By John Gustafson, Chapter 13 Trustee for the Northern District of Ohio, Western Division

1. I want to know the formula used by Trustees (either Ch 13 or Ch 7) to calculate taxes of Mean Test (sec 30 on B22C or sec 25 on B22A).

   Taxes: How are they calculated?
   (Form B22C, Line 30)

   1. There are two approach to taxes that Chapter 13 trustees typically use: 1) The deduction for taxes on Line 30 must be only the amount estimated to be necessary to pay taxes; or, 2) the deduction on Line 30 can be the actual amount debtor(s) overwithhold, but the debtors net tax refunds have to be paid into the Chapter 13 Plan.
   2. While the first approach may be more legally proper, if the estimate is wrong or things change, and debtors have changed their withholding to make their payments, there can be a post-petition tax liability created in the Chapter 13.
   3. Taking tax refunds allows a cushion that may prevent (or at least minimize) any post-petition tax liability if there is under-withholding.  However, it is a significant administrative burden for Chapter 13 trustees to collect tax refunds.
   4. The formulas that are typically used to calculate the actual tax liability are either a program for determining tax liabilities, like www.paycheckcity.com; an attempt to actually compute the necessary withholding using a relatively complex formula, or a simpler formula that looks at actual withholding and past refunds: “Line 30 should be computed by subtracting from the Debtors’ monthly withholdings one-twelfth of the previous year’s federal and state income tax refunds.”  In re Baldwin, 61 Collier Bankr. Cas. 2d (MB) 141, 2008 U.S. Dist. LEXIS 98352 at *9 (N.D.N.Y. Dec. 3, 2008)(rejecting use of the “paycheckcity” program.

   For “actual” tax obligation trustees use a number of different methods.

   One method is to subtract the debtor’s nontaxable income (retirement contributions and some health insurance premiums) from CMI to essentially arrive at adjusted gross income.  Then reduce that figure by the applicable exemptions and either the standard deduction or the previous year’s itemized deductions (provided they are not surrendering the house or had abnormally high medical expenses). Next, calculate federal tax using the applicable rates and reduce that figure by any child tax credits to arrive at necessary federal tax.  A similar computation for state taxes and, of course, calculate FICA taxes at 7.65% of CMI, keeping in mind that many health insurance premiums are not subject to FICA taxes and some professions (e.g., teachers and railroad workers) do not pay Social Security tax.

   The feedback I have gotten is that the programs overstate the tax liabilities because debtors attorneys just plug in gross income.  Chapter 13 trustees prefer a system that uses past tax refunds/withholding to calculate the appropriate number for Line 30, or a method that looks at taxable gross income – excluding monies paid into retirement accounts, paid for medical insurance, etc.

2. What do Debtor attorneys most commonly miss and get wrong.  What do we need to know.
    
   1. Once disposable income turns negative, debtors’ attorneys stop filling out the Means Test – if you have more deductions, take them.  That way, if I see something wrong that is minor, I won’t be forced to litigate the issue because it won’t change the negative number to a positive number.
   2. Not going through the Means Test and comparing it to Schedules I and J.  You would be surprised how many times I have the opportunity to look across the table and ask: “Counsel, are your clients required to pay taxes?”  because there is nothing deducted for taxes.
   3. Not asking questions about expenses.  Sometimes debtors are, for example, paying disability insurance directly, and because it is not coming out of the debtor’s paycheck, it is missed.
   4. All kinds of double dipping – not deducting the secured debt from the IRS standard deduction on Line 28 or 29, and then taking the deduction on Line 47.  Or, doing the same thing with a mortgage on Lines 25B and Line 47.
   5. Failing to provide documentation when the Means Test clearly states that if you take the deduction, you must give the trustee documentation, such as Line 42, 43, 44, and Line 57 and failing to state any reason for entitlement to the housing and utility adjustment on Line 26.
   6. Taking a deduction for landline and cellphones on Line 37.
   7. Attempting to deduct the college costs for the debtor’s children.  There is no such deduction if the child is not chronically ill or disabled (Line 40) or under 18 (Line 43).
   8. A random Plan payment number is used in calculating the Chapter 13 administrative expense deduction.
3. #1. Please discuss the differences between line 57 and line 60 of Form 22C.

