1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 2
3 IN RE: 4 JUAN CARLOS OCASIO ROMAN CASE NO. 11-01415 BKT 5 Chapter 13 6
8 9 XXX-XX-3794 10
12 FILED & ENTERED ON 11/16/2011
13 Debtor(s) 14
15 OPINION AND ORDER 16 17 This proceeding is before the Court upon Debtor’s Amended Chapter 13 Plan (Dkt No. 46)1 18 and the Chapter 13 Trustee’s (the “Trustee”) objection to confirmation of the debtors' chapter 13 plan 19 and objection to amended statement of current monthly income (the “Objection”) (Dkt No. 59). The 20 21 controversy is based on Debtor’s calculation of their current monthly income. Debtor, following the 22 format and instructions of Official Bankruptcy Form B22C (“Form B22C”), deducted business 23 expenses from its self-employed income, which resulted in below-median income, entitling debtors 24 25 to a three (3) year commitment period. For the reasons set forth below, this Court adopts the
mechanical test for determining disposable income as set forth in Sections 1325(b)(1)(B) and 1325(b)(2), by reference to current monthly income determined pursuant to Section 101(10A) and
1 Debtor again amended its Chapter 13 Plan on November 3, 2011 (Dkt No. 62), basing the same on the calculations of the ASCMI, thus, not affecting this Court’s current determination. 1 Official Form B22C, and therefore denies the Trustee’s Objection. 2 I. JURISDICTION 3 This Court has jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. 4 5 §§1334 and 157(a) and the General Order of referral of Title 11 Proceedings to the United States 6 Bankruptcy Court for the District of Puerto Rico dated July 19, 1984 (Torruella, C.J.). This is a core 7 proceeding in accordance with 28 U.S.C. §157(b). 8 9 II. BACKGROUND 10 Debtor is a self-employed truck driver with a monthly gross income of $4,993.99. (Schedule 11 12 I, Dkt. No. 1). Debtor’s original statement of current monthly income (“SCMI”) or Form B22C 13 shows that Debtor’s gross receipts totaled $5,925.18, and after deducting $2,093.00 as ordinary and 14 necessary business expenses, Debtor was left with a net business income of $3,832.18. (SCMI, ¶ 3, 15 16 Dkt. No. 1). The applicable commitment period was five (5) years, with a monthly disposable 17 income of $599.311. (SCMI, ¶ 59, Dkt. No. 1). 18 On April 19, 2011, debtor filed an amended SCMI (“ASCMI”)(Dkt No. 13) in which gross 19 20 receipts were increased to $6,263.21, deductions of $4,754.68 as ordinary and necessary business 21 expenses, and a resulting net business income of $1,508.53. (ASCMI, ¶ 3, Dkt. No. 13). 22 Consequently, the applicable commitment is three (3) years. (SCMI, ¶ 59, Dkt. No. 1). 23 24 The Trustee’s position is that a self-employed Chapter 13 debtor, as in this case, should not 25 be allowed to deduct the ordinary and necessary business expenses from line 3 of the SCMI when
calculating the current monthly income and the applicable commitment period, even though the official form (Form B22C) so provides. 1 III. DISCUSSION 2 The Trustee contests deduction of ordinary and necessary business expenses when calculating 3 Debtor’s current monthly income in Part I of Official Form B22C vis a vis allowing said deductions 4 5 in “Other Expenses” category included in Part IV of Form B22 C. Form B22C comprises: (i) a 6 report of current monthly income (Part I of Form B22C), (ii) calculation of the plan’s applicable 7 commitment period (Part II of Form B22C) and (iii) computation of means test and deductions to 8 9 determine monthly disposable income for above-median income chapter 13 debtors (Parts III & IV of 10 Form B22C). We must first analyze the pertinent statutory language in Sections 101(10A) and 11 12 1325(b)(2) of the Bankruptcy Code. 11 U.S.C. §§ 101(10A) & 1325. 