§ 707(b)(2) - Deduction of Mortgage Obligation from Means Test Calculation

In re Ballard, Case No. 07-61486 (Bankr. N.D. Ohio March 25, 2008) (J. Kendig). The United States Trustee filed a Motion to Dismiss the Debtors’ bankruptcy case pursuant to 11 U.S.C. § 707(b). The issue presented arose under § 707(b)(2) and concerned the Debtors’ mortgage obligation. Prior to the Debtors’ bankruptcy filing, their residential real property had gone into foreclosure and a judgment of foreclosure was issued by the state court. Thus, the issue presented was whether the Debtors could take a deduction for the mortgage expense from their means test in light of the foreclosure judgment. Through the following analysis, the Court concluded that they could not.

When the Debtors filed their bankruptcy petition, they deducted a mortgage expense of $1,083 on line 42a. of Official Form B22A. Since the mortgage was in default, the Debtors also claimed a $133.33 deduction as a cure amount on line 43a. of Form B22A. Although they were no longer residing at the real property, they did not take a deduction for the rental amount of their new residence.

Picking up on the UST’s argument that the foreclosure judgment merged the Debtors’ obligation on the underlying promissory note into the judgment and that there no longer existed a contractual amount due under the note, the Court discussed the doctrine of merger and its applicability. In section 42 of Form B22A, a debtor may take an expense deduction for “[f]uture payments and secured claims.” The average monthly payment is then scheduled in the means test. The term “average monthly payment” is a defined term under § 707(b)(2)(A)(iii)(I), and the definition references amounts “contractually due.” Thus, the UST contended that since the contract merged into the judgment, there were no longer amounts contractually due.

In general, the doctrine of merger provides that when a valid and final personal judgment is rendered in favor of a plaintiff, plaintiff then cannot maintain a subsequent action on any part of the original claim. Thus, the original claim merges into the final judgment. The effect of the merger is that the old debt ceases to exist, and the new judgment debt takes its place. Therefore, at the time of the Debtors’ bankruptcy filing, their liability to the mortgage company was not based upon the contract but upon the judgment. The contract ceased to exist upon the entry of the judgment. Thus, the Debtors were liable on the judgment and their liability remained secured by the real estate, however, since their liability was no longer contractual, the debt could not be “scheduled as contractually due” pursuant to § 707(b)(2)(A)(iii)(I) and was not an acceptable expense in section 42 of Form B22A.

COMMENT: Although the Court’s application of the doctrine of merger is a creative and seemingly logical way to resolve the issue of whether debtors who have indicated that they are surrendering their residence in their bankruptcy proceeding after a judgment has been issued in a foreclosure action concerning that property may be able to deduct their mortgage expense on line 42a. of Official Form B22A, this commentator disagrees with the Court's conclusion in this case.

The Court did not consider the effect of the language in § 707(b)(2)(A)(iii)(II), which provides that a debtor's average monthly secured payments may include "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 . . . ." Section 1322 allows a debtor to cure a default on his or her residence and to continue to make monthly mortgage payments along with an additional amount necessary to pay off the mortgage arrearage within a reasonable time. The amount necessary to cure the default is determined in accordance with the underlying agreement and state law. Even if § 1322 does not somehow revive a contract that was destroyed by the doctrine of merger, it certainly creates additional payments to be made to secured creditors that will allow the debtor to maintain his or her residence. The plain language of § 707(b) dictates that mortgage payments, whether obligated by contract or judgment, are to be included in the 707(b) calculation.

Aaron Ridenbaugh