Opinion
Case No. 00-36516-T Chapter 13
May 22, 2001
Robert E. Hyman, Esquire, Richmond, Virginia, Chapter 13 Trustee.
James E. Kane, Esquire, Richmond, Virginia, Counsel for Debtors.
MEMORANDUM OPINION AND ORDER
Hearing was held April 18, 2001, on the chapter 13 trustee's objection to confirmation of debtors' modified plan. At conclusion of the hearing, the court took the matter under advisement. For the reasons stated herein, the court will sustain the trustee's objection and deny confirmation of debtors' modified plan dated March 5, 2001.
Findings of Fact.
Debtors filed this chapter 13 case on December 11, 2000. On January 3, 2001, debtors filed a chapter 13 plan. The original plan lists debtors' total assets as $357,480.00, total unsecured debt as $66,552.00 and total secured debt as $170,168.00. Debtors proposed to pay $220.00 per month for thirty-six months. The total amount to be paid into the plan is $7,920.00, which provides for unsecured creditors to receive 10% of their claims.
On January 16, 2001, the chapter 13 trustee objected to debtors' plan on the basis that it was not filed in good faith for two reasons. First, debtors' budget reflects an IRA and retirement plan of $130,000.00, while debtors propose to pay unsecured creditors approximately $185.00 per month. Second, debtors own a boat that is being paid for and maintained to the detriment of the unsecured creditors.
The trustee's objection was sustained on February 21, 2001, and the plan was denied confirmation.
On March 5, 2001, debtors filed a modified chapter 13 plan. The modified plan lists debtors' total unsecured debt as $40,000.00, rather than $66,552.00. Debtors also amended their plan to surrender the boat. Debtors budget and schedules were not amended.
Schedule I states that Stuart is a self-employed CPA, and his net income is $2,000.00 per month. Catherine is a teacher and nets approximately $1,300.00 per month. According to Schedule J, debtors' expenses total $3,082.00 per month, leaving $218.00 per month in disposable income.
Debtors amended plan proposes to pay $220.00 per month for thirty-six months, which provides for a 10% repayment to unsecured creditors.
On March 14, 2001, the chapter 13 trustee objected to debtors' modified plan on the basis that it was not filed in good faith. The trustee's position is that the expenses attributable to the boat that debtors will surrender should result in additional net disposable income that is not reflected in the modified plan. Moreover, the trustee reiterated his previous objection that debtors' budget reflects a combined asset in an IRA and retirement plan totaling $130,000.00, while unsecured creditors will receive only $111.00 per month.
Discussion and Conclusions of Law.
I. Section 1325(b)(1)(B) Analysis.
Upon objection by the trustee, § 1325(b)(1)(B) prohibits confirmation of a chapter 13 plan unless debtors devote all projected disposable income to their plan. The trustee objects to debtors' modified plan because it proposes to surrender a boat, and income previously used to maintain the boat could now be used to fund the plan. Debtors budget was not amended to reflect an increase in disposable income.
In debtors' original plan, they proposed to retain a boat. That plan provided that the boat payments would be made by a third party co-obligor. Debtors modified plan proposes to surrender the boat. Because a third party co-obligor was going to make the boat payments under the original plan, debtors are not required to increase their disposable plan income as a result of surrendering the boat.
Debtors' schedules of income and expenses are reasonable and debtors' modified plan does not include payment of any luxury items. The court is satisfied that debtors are paying all of their disposable income into the plan. However, because the trustee also contends that the plan was not filed in good faith, further analysis is required.
II. Section 1325(a)(3) Analysis.
Debtors have the burden of proving that their modified plan was proposed in good faith.
See, e.g., In re Harrison, 203 B.R. 253 (Bankr.E.D.Va. 1996). The court cannot confirm a chapter 13 plan that is not proposed in good faith. See 11 U.S.C. § 1325(a)(3).
Good faith is not defined in the Bankruptcy Code. Therefore, courts have some discretion in making a determination of whether a plan is proposed in good faith. See Deans v. O'Donnell, 692 F.2d 968 (4th Cir. 1982). However, the totality of the circumstances must be taken into consideration when making this determination. See id. at 972.
Factors that courts may consider when determining whether the good faith requirement has been satisfied include:
(1) the percentage of the proposed repayment;
(2) debtor's financial situation;
(3) the period of time over which payment will be made;
(4) debtor's employment history and prospects;
(5) the nature and amount of unsecured claims;
(6) debtor's past bankruptcy filings;
(7) debtor's honesty in representing facts; and
(8) any unusual or exceptional problems facing the particular debtor.
In re Harrison, 203 B.R. at 255 (citing Deans, 692 F.2d at 972).
Debtors' modified plan is deficient in three areas: the percentage of proposed repayment to unsecured creditors, the duration of the plan, and the nature and amount of unsecured claims.
A. Percentage of Proposed Repayment.
Debtors' modified plan proposes to pay unsecured creditors approximately 10% of their claims. While repayment to unsecured creditors is not a requirement for confirmation, "[f]ailure to provide substantial repayment is certainly evidence that a debtor is attempting to manipulate the statute rather than attempting honestly to repay his debts." Deans, 692 F.2d at 972.
Counsel for debtors contends that the plan may pay more than 10% to unsecured creditors since the amount of unsecured debt is less than in the original plan. However, no evidence was presented to support this contention.
The trustee suggests that if the duration of the plan is extended to five years then the unsecured creditors would be repaid a higher percentage on their claims.
B. Duration of Plan.
The trustee objects to the modified plan because it is a thirty-six month plan rather than a sixty month plan. Counsel for debtors states that rather than extend the plan, debtors will use tax refunds to fund the plan. Debtors' counsel put forth no evidence of what those future tax refunds might be, if any, or what effect they would have on the plan funding.
C. Nature and Amount of Unsecured Claims.
This is debtors' first bankruptcy. At hearing, their counsel stated that Mr. Wallace entered into a long-term lease to operate a flea market and fell behind on the rent payments. Mrs. Wallace had to co-sign with her husband, and when they attempted to cure the arrears they ran up his credit cards to pay their other expenses.
Debtors argue that they are in bankruptcy solely due to the failed flea market business and resulting credit card bills. In sum, the unsecured debt that debtors propose to repay at 10% is the reason why they filed a chapter 13 case.
III. Conclusion.
Considering the totality of the circumstances, including Mr. Wallace's profession, the debtors' ownership of a substantial IRA, the low percentage of proposed repayment of substantial unsecured debt and the limited duration of the plan, debtors have failed to prove that their plan was proposed in good faith. Accordingly, debtors' modified plan does not comply with 11 U.S.C. § 1325(a)(3), and the court will sustain the objection of the trustee and deny confirmation of debtors' modified plan.
IT IS ORDERED that confirmation of debtors' modified plan dated March 5, 2001 is DENIED.
IT IS FURTHER ORDERED that the clerk is directed to dismiss the chapter 13 case unless, within 10 days from the date of entry of this order, debtors take one of the actions enumerated in Local Bankruptcy Rule 3015-2.