By Keith Rucinski, Standing Chapter 13 Trustee, Akron, Ohio
The more things change, the more they stay the same. After more than a decade of a national debate in the bankruptcy community on whether Courts should follow a mechanical, mathematical approach in determining the amount that creditors should receive in a Chapter 13 plan, the United States Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). This law instituted a mathematical “means test” based on a combination of Internal Revenue Service Standards (both national and localized standards), US census data, and a few applicable “real” expenses allowed on a case-by-case determination.
The enactment of BAPCPA was followed by an additional six years of litigation on when and how the mechanical approach should be applied. The U.S. Supreme Court’s decision in Hamilton v. Lanning, 130 S. Ct 2464 (2010), returned us to looking at petition schedules I and J in determining what a debtor should pay in a Chapter 13 plan. The Court’s decision did not eliminate the means test or make it irrelevant. The means test provides a rebuttal presumption of what a debtor may be able to pay in a Chapter 13 plan with a calculation of disposable income. However, the means test disposable income calculation is backward looking, in that it is the average monthly income and expenses of the debtor for the six months prior to the filing date of the bankruptcy petition. Under 11 USC Section 1325, for a plan to be confirmed, the debtor must devote all of the debtor’s projected disposable income into the plan for the applicable commitment period. Projected disposable income is forward looking. Hence if the debtor can show a change in circumstances at the bankruptcy petition filing date from the income and expenses in the six month time period prior to the bankruptcy filing date then the debtor can rebut the means test and base plan payments on petition schedules I and J.
Given that the Chapter 13 means test often results in a low or negative number, debtors are often successful in rebutting it. This rebuttal requires that debtors and Trustees return to petition Schedule I (income) and petition Schedule J (expenses) in determining what should be paid and what amount should creditors receive in a Chapter 13 plan. Schedule I can generally be determined based on the debtor’s pay stubs and other financial data.
But what should be allowed expenses on petition Schedule J? BAPCPA allowed below median debtors (debtors whose income is below the average income for their respective state) to use their own expenses in determining reasonable and necessary expenses. Below median debtors are not subject to the expense calculations on the means test.
After BAPCPA, above median income debtors (debtors whose income is above the average income for their respective state) were supposed to be confined to the means test and the expenses allowed under 11 USC Section 707. However, since Lanning allows the means test to be rebutted, are not above median income debtors also now allowed their own reasonable and necessary expenses?
So once again it comes down to reasonable and necessary expenses. We have come full circle back to the beginning. For years Trustees have struggled to determine reasonable and necessary expenses, often litigating the issue. Generally Trustees rely on IRS standards, local case law, and most often, common sense.
There are problems, both legal and practical with using the IRS standards in the means test to determine reasonable and necessary expenses on petition Schedule J for above median income debtors. If the debtors have rebutted the means test, what is the legal basis for using the IRS standards on petition Schedule J? Even if for the sake of argument, 11 USC Section 707 expenses were applied to petition Schedule J, there are several items where no standard can be set such as professional dues, retirement loan repayments, care of dependents, and miscellaneous secured debt. Further, there are some items such as automobile insurance and property insurance (when not part of mortgage) which have to be listed at the end of the means test due to lack of a specific category or standard.
The IRS standards are not designed to help a debtor earn a discharge in a Chapter 13 plan. IRS standards are designed to maximize payment of delinquent taxes to the IRS in setting up a repayment program. Many debtors in an IRS repayment program file a Chapter 13 plan because they cannot keep up with the payments in the IRS repayment program. In fact, outside the IRS and local taxing authorities, Chapter 13 programs are most likely the largest collector of delinquent taxes.
Using case law to determine reasonable and necessary expenses generally is a case specific solution not applicable to a broader spectrum of cases. An expensive vehicle may be objectionable in one case. But if the vehicle is designed to assist the debtor with handicap dependents, it would not be objectionable in another case.
A few years ago, the Akron, Ohio, Trusteeship also struggled with the reasonable and necessary expense issue. Trustees have a dual fiduciary relationship: help the debtors earn a fresh financial start (discharge) and maximize the return to creditors. The solution was to develop a “No Look Budget” for Chapter 13 debtors. The “No Look Budget” was shared with the local bar. It gives an expectation of what the Chapter 13 Trusteeship will consider ordinary and necessary budget expenses for most cases.
