Barbara Gentry Sterrenberg

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
GREENVILLE DIVISION
IN RE:
BARBARA GENTRY STERRENBERG,
DEBTOR
CHAPTER 7
CASE NO. 11-08543-8-RDD
ORDER GRANTING MOTION TO DISMISS
CHAPTER 7 PROCEEDING PURSUANT TO 11 U.S.C. § 707(b)(1) OR (b)(3)
Pending before the Court is the Motion to Dismiss Chapter 7 Proceeding Pursuant to 11
U.S.C. § 707(b)(1) and (b)(3) filed by the Bankruptcy Administrator on January 12, 2012 (the
“Motion to Dismiss”) and the Response to Motion to Dismiss Chapter 7 Proceeding Pursuant to Rule
707(b)(1) and (b)(3) filed by Barbara Gentry Sterrenberg (the “Debtor”) on February 29, 2012 (the
“Response”). A hearing was held on April 26, 2012 in Wilson, North Carolina to consider the
Motion to Dismiss and the Response.
On November 8, 2011, the Debtor filed a voluntary petition for relief under Chapter 7 of title
11 of the United States Code (the “Bankruptcy Code”). As part of her petition, the Debtor filed her
Schedules, Official Form B22A-Chapter 7 Statement of Current Monthly Income and Means Test
(“Form B22A”). The Debtor indicated on Form B22A that based on the initial calculation of her
SO ORDERED.
SIGNED this 18 day of May, 2012.
________________________________________
Randy D. Doub
United States Bankruptcy Judge
____________________________________________________________
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monthly income a presumption of abuse did not arise. 	The Bankruptcy Administrator filed a
statement of presumed abuse which was timely docketed on December 20, 2011.
The Debtor’s schedules disclose that she has $227,253.63 of secured debts, $0.00 of priority
unsecured debts, and $104,173.18 of non-priority unsecured debts. Her debts consist primarily of
consumer debts. 	The Debtor’s schedule I indicates that she receives gross monthly wages of
$9,593.24. The Debtor deducts from her wages the following: $2,950.58 for payroll taxes and social
security; $550.17 for insurance; $51.94 for cafeteria; $387.47 for 401(k) loan; and $4.43 for
uniform. After payroll deductions the Debtor’s net monthly take home pay is $5,648.65. On the
means test the Debtor indicates that her current monthly income (“CMI”) as defined in 11 U.S.C.
§ 101(10A), from her employment is $9,593.24. The Debtor has been separated from her spouse
since February 2011. On line 42, the Debtor deducts $1,260.65 for a secured debt on her one-half
interest in her former residence, $202.08 for a secured debt on a one-half interest in a 2005 Sea Fox
Boat in the possession of her separated spouse, and $674.20 on a secured debt for a 2011 Chevrolet
Camaro. The Statement of Intention filed with the petition indicates that the Debtor intends to
surrender the collateral securing these debts. The separated non-debtor spouse has been making the
payments on the house and the boat. The Debtor’s CMI does not account for the payments that the
separated spouse has been making for her benefit.
Pursuant to the Motion to Dismiss, the Bankruptcy Administrator asserts that the Debtor’s
case should be dismissed pursuant to 11 U.S.C. § 707(b)(1). 	The Bankruptcy Administrator
contends that the Debtor has improperly calculated her means test, and once corrected, the case
would be a presumed abuse. Further, the Bankruptcy Administrator believes that the Debtor has a
projected disposable income that would require a substantial dividend to unsecured creditors in a
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Chapter 13. Additionally, pursuant to the motion, the Bankruptcy Administrator argues that when
taken as a whole, even if the presumption of abuse does not arise, this case should be dismissed
based on the totality of the circumstances of the Debtor’s financial situation pursuant to 11 U.S.C.
§ 707(b)(3).
The Debtor disputes that she has improperly calculated her means test, and contends that
there are special circumstances that warrant her deductions.
At the hearing, counsel for the Bankruptcy Administrator requested the Court only consider
the Section 707(b)(1) argument. Additionally, both the Bankruptcy Administrator and Counsel for
the Debtor agreed that the main issue before the Court is whether the Debtor’s deductions for debt
payment as indicated on Line 42 ($1,260.65 for a secured debt on her former residence; $202.08 on
a boat in the possession of her separated spouse, and $674.20 for a 2011 Chevrolet Camaro) should
be allowed. If the deductions are disallowed then the Debtor’s case is clearly an abuse. If the
deductions are allowed then the Debtor’s case is not an abuse.
