortgage payments directly to the
creditor, and that debt is scheduled to be paid off by the payment they should make in
March 2009.

On July 31, 2008, the Debtors amended two of their schedules. They amended
Schedule B, “Personal Property,” to report the Wife’s interest in her employer’s
retirement plan, which they valued at $148,000. They amended Schedule F, “Creditors
Holding Unsecured Nonpriority Claims,” to add a student loan debt of $10,893 which
they had not listed on their original schedules.

Among many other things, a Chapter 13 plan may be confirmed only if it “has
been proposed in good faith.”1 The Tenth Circuit has directed bankruptcy courts to
consider the totality of the circumstances in determining whether plans satisfy the “good
faith” requirement. In Flygare v. Boulden, the Circuit first listed a number of factors that
could be relevant in determining good faith.2 The Circuit most recently discussed the

111 U.S.C.A. § 1325(a)(3).

2709 F.2d 1344, 1347-48 (10th Cir. 1983).


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good faith requirement in Young v. Mason (In re Mason),3 saying:

As a general matter, a determination of good faith must be made on a case by case basis,
looking at the totality of the circumstances. See Pioneer Bank v. Rasmussen (In re
Rasmussen), 888 F.2d 703, 704 (10th Cir.1989). “In evaluating whether a debtor has
filed in good faith, courts should be guided by the eleven factors set forth in Flygare v.
Boulden, 709 F.2d 1344, 1347-48 (10th Cir.1983), as well as any other relevant
circumstances.” Robinson v. Tenantry (In re Robinson), 987 F.2d 665, 668 (10th
Cir.1993) (footnote omitted). The eleven Flygare factors are:

(1) the amount of proposed payments and the amount of the debtor's
surplus; (2) the debtor's employment history, ability to earn and likelihood
of future increases in income; (3) the probable or expected duration of the
plan; (4) the accuracy of the plan's statements of the debts, expenses and
percentage repayment of unsecured debt and whether any inaccuracies are
an attempt to mislead the court; (5) the extent of preferential treatment
between classes of creditors; (6) the extent to which secured claims are
modified; (7) the type of debt sought to be discharged and whether any
such debt is non-dischargeable in Chapter 7; (8) the existence of special
circumstances such as inordinate medical expenses; (9) the frequency with
which the debtor has sought relief under the Bankruptcy Reform Act;
(10) the motivation and sincerity of the debtor in seeking Chapter 13
relief; and (11) the burden which the plan's administration would place
upon the trustee.
Flygare, 709 F.2d at 1347-48 (quoting In re Estus, 695 F.2d 311, 317 (8th Cir.1982)).
But “the weight given each factor will necessarily vary with the facts and circumstances
of each case.” Id. at 1348.4

As indicated, the Trustee’s objection asked the Court to determine that the

Debtors’ plan had not been proposed in good faith based solely on the fact they started to

make contributions to the Wife’s retirement plan after they filed their bankruptcy petition.

The Court notes the Debtors also knew when they started the contributions that their case

either had been or soon would be converted to Chapter 13, so they should also have

3237 F.3d 1168, 1174-75 (10th Cir. 2001).

4Young, 237 F.3d at 1174-75.


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known starting the contributions would reduce the amount they would have available to
pay into a Chapter 13 plan. But the same would be true if they had started the
contributions the day before they filed for bankruptcy, and the Trustee seemingly
concedes that would have been permissible. The Court is not convinced the fact the
Wife’s contributions started postpetition should control the good faith analysis here.

In the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,5
Congress provided that money an employer withholds from an employee’s wages to
contribute to a retirement plan like the Wife’s is neither property of the bankruptcy estate
nor disposable income in a Chapter 13 case.6 This Congressional protection for such
contributions could be interpreted to mean a “good faith” analysis of a debtor’s Chapter
13 plan can never rely on the fact the debtor is making such contributions to find a lack of
good faith. When the Circuit decided Flygare, however, the Bankruptcy Code provided
that some debts that were nondischargeable in Chapter 7 were not excepted from
discharge in Chapter 13, and the Circuit nevertheless ruled the fact a debtor had a debt
that could not be discharged in Chapter 7 could support a finding of a lack of good faith
in proposing a Chapter 13 plan. Consequently, the Court concludes the fact the Debtors
are contributing to a retirement plan can be considered in analyzing their good faith in
proposing their plan.

5Pub. L. No. 109-8, § 323, 119 Stat. 23 (2005)
6See 11 U.S.C.A. § 541(b)(7) (excluding such contributions from the estate and from disposable
income under § 1325(b)(2)).

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Under these Debtors’ circumstances, the Court believes their commencement of
retirement contributions does not show their plan was not proposed in good faith. Both
Debtors are fast approaching retirement age, and also have medical conditions that might
hasten their retirements. After the Debtors filed for bankruptcy, the Wife’s employer
changed its retirement plan from one where it made contributions even if the Wife did not
to one where it would match the Wife’s contributions but otherwise make none. The
Debtors have only Social Security and the Wife’s retirement plan account to rely on for
support after they retire. Without new contributions, the Wife’s retirement plan account
would not grow nearly as fast during their few remaining working years as it would with
them. Although the Debtors began making the contributions while they were in
bankruptcy, they are contributing only about one-half (or less) of the full amount the Wife
could legally contribute to the plan. In other circumstances, a debtor who commences
retirement contributions while in a bankruptcy case might be demonstrating a lack of
good faith, but that is not so in this case.

On the other hand, various considerations suggest the Debtors might not have
acted in good faith in formulating their Chapter 13 plan. Their original bankruptcy
schedules were not as accurate as they should have been, and the Debtors have been slow
to correct them. The Debtors did not comply with the UST’s requests for additional
information as quickly as they should have. Their proposed $100 per month plan
payment is relatively small compared to their retirement and charitable contributions.
They have not proposed to increase their plan payments during the sixty months their plan


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must run, even though they have already made the last $300 monthly payment they owed
on their vehicle and they should make the last $254.79 monthly payment they owe on
their second mortgage in March of next year. Furthermore, the Debtors have effectively
preferred their student loan creditor over their other unsecured creditors by making direct
payments to it instead of paying that $147 per month into their plan. Their plan did not
reveal that they would be paying that creditor directly, or that those payments would give
that creditor a greater percentage on its claim than the other unsecured creditors would
receive through pro rata distributions under the plan. The Court will not make a finding
now that the plan was not proposed in good faith, but will not confirm the plan as
submitted. As directed at the end of the trial, the Debtors will have to amend their plan.


For these reasons, the Court rejects the Chapter 13 Trustee’s argument that the
Debtors’ postpetition commencement of retirement plan contributions, standing alone,
establishes that their Chapter 13 plan was not proposed in good faith. However, the Court
will not confirm the plan as proposed, and the Debtors must file an amended plan to
address the other concerns identified in this opinion.

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