While some may advocate that coming up with the monthly budget is the responsibility of the debtor and counsel, it can also be advocated that helping debtors put together a realistic budget will increase the chance of their plan succeeding. Cases that are dismissed early in the process result in no financial fresh start for the debtors who fail to earn a discharge. The early dismissal of cases also reduces the recovery for creditors. Lastly, early dismissal of cases will result in a loss of fee revenue for trusteeship operating expenses. Dismissed cases benefit no one.
Cases that stay active longer and eventually earn a discharge result in a higher success rate for debtors. Creditors benefit not only from successful completion of payments on secured debt, but also an increase in the unsecured dividend rate. Since using a “No Look Budget” in conjunction with the debtor education program, the percentage of completion rate in Akron has increased from the low thirties to nearly fifty percent. The average dividend is 36% (compared to 26% nationally). Having cases stay active until discharge also helps offset fee revenue lost when case filings experience a slow cycle.
How do you compile your own “No Look Budget”? Be reasonable, compassionate, and generous. Here are some guidelines the Akron Trusteeship used in developing the “No Look Budget”.
Recruit as many people in your staff as possible to get them to track their own expenses for a month. Embrace the diversity of your staff to have a good representation of differing expenses faced by various individuals. Younger people tend to have more child care expenses, transportation expenses in picking up and dropping off children, and school related expenses (more and more school districts require fees for sports and other club activities). Single people tend to eat out more and may be paying on student loans. Older (but young at heart) people may have more medical expenses, may be helping their children or providing supports for their own parents. Everyone age group has its own unique expenses and needs. It is important to include as many individuals as possible to track their own expenses for a month.
The monthly tracking of expenses requires a commitment to write down all of your expenses. If your grocery cart includes a bottle of wine, its alright, probation ended a long time ago. Just be honest. If you have a high cable bill because you look after an elderly parent who cannot get out much, good for you. The goal of the monthly study is to come to a reasonable number for a “No Look Budget” in your area. Once the month is over, you next need to do your own petition Schedule J by adding up all of your food purchases, gasoline purchases, etc.
The next step is to have a staff member develop a range for the different expense items on petition Schedule J. The ranges should be shared with the staff members who tracked their own expenses for review. Feedback is important. Schedule J is an average of expenses, and this review lets staff members filter out unusual, one-time expenses such as a high medical deductible for needed surgery.
Finally, have a brain storming session with these staff members. Review the ranges and determine the amount to be set for “No Look Budget”. Be generous in setting the amount. In Akron, we chose the midpoint of the ranges and then added twenty percent. There is no set formula to do this. The goal is avoid the micro-managing of the debtors expenses if the expenses are reasonable.
The Current Monthly Akron “No Look Budget” is as follows:
|Rent or Mortgage
|Per Contract or Mortgage
|Electric and Heating Fuel
|Cable and Internet
|1 phone $70, 2 phones $90, 3 phones $120
|$50 rent or $100 if buying home
|Food – includes eating out, pet food, and cleaning supplies
|1 person $500
2 people $800
3 people $900
4 people $1000
|Laundry and Dry Cleaning
|Medical and Dental
|Case by Case Review
|Transportation (2 cars)
Will consider additional depending on travel for work and type of vehicle.
|Will require proof if not deducted on taxes.
|Insurance – home, auto, health, life
|Be sure to use monthly and not quarterly invoice amount.
|Verify Amount with County Auditor
|Actual Payment Amounts per contract – with explanation on why luxury items are not being surrendered.
One criticism of a “No Look Budget” is that it can be too generous. The goal of the budget is to help the debtors get a discharge. Budgets that are too stingy will fail once the car needs a new battery or an unexpected expense for a child. By allowing the budget to be generous there is enough slack room to absorb unexpected but every day living expenses. The budget is also not set in stone it should be reviewed every couple of years. Some debtors may have higher expenses in one area (medical) and lower in another (transportation). The amounts can be average out to determine, if in total it is realistic and reasonable.