13 Section 1325(a) sets forth the requirements for Chapter 13 plan confirmation. 11 U.S.C. § 14 1325. Additional requirements for confirmation are triggered by an objection from a trustee or an 15 16 unsecured creditor, pursuant to 11 U.S.C. § 1325(b)(1). For instance, the Court is precluded from 17 confirming a plan over the objection of a trustee or holder of an allowed unsecured claim unless: 18 (A) the value of the property to be distributed under the plan on account of such 19 claim is not less than the amount of such [unsecured] claim; or 20 (B) the plan provides that all of the debtor’s projected disposable income to be received in the applicable commitment period beginning on the date that the first 21 payment is due under the plan will be applied to make payments to unsecured 22 creditors under the plan. Section 1325(b)(1) 23 24 Debtor in this case is not proposing to pay unsecured creditors’ claims in full, therefore, he 25 must commit all of his projected disposable income received during the applicable commitment
period to fund the plan. Section 1325(b) begins the disposable income calculation by determining the debtor’s current monthly income. Section 101(10A) defines “current monthly income” as the “average monthly 1 income from all sources that the debtor receives, without regard to whether such income is taxable 2 income, derived during the 6-month period before the petition date, subject to certain exclusions 3 specified in Section 101(10A)(A)(i) & (ii). 11 U.S.C. § 101(10A). 4 5 After obtaining its current monthly income, a debtor must then subtract a series of income 6 exclusions and expense deductions to arrive at “disposable income”. In re Williams, 394 B.R. 550, 7 557 (Bankr.D.Colo. Sep 12, 2008) citing 6 Keith M. Lundin, Chapter 13 Bankruptcy § 467.1 at 467- 8 9 3 to 467-12 (3d ed.2000 & Supp.2007–1) (describing the categories of exclusions and adjustments a 10 debtor must make to get from current monthly income to disposable income). 11 12 In this regard, Section 1325(b)(2) defines “disposable income” as the current monthly income 13 received by the debtor, less amounts reasonably necessary for support and maintenance of the debtor 14 and the debtor’s dependents. 11 U.S.C.1325(b)(2)(A). 15 16 Under Section 1325(b)(2)(B), debtors engaged in business are subject to additional 17 exclusions and deductions to arrive at the disposable income. That is, after the deduction of amounts 18 necessary for support and maintenance of the debtor and the debtor’s dependents, the debtor must 19 20 also deduct from the business gross income those expenditures which are necessary for the 21 continuation, preservation, and operation of the debtor’s business. 11 U.S.C. 1325(b)(2)(B); 8 22 Collier on Bankruptcy ¶ 1325.11[4][c] (16th ed.). 23 24 In this sense, the Court’s task is limited to determining whether expenditures are necessary 25 for the continuation, preservation, and operation of the business. 11 U.S.C. 1325(b)(2)(B); 8 Collier
on Bankruptcy, supra. Discretion must be given to the debtor, who will usually know its business far better than the Court or the Trustee. Id.
