The chapter 13 debtors’ monthly mortgage payment was $1,100 more than the local standard mortgage deduction. Abjuring a split of circuits, the Fourth Circuit held that debtors with above-median income can deduct the actual amount of their mortgage payments when calculating disposable income.
Upholding Bankruptcy Judge Stephanie W. Humrickhouse on direct appeal, the June 14 opinion by Circuit Judge Toby J. Heytens sided with the Sixth and Ninth Circuits.
The Mortgage and Official Form 122C-2
A couple filed a chapter 13 petition, owning a home with a monthly mortgage payment of some $2,200. They calculated their disposable income on Official Form 122C-2. Subtracting the entire monthly mortgage payment, they ended up with disposable monthly income of $253 earmarked for creditors.
The chapter 13 trustee objected, contending that the debtors could only deduct about $1,100, the local standard deduction for home mortgages. The trustee believed that the debtors should be paying another $1,100 to their creditors every month.
Bankruptcy Judge Humrickhouse of Raleigh, N.C., overruled the objection and confirmed the plan. When the trustee appealed, Judge Humrickhouse certified a direct appeal to the Fourth Circuit. The appeals court accepted the direct appeal.
The Complex Statute
Judge Heytens said that the “relevant statutory provisions — though intricate — are straightforward.” The answer to the appeal lay in the complex interrelationship among the subdivisions in Section 707(b)(2).
Without tracking all of the detail meticulously laid out by Judge Heytens, the answer is buried in Section 707(b)(2)(A)(iii)(I). The subsection says that debtors’ “average monthly payments on account of” their mortgages “shall be calculated” based on the amounts “contractually due to secured creditors.”
Next, Section 707(b)(2)(A)(i) says that debtors “reduce[]” their “current monthly income” “by the amount[] determined under” Section 707(b)(2)(A)(iii)(I).
The answer, Judge Heytens said, is “easy-peasy” and yields disposable income of $253.
The trustee offered “a flurry of arguments against this straightforward reading,” Judge Heytens said. He described the arguments as failing “multiple times over.”
In addition to allowing a deduction for the contractually due mortgage payments, Judge Heytens explained that Section 707(b)(2)(A)(iii)(I) “allows debtors to deduct ‘any additional payments to secured creditors necessary for the debtor . . . to maintain possession of the debtor’s primary residence.’” He said that the provision “cannot be squared with the trustee’s view that the means test could leave debtors . . . with insufficient funds to pay their mortgage in the first place.”
As a matter of public policy, the trustee wanted the court to impose a reasonableness test. Like the Ninth Circuit, Judge Heytens recognized that his interpretation of the statute could allow debtors to retain expensive homes and luxury items, yielding little disposable income for creditors.
Judge Heytens saw “at least” two sides to the policy argument. On the other side of the coin, he said that the statute supplanted the previous practice allowing courts to evaluate the reasonableness of expenses. The result, he said, was inconsistent determinations.
Affirming Bankruptcy Judge Humrickhouse, Judge Heytens declined “to interpret the statute to restore the very power Congress removed.”
C.V. of Judge Heytens
After law school, Judge Heytens clerked on the Third Circuit and then for Supreme Court Justice Ruth Bader Ginsburg. He was an assistant U.S. solicitor general after his clerkships and was Virginia’s Solicitor General before nomination to the Fourth Circuit by President Biden. He was also a professor of law at the University of Virginia.
The chapter 13 debtors’ monthly mortgage payment was $1,100 more than the local standard mortgage deduction. Abjuring a split of circuits, the Fourth Circuit held that debtors with above-median income can deduct the actual amount of their mortgage payments when calculating disposable income.
Upholding Bankruptcy Judge Stephanie W. Humrickhouse on direct appeal, the June 14 opinion by Circuit Judge Toby J. Heytens sided with the Sixth and Ninth Circuits.