Section 707(b)(1) provides that the Court may dismiss a case under Chapter 7 or, with the
consent of the debtor, convert a case to Chapter 11 or 13, should the court determine that granting
relief would be an abuse of the provisions of Chapter 7. To determine whether granting relief would
be an abuse, a court should presume an abuse if the debtor’s current monthly income reduced by
certain amounts and multiplied by 60 is not less than the lesser of 25 percent of the debtor’s
nonpriority unsecured claims, or $7,025, whichever is greater; or $11,725. 	11 U.S.C. §
707(b)(2)(A)(I). In re Leggett, No. 10-03383-8-RDD, 2011 WL 802806 at *2 (Bankr. E.D.N.C.
Mar. 2, 2011).
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The Bankruptcy Administrator argues that the deductions taken on line 42 ($1,260.65 for a
secured debt on her former residence, $202.08 on a boat in the possession of her separated spouse,
and $674.20 for a 2011 Chevrolet Camaro) should be disallowed because the Debtor intends to
surrender the collateral securing these debts and the separated spouse has been making the payments
on the house and the boat. Therefore, the Debtor will not be making these payments going forward.
The Debtor contends that the plain language of the statute allows her to deduct the payments.
The issue therefore, is whether the Debtor may claim a line 42 deduction, for payments that
the Debtor does not intend to pay, secured by collateral that the Debtor does not intend to retain.
This is a matter of first impression in this Court.
11 U.S.C. § 707(b)(2)(A)(iii) provides:
[t]he debtor’s average monthly payments on account of secured debts shall be
calculated as the sum of - (I) the total of all amounts scheduled as contractually due
to secured creditors in each month of the 60 months following the date of the filing
of the petition; and - (II) any additional payments to secured creditors necessary for
the debtor, in filing a plan under chapter 13 of this title, to maintain possession of the
debtor’s primary residence, motor vehicle, or other property necessary for the
support of the debtor and the debtor’s dependents, that serves as collateral for
secured debts; divided by 60.
Therefore, the means test allows debtors to deduct from their monthly disposable income “the total
of all amounts scheduled as contractually due to each secured creditor in the 60 months following
the filing of the bankruptcy case.” Form B22A, Line 42.
Courts having addressed this issue have come to varying conclusions. The court in In re
Walker, 2006 WL 1314125 (Bankr. N.D.Ga. May 1, 2006), addressed the issue of whether the
Chapter 7 debtors could include in their means test calculation deductions for payments secured by
collateral that the debtors intended to surrender after the bankruptcy filing. Id. at 2. See also, In re
Rudler, 576 F.3d 37, 45 (1st Cir. 2009) (holding that a Chapter 7 debtor may deduct from his CMI
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secured debt payments, regardless of whether the debtor intends to surrender the collateral
corresponding to the debt); In re Oliver, 2006 WL 2086691 at * 3 (Bankr. D.Or. Jun. 29, 2006)
(finding that the Chapter 13 debtors could include on Form B22C average payments on secured
debts even when those payments would not be made under the plan). 	The bankruptcy court
examined the language in 11 U.S.C. § 707(b)(2)(A)(iii) and determined that the phrase “scheduled
as contractually due” permitted the debtor to deduct the payments even if the debtor intended to
surrender the property postpetition. Id. at 3.
Other bankruptcy courts have found that monthly payments for secured debts may not be
included in the means test calculation when the debtor intends to surrender the collateral. In re
Harris, 353 B.R. 304, 309-310 (Bankr. E.D.Okla. Oct. 13, 2006). The court in In re Harris, adopted
the reasoning of In re Skaggs, 349 B.R. 594, 599-600 (Bankr. E.D.Mo. 2006). 	In Skaggs, the
bankruptcy court noted that “Congress used the phrase ‘scheduled as’ several times in the
Bankruptcy Code to refer not to the common dictionary meaning for the word schedule (i.e. ‘To plan
for a certain date’), but to whether a debt is identified on a debtor’s bankruptcy schedules.” Id. at
309 (quoting In re Skaggs, 349 B.R. at 599-600). Applying this reasoning, the Harris court noted
that the “means test was intended to ‘ensure that those who can afford to repay some portion of their
unsecured debts [be] required to do so.’” Id. at 309 (quoting Hardacre, 338 B.R. at 725 (quoting 151
CONG. REC. S2470 (March 10, 2005))). The court concluded that “monthly payments for secured
debt cannot be included in the means test calculation when a debtor or debtors intend to surrender
the corresponding collateral.” Id. at 309-310.