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1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 2
3 IN RE: 4 JUAN CARLOS OCASIO ROMAN CASE NO. 11-01415 BKT 5 Chapter 13 6
8 9 XXX-XX-3794 10
12 FILED & ENTERED ON 11/16/2011
13 Debtor(s) 14
15 OPINION AND ORDER 16 17 This proceeding is before the Court upon Debtor’s Amended Chapter 13 Plan (Dkt No. 46)1 18 and the Chapter 13 Trustee’s (the “Trustee”) objection to confirmation of the debtors' chapter 13 plan 19 and objection to amended statement of current monthly income (the “Objection”) (Dkt No. 59). The 20 21 controversy is based on Debtor’s calculation of their current monthly income. Debtor, following the 22 format and instructions of Official Bankruptcy Form B22C (“Form B22C”), deducted business 23 expenses from its self-employed income, which resulted in below-median income, entitling debtors 24 25 to a three (3) year commitment period. For the reasons set forth below, this Court adopts the
mechanical test for determining disposable income as set forth in Sections 1325(b)(1)(B) and 1325(b)(2), by reference to current monthly income determined pursuant to Section 101(10A) and
1 Debtor again amended its Chapter 13 Plan on November 3, 2011 (Dkt No. 62), basing the same on the calculations of the ASCMI, thus, not affecting this Court’s current determination. 1 Official Form B22C, and therefore denies the Trustee’s Objection. 2 I. JURISDICTION 3 This Court has jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. 4 5 §§1334 and 157(a) and the General Order of referral of Title 11 Proceedings to the United States 6 Bankruptcy Court for the District of Puerto Rico dated July 19, 1984 (Torruella, C.J.). This is a core 7 proceeding in accordance with 28 U.S.C. §157(b). 8 9 II. BACKGROUND 10 Debtor is a self-employed truck driver with a monthly gross income of $4,993.99. (Schedule 11 12 I, Dkt. No. 1). Debtor’s original statement of current monthly income (“SCMI”) or Form B22C 13 shows that Debtor’s gross receipts totaled $5,925.18, and after deducting $2,093.00 as ordinary and 14 necessary business expenses, Debtor was left with a net business income of $3,832.18. (SCMI, ¶ 3, 15 16 Dkt. No. 1). The applicable commitment period was five (5) years, with a monthly disposable 17 income of $599.311. (SCMI, ¶ 59, Dkt. No. 1). 18 On April 19, 2011, debtor filed an amended SCMI (“ASCMI”)(Dkt No. 13) in which gross 19 20 receipts were increased to $6,263.21, deductions of $4,754.68 as ordinary and necessary business 21 expenses, and a resulting net business income of $1,508.53. (ASCMI, ¶ 3, Dkt. No. 13). 22 Consequently, the applicable commitment is three (3) years. (SCMI, ¶ 59, Dkt. No. 1). 23 24 The Trustee’s position is that a self-employed Chapter 13 debtor, as in this case, should not 25 be allowed to deduct the ordinary and necessary business expenses from line 3 of the SCMI when
calculating the current monthly income and the applicable commitment period, even though the official form (Form B22C) so provides. 1 III. DISCUSSION 2 The Trustee contests deduction of ordinary and necessary business expenses when calculating 3 Debtor’s current monthly income in Part I of Official Form B22C vis a vis allowing said deductions 4 5 in “Other Expenses” category included in Part IV of Form B22 C. Form B22C comprises: (i) a 6 report of current monthly income (Part I of Form B22C), (ii) calculation of the plan’s applicable 7 commitment period (Part II of Form B22C) and (iii) computation of means test and deductions to 8 9 determine monthly disposable income for above-median income chapter 13 debtors (Parts III & IV of 10 Form B22C). We must first analyze the pertinent statutory language in Sections 101(10A) and 11 12 1325(b)(2) of the Bankruptcy Code. 11 U.S.C. §§ 101(10A) & 1325. 13 Section 1325(a) sets forth the requirements for Chapter 13 plan confirmation. 11 U.S.C. § 14 1325. Additional requirements for confirmation are triggered by an objection from a trustee or an 15 16 unsecured creditor, pursuant to 11 U.S.C. § 1325(b)(1). For instance, the Court is precluded from 17 confirming a plan over the objection of a trustee or holder of an allowed unsecured claim unless: 18 (A) the value of the property to be distributed under the plan on account of such 19 claim is not less than the amount of such [unsecured] claim; or 20 (B) the plan provides that all of the debtor’s projected disposable income to be received in the applicable commitment period beginning on the date that the first 21 payment is due under the plan will be applied to make payments to unsecured 22 creditors under the plan. Section 1325(b)(1) 23 24 Debtor in this case is not proposing to pay unsecured creditors’ claims in full, therefore, he 25 must commit all of his projected disposable income received during the applicable commitment
