By John P. Gustafson, Chapter 13 Standing Trustee, Northern District of Ohio, Western Division
Regardless of whether your judge(s) use the Means Test – for above median debtors only, or also for those with below median income; applying the Means Test either strictly or with equitable and changed circumstances modifications; or if you court relies, instead, on Schedules I and J for all debtors — everyone has the same issues: What is income? And, how do I check the gross income that is reported to make sure it is accurate?
A. What Is Income?
The definition includes income “from all sources that the debtor receives”, “without regard to whether such income is taxable income”, unless the income is excluded by statute.
Income from Social Security is excluded by statute: 11 U.S.C. §101(10A). The exact language of the provision defining “current monthly income” states that it excludes: “excludes benefits received under the Social Security Act”.
1. Social Security Income – A Hot Issue:
The exclusion of Social Security from income is not without some controversy. It appears that the majority of courts permit social security income to be excluded from consideration of minimum Chapter 13 payments. Baud v. Carroll, ___ F3d ___, 2011 U.S. App. LEXIS 2182; 2011 WL 338001, 2011 FED App. 0033P, Bankr. L. Rep. (CCH) P81,930 (6th Cir. Feb. 4, 2011); In re Burnett, 2011 Bankr. LEXIS 213 (Bankr. N.D.N.Y. January 21, 2011); In re Miller, 2011 Bankr. LEXIS 62, (Bankr. D. S.C. January 11, 2011)(non-filing spouse’s social security income properly excluded); In re Welsh, 440 B.R. 836 (Bankr. D. Mont. 2010); In re Bartelini, 434 B.R. 285 (Bankr. N.D.N.Y. 2010); In re Rush, 387 B.R. 26, 29 (Bankr. W.D. Mo. 2008).
However, there are some courts that either require Social Security income to be used in determination of disposable income, or allow the non-use of Social Security income to provide the basis for denial of confirmation of the Chapter 13 Plan on good faith grounds. See, In re Thomas, 443 B.R. 213 (Bankr. N.D. Ga. 2010)(Bankruptcy court refused to confirm a plan because it was not proposed in good faith because the debtor’s plan ignored Social Security income he was receiving without making any payments to unsecured creditors); In re Cranmer, 433 B.R. 391 (Bankr. D. Utah 2010)(A Chapter 13 debtor could not exclude SSI from his projected disposable income (PDI) analysis and a plan was not proposed in good faith when the debtor’s SSI was excluded from PDI).
However, other courts that have considered whether “good faith” can be used based solely on the failure to use social security income to pay unsecured creditors have rejected that theory. See e.g., Fink v. Thompson (In re Thompson), 439 B.R. 140 (8th Cir. BAP 2010)(To be confirmed, a Chapter 13 plan had to be proposed in good faith. Plain language of the Bankruptcy Code precluded the Chapter 13 Trustee from objecting to debtors’ plan based on an alleged lack of good faith based solely only on the fact debtors did not devote all of their Social Security income to their creditors.)
An interesting issue arises when a motion to modify under Section 1329 is filed. At least one court has held that on a motion to modify, social security income can be considered. See, In re Hall, 442 B.R. 754 (Bankr. D. Idaho 2010)(Debtor wife’s SSDI benefits could be considered with respect to a modification of a Chapter 13 confirmed plan because disposable income requirements for confirmation under §1325(b) did not apply to a proposed modified plan because § 1325(b) was not expressly listed in §1329(b)(1).
Another problem is when the funds contributed to the household, either for expenses are rent, have social security income as their source. See, In re Olguin, 429 B.R. 346 (Bankr. D. Colo. 2010)(When Social Security recipients gave funds derived from their benefits to third parties, funds ceased to be in nature of “benefits.” Grandparents’ regular contribution to debtors’ household expenses was not “a benefit received under the Social Security Act,” §101(10A)(B), and had to be included in the calculation of debtors’ income.)
Finally, there is an issue – apparently unlitigated at present – about whether the exclusion of social security income extends so far as to become a subsidy. For example, if a debtor has wage income, pension income and social security income, and the social security income is therefore taxable, are the taxes attributable to the social security income deductible, or does the social security income (if excluded) have to at least “pay its own taxes”?