Guided by the Harris decision, the court in In re Ray, found that the debtors were not
allowed to deduct secured payments for collateral when the debtors stated their intention to
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surrender the collateral in their Statement of Intention. In re Ray, 362 B.R. 680, 685 (Bankr. D.S.C.
Feb. 28, 2007). The court discussed the varying authorities on the issue and noted that the deduction
at issue was for “average monthly payments on account of secured debts” which is calculated by
looking to the “60 months following the date of the filing of the petition.” Id. at 684. The court
found that these two phrases “are best construed as contemplating a forward-looking calculation.”
Id. at 685. The court determined that the “better construction of ‘scheduled as contractually due’
would consider the debtors’ intention to surrender the collateral and make no future payments to the
creditor.” Id. Because the debtors indicated on their Statement of Intention, the intent to surrender
the collateral and make no future payments to the creditor, 	the debt was not “scheduled as
contractually due.” Id. 	Therefore, the debtors could not deduct the “average monthly payments”
from their current monthly income. Id. The Ray court noted that when considering “whether debtors
are abusing chapter 7 it is proper to construe the statute in such a way as to determine whether they
have an ability to repay their general unsecured creditors once they have carried out their stated
intentions.” Id.
The Fourth Circuit recently addressed the issue of whether the debtor’s “projected disposable
income” should take into account the debtor’s intention to surrender two vehicles to her secured
creditors in Morris v. Quigley (In re Quigley), 673 F.3d 269 (4th Cir. 2012). The bankruptcy court
held that the Chapter 13 debtor could deduct monthly payments made during the six-month period
preceding the bankruptcy even though she would not in fact be required to make these payments
through her plan. Id. at 271. The Chapter 13 trustee appealed and the district court affirmed. Id.
Reversing the bankruptcy court and the district court, the Fourth Circuit relied on Hamilton v.
Lanning, 130 S.Ct. 2464 (2010), which was decided after the bankruptcy court’s and district court’s
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decisions. Id. at 272-273. The Fourth Circuit noted that the Supreme Court in Hamilton v. Lanning,
adopted a “forward looking approach” and held “that when a bankruptcy court calculates a debtor’s
projected disposable income, the court may account for changes in the debtor’s income or expenses
that are known or virtually certain at the time of confirmation.” Id. at 273 (quoting Hamilton v.
Lanning, 130 S.Ct. 2462, 2478 (2010)). The debtor attempted to distinguish Lanning, by noting that
Lanning involved a change in income where the debtor’s case involved a change in expense. Id.
The Fourth Circuit held, however, that the same principles articulated by the Supreme Court apply
equally to both situations. Id.
The Supreme Court addressed the issue of “whether a [chapter 13] debtor who does not
make loan or lease payments on his car may claim the deduction for vehicle-ownership costs.”
Ransom v. FIA Card Services, N.A., 131 S.Ct. 716, 723 (2011). In making this determination, the
Supreme Court interpreted 11 U.S.C. § 707(b)(2)(A)(ii)(I). 	The Court focused on the term
“applicable” expense amounts. Id. at 724. The Court determined an “expense amount is ‘applicable’
within the plain meaning of the statute when it is appropriate, relevant, suitable, or fit.” Id. The
Court held that a deduction is “appropriate” to a debtor, “only if the debtor has costs corresponding
to the category covered by the table–that is, only if the debtor will incur that kind of expense during
the life of the plan.” 	Id. 	The Court noted that “[i]f a debtor will not have a particular kind of
expense during his plan, an allowance to cover that cost is not “reasonably necessary” within the
meaning of the statute.” Id. at 725. 	Referencing Hamilton v. Lanning, the Court noted that
“Congress designed the means test to measure debtors’ disposable income and, in that way, ‘to
ensure that [they] repay creditors the maximum they can afford.’” Id. at 725 (quoting H.R.Rep. No.
109-31, pt. 1, p.2 (2005)).
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Although Ransom involved a Chapter 13 case, the same principles apply here. In re Wilson,
454 B.R. 155, 157 (Bankr. D.Colo. Feb. 25, 2011) (applying Ransom and finding that the debtor
could not deduct, as “applicable monthly expense amount,” the standard mortgage/rent expense,
when the debtor did not pay any rent and did not have any mortgage obligation for the property
where he resided). “The Supreme Court’s analysis was focused on the terms of § 707(b)(2)(A)(ii)(I)
and the overall purpose of the Means Test, which is obviously applicable to Chapter 7 cases as well
as being incorporated in § 1325. Although the Ransom Court found support for its interpretation
from the context of § 1325(b)(3) and that section’s definition of disposable income for purposes of
a Chapter 13 plan, see id. at 724 - 25, the Court’s holding was in no way limited to Chapter 13
cases.” Id. As such, this Court must apply the holding of Ransom to this case.