period to fund the plan. Section 1325(b) begins the disposable income calculation by determining the debtor’s current monthly income. Section 101(10A) defines “current monthly income” as the “average monthly 1 income from all sources that the debtor receives, without regard to whether such income is taxable 2 income, derived during the 6-month period before the petition date, subject to certain exclusions 3 specified in Section 101(10A)(A)(i) & (ii). 11 U.S.C. § 101(10A). 4 5 After obtaining its current monthly income, a debtor must then subtract a series of income 6 exclusions and expense deductions to arrive at “disposable income”. In re Williams, 394 B.R. 550, 7 557 (Bankr.D.Colo. Sep 12, 2008) citing 6 Keith M. Lundin, Chapter 13 Bankruptcy § 467.1 at 467- 8 9 3 to 467-12 (3d ed.2000 & Supp.2007–1) (describing the categories of exclusions and adjustments a 10 debtor must make to get from current monthly income to disposable income). 11 12 In this regard, Section 1325(b)(2) defines “disposable income” as the current monthly income 13 received by the debtor, less amounts reasonably necessary for support and maintenance of the debtor 14 and the debtor’s dependents. 11 U.S.C.1325(b)(2)(A). 15 16 Under Section 1325(b)(2)(B), debtors engaged in business are subject to additional 17 exclusions and deductions to arrive at the disposable income. That is, after the deduction of amounts 18 necessary for support and maintenance of the debtor and the debtor’s dependents, the debtor must 19 20 also deduct from the business gross income those expenditures which are necessary for the 21 continuation, preservation, and operation of the debtor’s business. 11 U.S.C. 1325(b)(2)(B); 8 22 Collier on Bankruptcy ¶ 1325.11[4][c] (16th ed.). 23 24 In this sense, the Court’s task is limited to determining whether expenditures are necessary 25 for the continuation, preservation, and operation of the business. 11 U.S.C. 1325(b)(2)(B); 8 Collier
on Bankruptcy, supra. Discretion must be given to the debtor, who will usually know its business far better than the Court or the Trustee. Id. Section 1325(b)(3) directs the use of the “means test” rules of Section 707(b)(2)(A) and (B) 1 for an above-median debtor to determine the amounts reasonably necessary to be expended for 2 purposes of calculating disposable income and to determine payments to unsecured creditors. 11 3 U.S.C. §707(b)(2)(A)&(B). 4 5 The applicable commitment period for above-median income chapter 13 debtors is not less 6 than five years, 11 U.S.C. §1325(b)(4)(A)(ii), although, the commitment period for below-median 7 income debtors is three years. 11 U.S.C. §1325(b)(4)(A)(i). 8 9 Here, the Trustee argues that Debtor should deduct the business expenses in Part IV of the 10 Form B22C in order to determine his disposable income, and not in Part I of the Form B22C where 11 12 the current monthly income is computed. The Trustee claims that the plain meaning of the statute 13 dictates such a result. 14 The Court agrees that the plain meaning of the statute must govern the result. However, the 15 16 Court disagrees with the Trustee’s interpretation of the plain meaning of Sections 101(10A), 17 1325(b)(2)(B) and Form B22C. 18 To assist a debtor in calculating the required disposable income amount under § 1325(b)(2), 19 20 the Judicial Conference of the United States prescribed Official Form B22C. Moreover, Bankruptcy 21 Rule 9009 requires the use of Official Forms, which shall be construed to be consistent with the 22 Bankruptcy Rules and Code. Particularly, Form B22C is intended to provide a standard 23 24 methodology for evaluating a debtor’s income and expenses. In re Nance, 371 B.R. 358, 361-62 25 (Bankr.S.D.Ill.2007).