2. Unemployment Benefits – Income, or Excluded?
The courts are currently divided on whether or not unemployment benefits are excluded under the “Social Security” umbrella, but the tide appears to have turned in favor of including unemployment benefits as income. Two early cases said that unemployment benefits were excluded as benefits paid under the Social Security Act: See, In re Munger, 370 B.R. 21 (Bankr.D.Mass. 2007); In re Sorrell, 359 B.R. 167 (Bankr.S.D.Ohio 2007). The more recent cases hold that unemployment benefits count as income. See, In re Washington, 438 B.R. 348 (M.D. Ala. 2010); In re Kucharz, 418 B.R. 635 (Bankr. C.D. Ill. 2009); In re Baden, 396 B.R. 617 (Bankr.M.D.Pa. 2008); In re Overby, Bankr. L. Rep. (CCH) P81,868, 2010 Bankr. LEXIS 8183 (Bankr. W.D. Mo. Sept. 24, 2010); In re Winkles, 2010 Bankr. LEXIS 2151, 2010 WL 2680895 (Bankr. S.D. Ill. July 6, 2010); In re Nance, 64 Collier Bankr. Cas. 2d (MB) 230, 2010 Bankr. LEXIS 1736, 2010 WL 2079653 (Bankr. S.D. Ind. May 21, 2010); In re Rose, 2010 Bankr. LEXIS 1851, 2010 WL 2600591 (Bankr. N.D. Ga. May 12, 2010).
3. Other Income Specifically Excluded Under 101(10A):
Also excluded by statute are “payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes, and payments to victims of international terrorism (as defined in section 2331 of title 18) or domestic terrorism (as defined in section 2331 of title 18) on account of their status as victims of such terrorism.” – but for most of us, those almost never come up. Clearly, however, those items are not income for Means Test purposes – and probably not for any Chapter 13 determination of income.
4. What About Other Income That Does Not Become Property Of The Estate?
There is a question whether income that is specifically excluded from becoming property of the estate by other federal law, would be income for Chapter 13 purposes. Cf., In re Anderson, 410 B.R. 289 (Bankr. W.D. Mo. 2009). One case that addresses the the “exemption” and “exclusion from property of the estate” issue in terms of how income is treated is In re Scholz, 427 B.R. 864 (Bankr. E.D. Cal. 2010)(Benefits received under Railroad Retirement Act of 1974 (RRA), 45 U.S.C.S. § 231 et seq., were absolutely protected from any adverse action by creditors of the recipient. 45 U.S.C.S. § 231m excluded RRA Benefits from the operation of the Bankruptcy Code. Accordingly, debtor’s RRA Benefits were not included in calculation of current monthly income.). Presumably, other courts would count railroad retirement as income based on the expressio unius est exclusio alterius and plain language of the statute not including railroad retirement.
5. What About Monies Withdrawn From A 401(k) Or An IRA?
The majority of courts appear to hold that pre-retirement withdrawals from a 401(k) or IRA are not considered income for bankruptcy purposes. See, In re Cram, 414 B.R. 674 (Bankr. D. Idaho 2009)(401(k) distribution did not meet criteria of current monthly income under §101(10A)); In re Zahn, 391 B.R. 840 (8th Cir. BAP 2008)(IRA distribution to non-filing spouse not income); In re Mendelson, 412 B.R. 75 (Bankr. E.D.N.Y. 2009)(one-time early withdrawal from a retirement account was not included in income). But see, In re DeThample, 390 B.R. 716 (Bankr. D. Kan. 2008)(401(k) was required to be included in calculating CMI).
Remember, under Section 101(10A)((B), “current monthly income” is defined as payments made “on a regular bases” payments from any entity. One time withdrawals from a 401(k), IRA or other retirement account are not made on a regular basis. That may distinguish those kinds of withdrawals from people whose income is supplement by fixed payments from a 401(k), in amounts they may be required to withdraw under a law that imposes penalties if they fail to make such withdawals.
The cases also discuss whether the “one time” withdrawals are “income” because the money that is withdrawn was the debtor’s money, albeit in a protected account.
6. Life Insurance Proceeds are Income:
Proceeds from life insurance were held part of disposable income. In re Florida, 268 B.R. 875 (Bankr. M.D. Fla. 2001); contra, In re Richardson, 283 B.R. 783 (Bankr. D. Kan. 2002).
7. Food Stamps and Government Aid are Income:
Yes, the majority view is that they are income. See, In re Justice, 404 B.R. 506 (Bankr. W.D. Ark. 2009)(government assistance to non-debtor daughter and her infant son was income); Bibb County Dept. of Family & Children Services v. Hope (In re Hammonds), 729 F.2d 1391, 1395 (11th Cir. 1984); In re Rigales, 290 B.R. 401 (D. N.M. 2003)(food stamps).
8. Veterans Benefits are Income:
See, In re Hedge, 394 463 (Bankr. S.D.N.Y. 2008); In re Waters, 384 B.R. 432, 437-38 (Bankr. N.D. W.Va. 2008); In re Redmond, CASE NO. 07-80634-G3-13, 2008 Bankr. LEXIS 1495, (Bankr. S.D. Tex. April 14, 2008)
9. Disability Payments (from sources other than Social Security) are Income.
Blausey v. U.S. Trustee, 552 F.3d 1124 (9th Cir. 2009).
