Can a Chapter 13 debtor deduct the full amount permitted by IRS standards on their means test, even if their actual expenses are lower? The U.S. Bankruptcy Court for the Southern District of New York, in the recent case of In re Osei, 2008 WL 2515875 (Bankr.S.D.N.Y. 2008), recently held that the debtor may do just that.
The case, involving an objection to confirmation by eCast Settlement Corporation, involved a debtor who proposed a Chapter 13 Plan proposing the pay approximately 20% of unsecured claims over 60 months. The debtor’s actual monthly rent of $1,150 was lower than the IRS standard deduction of $1,494 for a household of his size.
In a case of first impression in Southern District of New York, the court looked to Section 1325(b)(1) of the U.S. Bankruptcy Code to note that the Plan may be approved over objection if it provides that all of the debtor’s projected disposable income during the life of the Plan will be applied to make payments to unsecured creditors. Looking to Section 1325(b)(2) and 1325(b)(3), the Court reviewed how “disposable income” is to be defined.
The Court also reviewed three reported decisions by other Second Circuit bankruptcy judges, all concluding that a debtor may properly claim the full expense amounts allocated under the Local Standards even when the debtor actually spent less. See In re Schneider, 2008 WL 1885768, No. 07-32487, slip op. (Bankr.N.D.N.Y. Apr. 28, 2008) (overruling objections by creditor and trustee after finding that § 707(b)(2)(A)(ii)(I) is unambiguous, allowing a debtor to deduct the full expense amount under the Local Standards for transportation/ownership expenses); In re Roberts, 2008 WL 542503, No. 07- 210247, slip op. (Bankr.D.Conn. Feb. 28, 2008) (overruling objection by chapter 13 trustee and allowing debtor to deduct the full amount of a transportation ownership expense for a vehicle she owned free and clear of any lease or other encumbrance); In re Austin, 372 B.R. 668 (Bankr.D.Vt.2007) (holding that Congress’s intent in adopting the new § 1325(b)(3) was to allow courts to adopt a mechanical view in determining projected disposable income, looking to the deductions set out in § 707(b)(2) to determine the expense amount of the disposable income equation rather than actual expenses shown in a debtor’s schedule J).
When you fall behind on your mortgage payments in a bankruptcy, you should expect the bank to seek relief from the automatic stay. Until recently, those motions would be granted as a matter of course. In fact, most bankruptcy lawyers would not even trouble themselves to file an opposition to the motion because it was an exercise in futility.
Now, those same lawyers may decide otherwise. The Southern District of New York, in a brilliant opinion, has held that a motion from relief from stay should be denied in the case where the real estate at issue has sufficient equity to protect the bank’s interests during the term of the bankruptcy.
In the case of In re Schuessler, Case No. 07-35608 (cgm) (Bankr. S.D.N.Y. April 10, 2008) Chase Home Finance moves for relief from the automatic stay. The problem was that the alleged defaults were minimal and, although the Mortgage Servicer erroneously indicated otherwise, the property in question had equity in excess of $120,000.
Judge Cecelia Morris peeled back the layers of the onion of deceit in this case, revealing more questionable practices. For example, one of the two missing payments that the Mortgage Servicer relied upon to make its lift-stay motion was “missing” only because the payment was refused when the Debtors tendered it at the Bank Branch. The staff at the Bank Branch, as the Mortgage Servicer was quick to point out, does not work for the Mortgage Servicer; rather, the Bank Branches work for the original Mortgagee, and the Bank Branch refused to accept payments on the instructions of the Mortgage Servicer, solely because the Debtors filed for bankruptcy.
Te court notes the failure to make mortgage payments constitutes “cause” for relief from the automatic stay and is one of the best examples of a “lack of adequate protection” under Section 362(d)(1) of the Bankruptcy Code. See In re Taylor, 151 B.R. 646, 648 (E.D.N.Y. 1993). In the short run, where there is a substantial equity cushion, the single fact that a debtor has missed one or more payments is not cause per se for relief from the automatic stay. Where, as in this case, the contractual default resulted from a record-keeping glitch or miscommunication rooted in the past and does not reflect a current or ongoing failure or inability to make payments, the court held that cause does not exist for granting relief from stay. Furthermore, “where the value of the collateral substantially exceeds the secured creditor’s claim, a debtor’s breach of his financial obligation alone may not constitute ‘cause’ because the equity cushion in the collateral may provide the secured creditor with adequate protection.” In re Zeoli, 249 B.R. 61 (Bankr. S.D.N.Y. 2000); see also In re Elmira Litho, Inc., 174 B.R. 892, 904 (Bankr. S.D.N.Y. 1994).
The case reads like a roadmap of inaction, misdirection and the utter cluelessness of the bank’s lawyers. They failed to verify information, worked with incorrect data, and took no steps to ensure that the statements made to the court were correct
The real value of the case is not only in the debtor protections reaffirmed and clarified by the court, but also in revealing the operations of Chase Home Finance, LLC and their bankruptcy counsel, Steven J. Baum, P.C. for what they are - a shell game seemingly designed to obfuscate the process, stonewall honest debtors, and perpetuate the problems faces by consumers who experience financial problems.
