Means Test Webinar Q & A – Part II

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

8.  If Debtor is married with pre-nuptial agreement, is the non-filing spouse income required to be included in the means test? and in the income and expenses schedules I and J.?

I don’t think a pre-nuptial agreement should have any effect on the application of the Means Test and the “Marital Adjustment”.  The test is mechanical, based on historical contributions.  The absence of a legal obligation would – in my view – not make a difference.

One way such an agreement might come into play is if there were a “good faith” attack based on the uses the non-filing spouse was making of the excess income.  However, the existence of a “pre-nup” didn’t help the debtor/non-filing spouse in In re Waechter, 439 B.R. 253 (Bankr. D. Mass. 2010); see also, In re Simms, 2011 Bankr. LEXIS 2570 at *11-*12 & *15-*16 (Bankr. D. Md. June 30, 2011).

9.  Please explain the car allowance and show the calculations – thank you

For the ownership allowance on Lines 28 and 29, if the car is owned free and clear, there is no applicable deduction on those lines after Ransom.

If there is a purchase money debt for the vehicle, Line 28 would be filled out as follows in most jurisdictions:  The motor vehicle ownership allowance starts with the IRS standard deduction (which varies based on your location).  For me, it is $517 a month – so that is the amount that goes on Line 28a.  The average monthly payment for the debt secured by the vehicle – which would be the amount needed to pay off the debt over 60 months – is deducted from the number on Line 28a.  Let’s say it’s $300 a month.  You subtract the amount on Line 28b ($300) from the IRS Standard deduction on Line 28a ($51&), and the difference is what you put in the skinny right hand column as a deduction for Line 28 – in this case, it would be $217.  Then you take the amount on Line 28b, and put that number down as a secured debt deduction on Line 47.  If the amount on Line 28b is less than the amount on Line 28a, as long as you remember to take the “deduction from the deduction” on Line 28b as a secured debt deduction on Line 47, the total net deduction will always be the same as the IRS local standard.

If the amount on Line 28b is greater than 28a, the actual deduction in the skinny column on the right would be zero, and the full amount of the secured debt deduction (if properly divided by 60 as required) would be deducted on Line 47.

[See Exhibit A attached]

10.  “Please discuss why ongoing, nondischargeable student loans that continue on beyond the life of the plan (60 months) cannot be listed in B22 as a debt payment, or listed on schedule J and paid for directly outside the plan.”///Q. 10A “Please discuss your position regarding student loan payments, and why you disagree with courts that held that student loans fall within 1322(b)(5).”

Student loan debts are a continuing source of discontent, both inside and outside of bankruptcy.

There is now more student loan debt than there is credit card debt in this country.  But, it is difficult to deal with student loan obligations in a bankruptcy.

Here is what I see as the framework of the problem:

  1. Student loans are not priority claims.  They are general unsecured claims that happen to be nondischargeable.  In re Sperna, 173 B.R. 654, 658-659 (9th Cir. BAP 1994.)  There has been a tremendous amount of discussion about the treatment of student loans as the Bankruptcy Code has been amended over the years – and the response of Congress has been to make it harder and harder to discharge student loans.  And, there has been no change in the Code to make student loans a priority claim under Section 507.
  2. Student loans can be lumped in with the other unsecured debt and paid the same percentage as general unsecured claims. Every court will allow that treatment.
  3. While a few courts will allow separate classification of student loans, allowing them to be paid a higher percentage than other general unsecured claims, most courts will not allow that treatment.  See, In re Harding, 423 B.R. 568 (Bankr. S.D. Fla. 2010).  A debt for fraud would be a general unsecured claim that is non-dischargeable – could that be separately classified and paid more than general unsecured claims?  The fact that a debt is nondischargeable – in and of itself – is not a strong basis for paying one general unsecured claim more than another general unsecured claim.
  4. Where the rubber hits the road is the argument that student loans are “long term debt”, and that the Code permits debtors to “cure and maintain” long term debts.  See, §1322(b)(5); In re Johnson, 446 B.R. 921, 925 (Bankr. E.D. Wis. Mar. 11, 2011).  Some courts hold that this provision for “long term debt” only applies to secured debts – even though the language of the statute is not limited in that way.
  5. The problem with the “cure and maintain” position is that the prohibition against unfair discrimination is not limited in a way that would exclude nondischargeable debts that happen to be long term obligations.  §1322(b)(1) provides in relevant part:  [T]he plan may…designate a class or classes of unsecured claims, as provided in section 1122 of this title,5 but may not discriminate unfairly against any class so designated; however, such plan may treat claims for a consumer debt of the debtor if an individual is liable on such consumer debt with the debtor differently than other unsecured claims.”  See, Gorman v. Birts (In re Birts), 2012 U.S. Dist. LEXIS 107811, 2012 WL 3150384, Bankr. L. Rep. (CCH) P82,324 (E.D. Va. August 1, 2012).
  6. One problem for the argument that preferential treatment for student loans should be allowed has been that bankruptcy courts have been more willing to allow discrimination in favor of student loans than the appellate courts.
  7. Sometimes, there are good mathematical arguments that the “cure and maintain” treatment isn’t discriminatory.  For example, where the debtor isn’t too far behind on the student loan, and the loan has a long repayment period – sometimes student loans have a 20 year term, or more.  Regular student loan payments may allow unsecured creditors to get as much or more than if a large student loan debt were lumped into the general unsecured pool.  In fact, cure and maintain treatment may be something that the student loan creditor may object to because getting regular monthly payments may, under some circumstances, discriminate AGAINST the student loan creditor.  They would get more money, faster, if the student loan was paid through the plan like other general unsecured creditors, with the student loan payment coming in on top of the amount proposed to be paid to the other general unsecured creditors.