Nationally, more than half of Chapter 13 plans fail. A good many of the plans could have been successful if the debtor and debtor’s counsel had spent more time on budgeting. The Akron Trusteeship offers quarterly debtor education classes (personal financial management) that are necessary for the debtor to earn a discharge. In each class, debtors are asked how many spent time with their attorney going over the budget. Consistently, nearly forty percent of debtors fail to raise their hand!
Here are some “failing to budget” horror stories from 341 meetings:
1. The debtors leased a washer, dryer, and lawn mower from a rental firm for $1,000 per month. Meaning in a 60 month plan they would pay $60,000 for these items and never really own them. Being a good fiduciary, the Trustee offered to sell the debtors his washer, dryer, and lawn mower for half that amount, or $30,000. Of course this offer was only in jest but meant to teach the debtors about expenses. The debtors had decent income and this was their third bankruptcy with the same attorney. Once the $60,000 number was illustrated for the debtors they were shocked. The good news is the plan was amended, the rental contract rejected, plan payments were suspended for a month, the debtors bought a new washer, dryer, and lawnmower, and consequently they adjusted their own monthly living expenses by $500 (half the rental contract amount) with the balance of the $500 used to increase plan payment and a higher dividend to creditors.
2. The debtors had a three person household and listed a monthly water bill of $400. In Northeastern Ohio if you have a $400 monthly water bill the maid is either bringing you water or you have a serious problem. The debtors had this large of a water bill for a few years and thought it was normal. Their attorney did not question the water bill when preparing the budget. After the 341 meeting, the debtors hired a plumber and discovered their “throne” was continuous running water due to worn out equipment.
3. Overall debtors generally seem to under budget for food because they do not include the amount they put on the credit card when eating out. A credit card that is no longer available since the filing of the Chapter 13 plan. It is not realistic that a family of four can buy groceries for $300 per month, yet that is a common amount seen in bankruptcy plans.
While some may advocate that coming up with the monthly budget is the responsibility of the debtor and counsel, it can also be advocated helping the debtors put together a realistic budget will increase their chance of succeeding in the plan. It is an urban legend that the “No Look Budget” cannot be questioned by the Trustee. The Budget is meant as guide. If debtors exceed the amount in one category then they must reduce by a similar amount in another category. If the debtors’ schedules indicate their home and workplace are only a few miles a part, then the debtor would not need the full $500 transportation allowance. A “No Look Budget” can increase the number of cases that are able to work their way toward a discharge.
Sharing the “No Look Budget” with your local debtor attorneys can be beneficial in educating the local bar and their clients concerning acceptable budget amounts. The “No Look Budget” can also be beneficial if an objection to confirmation or motion to dismiss needs to be filed. The “No Look Budget” and its methodology can be outlined in a pleading with the debtors’ budget compared to the “No Look Budget” in a side-by-side comparison. The argument then becomes that this debtors’ budget far exceeds what is reasonably necessary in the respective jurisdiction. The “No Look Budget” can be persuasive once parties become educated on how the budget was constructed. Sharing the “No Look Budget” with the local debtor attorneys can also help in the preparation of a realistic budget that has the opportunity to be successful instead of a plan with a poor budget that is designed to fail.
If a Trustee is not comfortable sharing a “No Look Budget” with their local debtor attorneys, the process can still be beneficial. Using a “No Look Budget” internally will still help staff members in being more objective in evaluating budgets and plans. Some staff members who do not have first hand knowledge of certain expenses will find the “No Look Budget” a good guide in determining the reasonableness of a certain expense. Staff members who may not have had the experience in caring for an elderly relative will better understand the costs associated with that care. Other staff members who are not familiar with the cost of daycare will better understand what is reasonable with a “No Look Budget” as an objective guide.
The process of developing a “No Look Budget” can help a Trustee have a better understanding of the level of certain expenses for which the Trustee may not have first hand knowledge. The “No Look Budget” will allow guidance in challenging a debtor on an expense during the 341 meeting or court proceeding. The exercise of tracking expenses for a month and compiling the data is a good educational tool in developing an objective guide to what is a reasonable and necessary expense.
Keith L. Rucinski is the Standing Chapter 13 Bankruptcy Trustee for Akron, Ohio. Mr. Rucinski is an attorney and certified public accountant. He has taught over 30 graduate and undergraduate courses in taxes, financial statement analysis, accounting, and business law. He is a frequent speaker at local and national seminars.