   Line 57 provides a place for deductions based on “Special Circumstances”.  There has to be “no reasonable alternative” to the expense.  Documentation is required.  One case that sticks out to me is the allowance of a deduction on Line 57 for the lease of a home in excess of the amount allowed on Line 25B – evidence was taken about the housing needs of the debtor and children, and the local market for leasing houses – and the court determined that there was no reasonable alternative to the amount being spent in excess of the Line 25B IRS standard allowance.  In re Stubbs, 2007 Bankr. LEXIS 4121 (Bankr. D. Mont. December 6, 2007).

   Note that unlike a “deduction” on Line 60, listing a deduction on Line 57 serves to reduce the amount of projected disposable income on Line 59.

   Line 60 is for listing “other expenses” required for the health and welfare of the debtor and family.  It does not reduce the number on Line 59.  If it is useful at all, I see it as a way to communicate with Chapter 13 trustee about other expenses that the debtors believe are necessary that don’t fit on the Means Test.

   Remember: the requirement that all projected disposable income be used to pay unsecured creditors is triggered when the Chapter 13 trustee, or a creditor, objects.  See, Section 1325(b)(1)(B).  One way to communicate why the trustee should NOT object, is to put those expenses you want considered on Line 60.

   Of course, the first draft of the new Form 22C that the Rules Committee submitted for comment left out Line 60.  The view being, it was underutilized and/or misused, and we’d be better off without it.

4. Pls cover issues surrounding (non) consumer debt such as Medical bills, student loans, taxes

   The issue of what is consumer debt, and not consumer debt, is important in the context of the Chapter 7 Means Test.  It is not a Chapter 13 issue.

   Under the majority views of the case law:

   A typical home mortgage is a consumer debt.  In re Price, 353 F.3d 1135, 1139 (9th Cir. 2004).

   Taxes are not consumer debts.  In re Westberry, 215 F.3d 589 (6^th Cir. 2000)

   Medical bills are consumer debts. It appears that most courts assume (by lumping them with consumer debts) that medical bills are consumer debts.  See, In re Thompson, 457 B.R. 872, 875 (Bankr. M.D. Fla. 2011)(“Debtors’ debts are primarily consumer debts consisting of two home mortgages on a property at 12351 Scottish Pine Lane, Clermont, Florida (“the Clermont Property”), medical bills, automobile loans, credit cards, and student loans.”); In re Dickerson, 193 B.R. 67, 70 (Bankr. M.D. Fla 1996)(Nonconsumer debts included medical bills, student loans and IRS debt); In re Martinez, 171 B.R. 264, 267 (Bankr. N.D. Ohio 1994)(Medical Bills are consumer debts).

   Student loans are a fact and circumstances situation – leaning toward being consumer debts.  See, In re Rucker, 454 B.R. 554 (Bankr. M.D. Ga. 2011)(no “per se” rule).

   If you are a subscriber, the case law on what is a “consumer debt” is covered in the Chapter 7 section of the full Means Test outline.

5. How does one deal with a secured debt on the means test when surrendering the underlying collateral?

   I don’t think the deduction for a secured debt on surrendered property can be taken in on the Chapter 13 Means Test – or, if it is taken, it has to be “backed out”.  Looking forward, as Lanning directs, there is not going to be a secured debt obligation that the debtor will be paying in the future.  See, In re Quigley, 673 F.3d 269 (4th Cir. 2012); In re Darrohn, 615 F.3d 470 (6th Cir. 2010); In re Turner, 574 F.3d 349, 356 (7th Cir. 2009).

   I DO think the debt payments on property being surrendered is a valid deduction on the Form 22A – the Chapter 7 Means Test.  (Subscribers see: my article on “Creeping Lanning-ism”)  There is no “forward looking” aspect to the Chapter 7 Means Test.  The argument for the forward-looking approach comes from the term “projected disposable income” – which is only found in Chapter 13.  And Chapter 13 is not incorporated into Chapter 7.  See, Section 103(i) (Chapter 13 only applies to Chapter 13 cases).

