Divorcing Debtor’s Plan Proposed in Good Faith

Posted by NCBRC - June 8, 2022


The below-median debtor was entitled to confirmation of his chapter 13 plan where he proposed his plan in good faith and committed all of his disposable income to it despite the fact that he was in the middle of a divorce and his income and expenses were in a state of flux. In re Szafraniec, No. 21-10216 (Bankr. N.D. Ill. May 27, 2022).

The debtor was a machinery and equipment appraiser operating his own business. He supplemented his income as a package delivery driver. The debtor and his wife, Julie, had separated but were still living together in their marital home with their two children at the time of his bankruptcy petition. By mutual agreement, the debtor paid Julie $2,000 per month to cover his share of the $2,500 monthly mortgage payments as well as other household expenses. One week before the confirmation hearing, the debtor moved into an apartment with his father where he paid $550 toward the rent, $64 for internet service and $120 for his cell phone, in addition to the $2,000 he continued to pay Julie. The debtor also agreed to pay $800 in child support, $300 for the vehicle he drove, and approximately $110 for car insurance.

The trustee objected to the debtor’s proposed plan on the grounds that it was not filed in good faith as required for plan confirmation under section 1325(a)(3) and, alternatively, that the debtor failed to contribute all of his disposable income to the plan.

As to the issue of good faith, the trustee maintained that the debtor had failed to reveal all his income sources and was not forthcoming with the court as to his ability to repay his creditors. Specifically, the trustee pointed to the debtor’s original Schedule I, which stated that he received payments each month from his soon-to-be ex-spouse in the amount of $1,250, and his testimony at the confirmation hearing where he said he paid his spouse $2,000 each month and that she paid his share of household expenses from that amount.

Noting the reality that divorce can play havoc on a couple’s allocation of expenses that “do not always lend themselves to a perfect representation on the fixed line items in Schedules I and J” the court found that section 1325 permits inquiry into a debtor’s financial circumstances beyond that listed on his schedules. As a below-median debtor, the court noted that the debtor was entitled to deduct expenses so long as they are “reasonably necessary.”

The court found any discrepancy between the debtor’s schedules and his testimony was adequately addressed by the debtor’s explanation of the division of expenses he and Julie had agreed to.

The trustee next questioned whether the debtor should have included Julie’s income in his calculation of disposable income. For purposes of good faith only, the court looked at the veracity of the debtor’s claim that he and his wife were separated despite continuing to live together. Finding the debtor candid and forthright, the court credited his testimony. It concluded that the debtor proposed his plan in good faith and turned to the issue of whether the debtor had committed all his disposable income to the plan as required by section 1325(b).

Where expenses for above-median debtors are circumscribed by the means test, below-median debtors’ expenses are determined on a “totality of circumstances” basis taking into account “the full amount needed for maintenance or support.”

Here, the court returned to the issue of whether Julie contributed to the debtor’s income. In the context of chapter 7, section 707(b) provides that if the debtor is separated from the non-filing spouse, her income is not considered in the disposable income calculation. But that provision does not apply in chapter 13. Instead, the court found the answer resided in section 101(10A) which defines current monthly income to “include[] any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor’s spouse), on a regular basis for the household expenses of the debtor or the debtor’s dependents[.]” The court reasoned that “if Julie pays any amount on a regular basis for Debtor’s household expenses, then those payments are included in Debtor’s current monthly income.”

The court found the debtor’s $2,000 monthly payment toward the mortgage and household expenses did not fully cover his share of household expenses. It went on to say that to the extent Julie was making up the difference, and in the absence of any indication that the debtor’s payments to her were an effort to shelter his income, Julie’s payments were not available to unsecured creditors because they related to reasonably necessary expenses which were deductible from the debtor’s current monthly income.

The trustee next challenged the debtor’s evidentiary showing of his expenses.

The court, again noting that the debtor’s living situation and expenses were in a state of flux due to his impending divorce, credited the debtor’s testimony insofar as it supported or updated the items on his schedules. Furthermore, the court observed that there is flexibility when calculating a below-median debtor’s expenses. Here, where the debtor estimated his expenses, the court used its own common sense to evaluate those expenses and found them reasonable.

The trustee also argued that the debtor’s income was higher than he represented in his amended Schedule I which he filed just before the confirmation hearing and which reduced his business income from $6,025.14 to $3,424.61. The court was not persuaded. The debtor’s original Schedule I failed to deduct operating expenses from the debtor’s gross income. In fact, the court noted that the debtor had taken on a second job to supplement his monthly income, indicating that the debtor was making efforts to repay his creditors. The debtor presented adequate evidence of his income and expenses relating to his business and his supplemental employment. The court was satisfied that he met his evidentiary burden.

The court concluded that the debtor proposed his plan in good faith and committed all his disposable income to it.

Szafraniec Bankr ND Ill May 2022

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