The holdings of Ransom, Hamilton v. Lanning, and Morris v. Quigley, provide clear
guidance. Taken together, this recent line of cases departs from the strict formulaic approach to the
means test and takes into account what is likely to occur in the future. Applying this reasoning
furthers the purpose of the means test, “which was intended to ‘ensure that those who can afford to
repay some portion of their unsecured debts [be] required to do so.’” In re Harris, 353 B.R. at 309
(quoting Hardacre, 338 B.R. at 725 (quoting 151 CONG. REC. S2470 (March 10, 2005)). The
cases cited above holding that Chapter 7 debtors may include in their means test calculation
deductions for payments secured by collateral that the debtors intended to surrender after the
bankruptcy filing, were decided prior to the decisions in Ransom, Hamilton v. Lanning, and Morris
v. Quigley. Thus, this Court’s decision reflects the Fourth Circuit and Supreme Court precedent
which encourages courts to apply a more case-specific forward looking approach that takes into
account the Debtor’s known or virtually certain future income and expenses.
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Here, the Debtor deducts secured payments and intends to surrender the corresponding
collateral. As the court in Ray noted, the best construction of “scheduled as contractually due”
considers the debtor’s intention to surrender the collateral and to make no future payments to the
creditor. In re Ray, 362 B.R. at 685. The Debtor’s Statement of Intention shows the debtor intends
to surrender the house, boat, and Chevy Camaro. The house and boat are currently in the possession
of the Debtor’s separated spouse who has been making payments on these obligations. Not only
does the Debtor intend to surrender the collateral, her non-filing separated spouse is making the
payments. To allow the Debtor to take these secured payment deductions would be absurd and
diametrically in opposition to the policy goals of the means test which Justice Kagan noted in
Ransom are “to help ensure that debtors who can pay creditors do pay them.” Ransom v. FIA Card
Services, N.A., 131 S.Ct. 716, 721 (2011) (emphasis in original). Looking forward, and taking into
account the Debtor’s actual financial situation, the Court finds that the Debtor will not be allowed
to deduct such fictional secured expenses. Therefore, the deductions for debt payment as to the 2011
Chevrolet Camaro, the one-half interest in home on 1 acre lot and the one-half interest in the 2005
Sea Fox Boat are not allowed because the Debtor intends to surrender the corresponding collateral.
As a result, the presumption of abuse arises pursuant to 11 U.S.C. § 707(b)(2).1 The Debtor has
1Based on the Debtor’s Amended Schedule F, the Debtor has $104,973.07 in nonpriority
unsecured claims. Twenty-five percent of those claims equals $26,243.27. Therefore, because
$11,725.00 is less than one quarter of the Debtor’s nonpriority unsecured claims, the Debtor’s
disposable income (current monthly income reduced by allowed deductions) multiplied by 60
must be less than $11,725.00. According to Form B22A, the Debtor’s monthly net or disposable
income is $-630.74. Over 60 months, the Debtor has $-37,844.40 in disposable income. This
amount is less than $11,725.00. Therefore, the Debtor indicated the presumption of abuse did
not arise. The Court finds that the Debtor is not allowed deductions in the amount of $1,260.65
for a secured debt on the debtor’s one-half interest in her former residence, $202.08 for a secured
debt on a one-half interest in a 2005 Sea Fox Boat in the possession of her separated spouse, and
$674.20 on a secured debt for a 2011 Chevrolet Camaro. Therefore, the calculation should be as
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failed to rebut the presumption of abuse and the motion to dismiss is GRANTED. The Debtor shall
have ten (10) days from the entry of this order to convert the case to a case under Chapter 13.
Should the Debtor fail to convert this case within ten (10) days, the case is DISMISSED pursuant
to § 707(b)(1).
SO ORDERED.
END OF DOCUMENT
follows: the Debtor’s monthly net or disposable income is $1,506.19. Over 60 months the Debtor
has $90,371.40 in disposable income. This amount is greater than $11,725.00, therefore, the
presumption of abuse arises in the Debtor’s case.
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