Pursuant to Fed. R. Bank. P. 1007(b)(6), debtors must complete Form B22C to determine its current monthly income and to calculate the disposable income amount. Using Form B22C, debtors compute their current monthly income (Part I of Form B22C) and the plan’s applicable commitment 1 period (Part II of Form B22C). 2 In establishing the current monthly income, Part I of Form B22C allows a debtor to deduct 3 the ordinary and necessary business expenses from the gross receipts of the operation of its business, 4 5 the difference of which is reported as business income. (Form B22C, Lines 3a to 3c). Form B22C 6 uses net, and not gross, business income to calculate a debtor’s current monthly income, which is the 7 income a debtor could expect to receive monthly. (Form B22C, Lines 3a to 3c). 8 9 All chapter 13 debtors are required to complete Form B22C and adhere to its form. After all, 10 Official Form 22C was considered and approved by the Advisory Committee on Bankruptcy Rules 11 12 and required by Fed.R.Bank.P. 1007(b)(6) & 9009. In fact, the Judicial Conference of the United 13 States approved and published, effective Jan. 1, 2008, amended Official Forms 22A, 22B and 22C, 14 which provide that current monthly income should include only net business expense amounts. 15 16 (Form B22C, Lines 3a to 3c). 17 Moreover, Form B22C provides for reporting of business expenses (Form B22C, Lines 3a to 18 3c), which are not listed as a specific category under “Other Necessary Expenses” (Part IV of Form 19 20 B22C), but rather included for computation of debtor’s current monthly income. (Part I of Form 21 B22C). 22 A myriad of interpretations exist as to the expense deduction allowed by Form B22C, some 23 24 which consider it to be inconsistent with 11 U.S.C. §1325(b)(2). See In re Wiegand, 386 B.R. 238, 25 242 (9th Cir. BAP 2008) citing In re Arnold, 376 B.R. 652, 654 (Bankr.M.D.Tenn.2007). Although
this Court recognizes that the different approaches are supported by persuasive arguments and authority, this Court sees no sufficient reason to depart from the mechanical test established in Sections 101(10A) and 1325(b) or from Form B22C. It is most likely that only in rare instances will 1 the Courts consider confirming chapter 13 plans that do not conform to the calculations on Form 2 B22C. In re Tuss, 360 B.R. 684, 692 (Bankr.D.Mont.2007). 3 Among other things, the additional income of a business (as of a non-debtor spouse) is 4 5 completely irrelevant for the reckoning of Debtor’s plan, if that income is not made available to 6 cover household expenses so that the debtor has more money available to make the plan payment. 7 See In re Dugan, 2008 WL 3558217 (Bankr. D. Kan. Aug. 12, 2008)(in determining whether to 8 9 consider income of a non-filing spouse). 10 Also, the use of gross receipts for self-employed debtors would lead to distinctions in the 11 12 calculation of current monthly income based on the business form under which the debtor has chosen 13 to operate, resulting in prejudicial treatment to business proprietors. Mark A. Redmiles, Saleela 14 Khanum Salahuddin, The Net Effect: Debtors with Business Income Are Permitted to Deduct 15 16 Ordinary and Necessary Business Expenses in Calculating Current Monthly Income, 27-OCT Am. 17 Bankr. Inst. J. 16, 57 (2008). Business owners need to invest in business related expenses, such as 18 raw materials and equipment, prior to generating any income. As a result, the net revenue (gross 19 20 revenue minus expenses) becomes the real income. 21 The Trustee’s interpretation of Form B22C would artificially inflate the current monthly 22 income of Debtor by including as part of his income the business revenue that would in fact be 23 24 consumed by business expenses, thereby forcing a longer commitment period under. 11 U.S.C. § 25 1325(b)(4).
Debtors filed its Amended Form B22C or SCMI, subtracting business expenses on Line 3, Part I, allowing for their current monthly income to fall below the median. As such, they were not required to fill out Parts IV through VI and could file a three-year plan. Trustees have no legitimate 1 || interest in objecting to plans, or modifications thereof, where debtors propose to pay all that they ca 2 truly afford. 8 Collier on Bankruptcy 4 1325.11[4][a] (16th ed.). 3 4 This Court holds that it will apply the mechanical test in determining disposable income i > |! both Sections 1325(b)(1)(B) and 1325(b)(2) by reference to current monthly income determine 6 pursuant to Section 101(10A) and Form B22C. 7 8 WHEREFORE, IT IS ORDERED that, in light of the foregoing, the Trustee’ s Objection (Dk 2 59) is hereby DENIED. 10 IT IS SO ORDERED. 11 San Juan, Puerto Rico this 16 day of November, 2011. 12 13 14 Aa 15 an K. T®@ster 16 .S. Bankruptcy Judge 17 18 19 20 21 22 23 24 25