6. How to handle married but living separately Issue of who are considered dependents – shared custody, approach to household size.

   We discussed the three approaches – Heads on the Beds, the IRS Dependents approach, and the Economic Unit approach.

   Clearly, the economic unit approach works best in shared parenting situations with multiple children – where parenting is 50-50, you divide by two and round up. . . .  In re Robinson, 449 B.R. 473 (Bankr. E.D. Va. 2011); Johnson v. Zimmer, 686 F.3d 224 (4^th Cir. 2012).

   Courts have come to different conclusions on the expenses of a separate household, but in a divorce situation, there is case law that would support an additional deduction on Line 57.  See, In re Crego, 387 B.R. 225 (Bankr. E.D. Wis. 2008)(Above-median-income Chapter 13 debtors’ need to live apart, based on their post-filing divorce, was a “special circumstance” warranting an adjustment to CMI.).

7. To what extent does the means test apply to a post-confirmation modified plan for an above-median income debtor (assume the disposable income test applies)?

   The case law on post-confirmation modifications is all over the board.  The statutory basis for medication lacks clarity in regards to the standards for medication.  The Lundin & Brown treatise lays out the statutory conundrums as follows:

   The Bankruptcy Code is unclear whether the disposable income test in § 1325(b)1 applies at modification after confirmation. The reported decisions on the question are fractured.

   On one hand, 11 U.S.C. § 1329(b)(1) specifically references four sections of the Code that “apply to any modification,” and § 1325(b) is not among the listed sections. Some courts have interpreted this omission as evidence that Congress did not intend the bankruptcy courts to “re-examine the debtor’s disposable income before deciding whether to approve a postconfirmation modification.”2

   On the other hand, § 1325(a) is among the sections listed in § 1329(b) to be applied to a modified plan. It can be argued that the cross-reference to § 1325(b) in § 1325(a) requires bankruptcy courts to apply both subsections. Section 1325(a) begins “except as provided in subsection (b) . . . .”3 One rule of statutory construction instructs that the exception for § 1325(b) in § 1325(a) captures both subsections; § 1329(b)(1) would then require application of § 1325(a) and (b) to any modification after confirmation.4

   Alternatively, § 1325(a)(1) requires that the plan “complies with the provisions of this chapter.”5 The disposable income test in § 1325(b) is a “provision of this chapter” incorporated by § 1325(a) into § 1329(b)(1). This argument runs squarely into other rules of construction that argue against redundancy in statutes—most of § 1329(b)(1) becomes redundant if all of Chapter 13 becomes applicable at postconfirmation modification by reference to § 1325(a). There is always a rule of statutory construction to give you the answer you seek.

Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 4th Edition, § 255.1

Generally, a debtor must show some material, adverse change in the debtor’s financial circumstances, that took place after the confirmation of the original plan.  While there is not a great deal of case law on the role of the Means Test vs. the role of Schedule I and J in hearings on Motions to Modify – my perception is that most courts are looking to Schedules I and J, rather than a revised Means Test, in determining whether to grant a Motion to Modify.

However, it is also likely that courts are going to be guided by some of the Means Test limitations.  For example, if a debtor seeks to spend $800 a month for private school education for a child under 18, when the Means Test limitation is $147 – there may be some deference given to the Means Test cap, even though the primary document being primarily referenced for expenses is Schedule J.

Further, courts appear to be hostile to motions to modify when the only “change” is being post-confirmation and being able to collaterally attack the Means Test requirement using Schedules I and J.  See, In re Nunez, 2009 Bankr. LEXIS 308, (Bankr. C.D. Cal. February 10, 2009)(the only difference was the debtors were 66 days into the confirmed Plan – modification denied).

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John was appointed Standing Chapter 13 Trustee for the Northern District of Ohio, Western Division on October 1, 2007