10. Loans are Not Income:
Loans are generally not income. See, In re Brown, 332 B.R. 562, 568 (Bankr. N.D. Ill. 2005) (“the refinance proceeds are accompanied by a new loan to the debtor, which significantly offsets the apparent increase to the debtor’s balance sheet”).
11. Income Taxes.
See the discussion below in the section “Exemptions v. Income”.
12. Pension monies received by a retiree are income.
In re Briggs, 440 B.R. 490 (Bankr. N.D. Ohio 2010). See also, In re Taylor, 212 F.3d 395 (8th Cir. 2000); In re Rogers, 168 B.R. 806, 808 (Bankr.M.D.Ga. 1993)
B. How Do You Know The Income Stated By The Debtor(s) Is Correct?
In looking at the debtor’s filings, you get income information in several places.
1. Schedule I reflects a gross income figure.
2. The Means Test states a gross income figure based on a six months “look back”.
3. The Statement of Financial Affairs asks for a history of the debtor’s earnings, year to date, and for the previous two years in its first two questions.
4. The federal income tax return provides additional information, including gross taxable income, for the previous tax year.
5. Pay advices give a more recent history of the debtor’s earnings.
Whether your court looks to Schedule I and J, or the Means Test, it is important to start with the correct gross income figure because if you put garbage in, you get garbage out. Sometimes the gross income figure is misstated – either by mistake, or intentional fudging. How do you check to make sure that the gross income figure is correct?
If you suspect that gross income is incorrectly stated, you can do cross-checks using all of the sources listed above.
For many debtors, the most useful document to look at are the pay advices. Typically, the pay advice will provide a year-to-date figure for the debtor’s gross earnings. If W-2 wage earners are fudging on their income, the pay advices can be used to show it.
To check whether the debtor’s actual gross income is stated correctly, one method is to turn the year-to-date gross income figure into a daily figure – what the debtor earns per day. This is done by noting what the ‘end date’ is on the most recent pay advice. Calculate how many days the ‘end date’ represents – say, for this example, it is the 184th day of the year. Then divide the year-to-date gross income – say, $31,055 – by the number of days (184) over which that income was earned. Using the numbers above, the debtor’s ‘per diem’ earnings would be $168.77. Multiply that by 365, and you get a projection of yearly earnings – here, that would be $61,601. Divide the yearly number by 12, and get an average monthly gross income figure – here, it would be $5,133.
The gross income figure calculated from the pay advice can by compared with the numbers given on the Means Test (Line 1) and Schedule I, Lines 1 and 2. If the gross income numbers you calculate are significantly different from what the Schedule I and the Means Test indicate to be gross income, you have to find out why.
Was the year-to-date earnings not reflective of some changes in income that were present in the Sixth months prior to filing? Or, did debtor’s counsel fail to count the correct number of paychecks? – 26 if the debtor was paid weekly, 13 if the debtor was paid bi-weekly, and 12 if the debtor was paid semi-monthly. Or, did debtor’s counsel look at gross taxable income, instead of gross income? Gross taxable income typically does not include monies deducted for retirement – if that mistake was made, and the retirement deducted again on either the Schedules or the Means Test, that is improper double counting of the deduction of contributions to the debtor’s retirement account.
. Or, is debtors’ counsel going to make the tired argument that overtime wasn’t listed on Schedule I because “it’s not guaranteed”. Or, “it fluctuates”. Schedule I, Question 2 requires a debtor to list their ESTIMATED overtime. Not their guaranteed overtime.
The most recent federal tax return is also worth looking at for determining if income is properly stated. For self-employed debtors, there are no pay advices. The tax return can be the most reliable document you are likely to get regarding their income. Plus, you can learn a lot from the attached schedules. But, on the other side of the coin, debtors often under-report tip income, side jobs, and income from their businesses. You just have to do the best you can with the self employed, tipped employees, and business owners.
If the gross income number on the tax return is significantly greater than the gross income claimed on Schedule I/Means Test, that naturally leads to questions about how the debtor’s income has changed over time. If questions 1 and 2 on the Statement of Financial Affairs are answered accurately, they can also help give a picture of the changes in debtor’s income over time.
For many jurisdictions, a properly prepared Schedule I may reflect a different income number than the Means Test. If income has decreased in the past six month, the Schedule I gross income number would be less than the gross income number on the Means Test. Conversely, if the debtor has had rising income, the Schedule I would be higher than the gross income on the Means Test.
Remember, Question No. 17 on Schedule I asks: “Describe any increase or decrease in income reasonably anticipated to occur within the year following the filing of this document.” If that question is left blank, I use that when debtors start talking about what might happen to reduce their income in the future.
John was appointed Standing Chapter 13 Trustee for the Northern District of Ohio, Western Division on October 1, 2007.