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In re Smith

October 5, 2009


Appeal from the United States Bankruptcy Court for the Western District of Washington, Hon. Paul B. Snyder, Bankruptcy Judge, Presiding. Bk. No. 07-43853-PBS.

The opinion of the court was delivered by: Montali, Bankruptcy Judge


Chapter 13 Trustee,


Argued and Submitted on May 19, 2009 at Seattle, Washington

Before: MONTALI, JURY and HOLLOWELL, Bankruptcy Judges.

In this case we decide an issue that has come before many courts throughout the country, but not before this Panel or the United States Court of Appeals for the Ninth Circuit. It is a problem that has vexed the bankruptcy bench and bar since the law was changed in 2005: may a debtor "deduct" secured debt payments not being paid because the property has been surrendered? We part company with several of our colleagues and conclude that debtors may not take those deductions.*fn1 Our conclusion is reinforced by a persuasive and compelling statement from our own court of appeals just a few weeks ago: "Ironic it would be indeed to diminish payments to unsecured creditors in this context on the basis of a fictitious expense not incurred by a debtor." Ransom v. MBNA Am. Bank (In re Ransom), 577 F.3d 1026, 1030 (9th Cir. 2009).

The chapter 13 trustee, the United States Trustee and an unsecured creditor objected to confirmation of debtors' chapter 13*fn2 plan, arguing that debtors had failed to devote all of their "projected disposable income" to payment of unsecured creditors as required by section 1325(b) and that the plan was not proposed in good faith. In particular, in calculating their "projected disposable income," debtors deducted payments for collateral (two houses and a vehicle) which they were surrendering under their plan.

Holding that Congress removed the flexibility of courts to consider whether the expenses of above-median income debtors are "reasonably necessary" and that the fixed formula of the means test under section 707(b)(2) (as incorporated by section 1325(b)(3)) permitted debtors to deduct payments that they were contractually obligated to make as of the petition date even though they intended to surrender the collateral, the bankruptcy court overruled the objections. All three objecting parties appealed.

Subsections (b)(2) and (b)(3) of section 1325, read together, provide that if an expense is not reasonably necessary for a debtor's and/or dependants' maintenance and support, it is not included in the calculation of disposable income. If the expense is reasonably necessary, and the debtor is an above-median income debtor, subsection (b)(3) requires the court to determine the amount in accordance with section 707(b)(2). In other words, subsections 1325(b)(2) and (b)(3) require a two-part inquiry.

Because we believe that a bankruptcy court must consider whether debtors themselves treat expenses as "reasonably necessary for their and their dependents' maintenance and support under section 1325(b)(2) before determining the "amount" of that expense under subsection (b)(3), we REVERSE. Given this result, we do not need to decide whether the bankruptcy court erred in rejecting the good faith objections.


Timothy and Karrie Smith ("Debtors") filed a voluntary chapter 7 petition on November 14, 2007. Debtors also filed a Statement of Current Monthly Income and Means Test Calculation ("Form B 22A"). After the United States Trustee ("UST") moved to dismiss the case under section 707(b), and with Debtors' consent, the bankruptcy court entered an order converting the case to chapter 13. The conversion order states that for the reasons set forth in the court's oral ruling, "the circumstances of the debtors' financial situation demonstrates abuse, justifying dismissal or, with the debtors' consent, conversion to chapter 13[.]"

Debtors' post-conversion Schedule I reflected actual, projected monthly gross income of $10,417, less payroll deductions of $2,810, for a net monthly income of $7,607. Schedule I also reflects that Debtors support three children aged 15 and under. Debtors' post-conversion Schedule J reflected living expenses in the amount of $6,718. Debtors also filed their Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income ("Form B 22C"), which contained the same financial information as that disclosed in their Form B 22A, except that Form B 22C included a chapter 13 administrative expense of $89 a month.

In particular, both Form B 22A and Form B 22C showed a current monthly income of $12,906 (for annual income of $154,872), which all parties agree was in excess of the applicable state median income. Debtors deducted from this income monthly expenses of $14,655, resulting in a negative monthly disposable income of -$1,749.00. Debtors' expenses included $7,185 in monthly payments on two houses and a vehicle which they proposed to surrender pursuant to section 4 of their chapter 13 plan. Because the resulting disposable income was a negative figure, Debtors did not propose a five-year plan but instead proposed a six-month plan with plan payments of $889 a month, providing unsecured creditors a total of $4,300.60 for a yield of approximately four percent.

If the payments on the surrendered property were not deducted, Debtors could claim a statutorily allowed housing allowance of $1,245*fn3 and would have a positive monthly disposable income of $4,191. In that event, Debtors could pay the scheduled unsecured debt*fn4 in full over 24 months (if all disposable income were applied to the plan each month) or in full over 60 months (if Debtors applied less than half of their disposable income to the plan each month).

American Express Bank, FSB ("Amex"), the UST and the chapter 13 trustee ("Trustee")*fn5 (collectively, "Appellants") objected to confirmation of Debtors' plan. They contended that if Debtors did not deduct payments for surrendered property when calculating their monthly disposable income, Debtors would be able to pay a 100 percent dividend to all creditors.*fn6 Both the UST and Amex asserted that Debtors' plan was not proposed in good faith (thus violating section 1325(a)(3)) and that the deduction of expenses for surrendered collateral was contrary to Congress' intent in enacting BAPCPA. Trustee contended that section 1325(b)(2) requires a court to determine whether an expense is "reasonably necessary" and that section 1325(b)(3)'s incorporation of the means test calculation of section 707(b)(2) for determining the "amounts" of permissible expenses simply supplements section (b)(2) and does not replace or supersede it. The UST contended that section 707(b)(2)(A) does not permit the deduction of payments on debts secured by property surrendered or to be surrendered by Debtors.

On November 14, 2008, the bankruptcy court entered an order overruling Appellants' objections to confirmation and a memorandum decision setting forth its findings of fact and conclusions of law. See In re Smith, 401 B.R. 469 (Bankr. W.D. Wash. 2008). Amex and the UST filed timely notices of appeal on November 24, 2008, commencing BAP Nos. 08-1311 and 1312, respectively. Trustee's predecessor filed a notice of appeal on November 25, 2008, commencing BAP No. 08-1313.*fn7

No order confirming Debtors' plan has been entered, so the order on appeal is interlocutory. On February 26, 2009, we sua sponte entered an order granting Appellants leave to appeal the interlocutory order overruling the objections to confirmation of Debtors' chapter 13 plan.*fn8 We also allowed Debtors to file a joint brief for all three appeals.

The case was argued before us on May 19, 2009. On August 14, 2009, the Ninth Circuit issued its Ransom decision.


In calculating their disposable income to be paid under their plans, may above-median income chapter 13 debtors deduct payments for collateral they are surrendering?


The bankruptcy court had jurisdiction under 28 U.S.C. § 157(b)(2)(L) and § 1334. We have jurisdiction under 28 U.S.C. § 158(a)(3), as we have granted leave to Appellants to appeal the interlocutory order ...

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