11. The part we are most unclear about is the amount a Debtor must pay if above median income, per the Means Test calculations.  Thanks.

For most courts, Line 59 is NOT the Chapter 13 Plan payment.

Line 59 is the amount that must go to “unsecured creditors” under the disposable income test stated in Section 1325(b)(1)(B).

So, if you are paying secured debt though the Chapter 13 trustee – either a conduit mortgage payment, or a vehicle that is being paid by the trustee, those secured debt payment have to be added to Line 59 number.

Similarly, if there was a deduction for a secured debt “cure” on Line 48 – to cure a secured debt arrearage – that deduction has to be added to the Line 59 number in coming up with a minimum payment amount.

The courts are not in complete agreement as to what the requirement that the monies go to “unsecured creditors” means.    While priority debts are unsecured debts, Line 49 allows the deduction of priority claims.  Why would debtors be allowed to deduct priority claims to determine projected disposable income, and then use that figure – which is “net” of the priority claims deduction, to pay priority claims?

This is a “double deduction” in the view of many courts, and one that they don’t allow.  So, for example, the amount of the priority claim deduction would have to be added to Line 59 to determine the minimum monthly payment.

So, in turn, would the deduction of the Chapter 13 administrative expense – it is deducted on Line 50, and then taken from the Plan payment.  For unsecured debtors to get the amount on Line 59, the deduction for Chapter 13 administrative expenses would also have to be “added back”.

In re Johnson, 408 B.R. at 816 (concluding that “[t]he plain language of the statute, considered in context, has only one permissible interpretation-the term ‘unsecured creditors’ refers to only non-priority unsecured creditors”); In re Renteria, 420 B.R. at 530 (stating that “given the carveout afforded to Debtors in calculating ‘disposable income,’. . . the language of Section 1325(b)(1)(B), when read in context, makes it clear that the resulting projected disposable income is intended to be paid only to nonpriority unsecured creditors”); In re Grabarczyk, 2012 Bankr. LEXIS 1435 (Bankr. N.D. Ohio March 15, 2012).

For most courts, there is also an issue as to how to deal with a 401(k) loan that will be paid off during the life of the Chapter 13 Plan – either the amount of the loan repayment needs to divided by 60, and only that amount deducted on Line 55, or the Chapter 13 Plan payments need to “step up” by the amount of the monthly 401(k) loan payment.

12. Does the means test require listing of a domestic partner’s income and expenses in California?  If so, where, in what detail, and to what extend should income be included on I and expenses on J?

Unless the debtor is married, the test for a non-spouse is:

Instead of including all income received by the debtor as well as the debtor’s non-filing spouse, and then deducting on Line 13 that portion of the income which is not paid on a regular basis towards debtor’s household expenses as a married debtor would do, an unmarried debtor must list his or her own income, and then add to it any amounts regularly received by the debtor from another entity for the household expenses of the debtor on Line 7.

In re Stansell, 395 B.R. 457, 462 (Bankr. D. Idaho 2008)(case holding that income contributed to household expenses remained part of the Form 22C calculation, even though the spouse had died prior to the filing of the Chapter 13 Petition).

While there is a clear movement away from objecting to joint cases filed by married same-sex couples, based on the Defense of Marriage Act – if they are domestic partners (and not married) under state law, I don’t think most courts would allow the “Marital Adjustment” regardless of the gender make up of the domestic partners.

13. What is the education expense deduction on Line 43 for?  Private schools?  Public school expense actually paid or is it for each child regardless if $$ paid (like transportation expense is automatic if you have a car with a loan)

  1. Private school – yes.
  2. Public school expenses for a necessary educational purpose – yes.
  3. Enrichment, extra circular activities, etc. – more questionable.  See, In re Leggett, 2011 Bankr. LEXIS 820 at *23 – *24 (Bankr. E.D.N.C. 2011); In re Justice, 404 B.R. 506, 518 (Bankr. W.D. Ark. 2009); In re Sullivan, 370 B.R. 314, 322 (Bankr. D. Mont. 2007)(all three are Chapter 7 cases).
  4. Debtor must show why the expenses are reasonable and necessary and not already covered by Other Necessary Expenses: “Debtors provided no supporting documentation in support of the $95 for their nephew’s school activities, failed to explain why such expenses are reasonable and necessary and not already accounted for in the National and Local Standards or Other Necessary Expenses, and therefore failed their burden under the plain language of both subsections §707(b)(2)(A)(ii)(IV) and §707(b)(2)(B).”  In re O’Connor, 2008 Bankr. LEXIS 3629 at *39 (Bankr. D. Mont. Sept. 30, 2008);  In re Paliev, 2012 Bankr. LEXIS 3801 at *28 – *30 (Bankr. E.D. Va. August 17, 2012).
  5. Make sure you have the same educational expense listed on Schedule J that you have on Line 43.
  6. The expenses also have to be “actual” – it is not an automatic allocation that debtors get just because they have children under the age of 18.

14. Does any income from Social Security Administration have to be included in the Means Test review, such as disability income or minor’s benefits?

I think that any income received “under the Social Security Act” is excluded under Section 101(10A)(B), if it is received by the debtor.  If it is received by someone else in the household – there may be other issues.

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

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