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Consumer Bankruptcy Law and Practice: 13.4.3.2.4 Treatment of business income

The definition of current monthly income appears to include the debtor’s gross business income, rather than net income, especially because, in chapter 13, section 1325(b) explicitly provides for business expenses to be deducted from the debtor’s current monthly income.105 However, the forms adopted by the Judicial Conference count only net business income and net rental income toward current monthly income.106 The primary difference between the two methods in chapter 7 cases is that the deductio

Consumer Bankruptcy Law and Practice: 13.4.3.2.6 Distributions or withdrawals from an IRA or pension plan

There may also be questions about how to treat distributions or withdrawals from retirement accounts or pension plans. Although these withdrawals may well be taxable income, the definition of current monthly income specifically provides that tax treatment is not determinative.111 Courts are divided on the issue. Some courts have held that individual retirement account (IRA) contributions are properly treated as income at the time the contribution is made, rather than when a distribution is made.

Consumer Bankruptcy Law and Practice: 13.4.3.2.7 Explicit statutory exemptions from current monthly income

Excluded from current monthly income are benefits received under the Social Security Act, and payments made to victims of war crimes, crimes against humanity, and international terrorism on account of such status.116 This provision will bring many elderly and disabled debtors below the median income thresholds. It would exclude from a debtor’s current monthly income benefits paid to a child. On the other hand, private disability benefits are not excluded by this provision.

Consumer Bankruptcy Law and Practice: 13.4.4 Safe Harbor for Disabled Veterans, Reservists, and National Guard Members

The 2005 amendments create a separate safe harbor from the means test for debtors who are disabled veterans (as defined in 38 U.S.C. § 3741(1), which requires at least a thirty percent disability), if their “indebtedness occurred primarily” during a period when they were on active duty or “performing a homeland defense activity.”146 In most cases, if the debtor bought a home or refinanced a mortgage while on active duty, this test will be met because the mortgage will be over fifty percent of the debtor’s debts.

Consumer Bankruptcy Law and Practice: 13.4.5.1 Generally

If the debtor is not protected by the disabled veteran, reservists, National Guard, or median income safe harbor and has primarily consumer debts, a means test formula is then applied to determine whether a presumption of abuse exists. In general terms, the means test formula begins with the debtor’s current monthly income, and deducts from that income certain allowed expenses to come up with a monthly amount presumed to be available to general unsecured creditors.

Consumer Bankruptcy Law and Practice: 13.4.5.2.1 Introduction

The debtor is allowed to deduct from current monthly income expenses allowed by the Internal Revenue Service (IRS) in its financial standards used in collecting taxes. These expenses are allowed for the debtor and the debtor’s dependents, and for the debtor’s spouse in a joint case. Expenses for a dependent are allowed even if the dependent is not in the same household. As discussed above, the term “dependent” should be defined broadly.

Consumer Bankruptcy Law and Practice: 13.4.5.2.2 IRS national standards for food, clothing, housekeeping supplies, personal care, and miscellaneous expenses

The IRS national standards provide for the debtor’s allowed living expenses in five categories: food, clothing and services, housekeeping supplies, personal care products and services, and miscellaneous items.161 The amounts listed in the national standards for these categories apply to debtors in every state. Some of the national standards depend on the size of the debtor’s household.

Consumer Bankruptcy Law and Practice: 13.4.5.2.4 IRS local standards for transportation expenses

The debtor may also claim transportation expenses under the regional IRS local standards for transportation, which differentiate between ownership costs, operating costs, and public transportation costs.170 The ownership costs expense is provided as a national standard that is the same no matter where the debtor resides. The debtor is permitted an ownership expense of $588 for one car and $1176 for two cars (based on 2022 figures).

Consumer Bankruptcy Law and Practice: 13.4.5.2.5 IRS local standards for housing and utilities

The debtor may take as an expense deduction a housing allowance under the IRS local standards.182 Debtors should not be penalized for spending less than the housing allowance permits, and most courts have so held.183 Housing allowances are specified for each county, dependent on family size, and on the Official Form are broken into separate housing and utilities allowances for “non-mortgage expenses” and for mortgage or rent payments.

Consumer Bankruptcy Law and Practice: 13.4.5.3.1 Introduction

In addition to expenses covered under the IRS guidelines, section 707(b) provides a list of expense items that may be deducted from the debtor’s current monthly income in a range of categories, such as health insurance costs, expenses to maintain safety from domestic violence, certain expenses to care for others, costs necessary in a chapter 13 case, certain educational expenses, and charitable contributions.200 Some of these items are deductible under the IRS standards and presumably should not be double counted.

Consumer Bankruptcy Law and Practice: 13.4.5.3.2 Deduction for secured debts

The debtor may deduct the average monthly payments due on secured debts.201 This amount is determined by taking the sum of (1) the total of all amounts “scheduled as contractually due” to secured creditors in each month of the sixty months following the date of the petition,202 and (2) any additional payments to secured creditors that would need to be paid under a chapter 13 plan as described below.203 This total is then divided by sixty to determi

Consumer Bankruptcy Law and Practice: 13.4.5.3.3 Deduction for priority debts

The debtor may deduct as an allowed monthly expense payments on priority debts, determined by calculating the total amount of debts entitled to priority, and then dividing by sixty.213 Such debts include priority taxes, domestic support obligations (including support debts assigned to a governmental unit), and priority drunk driving debts.

Consumer Bankruptcy Law and Practice: 13.4.5.3.4 Deduction for health insurance

The debtor may deduct reasonably necessary expenses for health insurance, disability insurance, and a health savings account for the debtor, the debtor’s dependents, and the debtor’s spouse.217 For debtors who do not have such insurance, obtaining it before a bankruptcy case is filed can be an important step toward financial stability. In addition, it is a significant expense that can be deducted under the means test.

Consumer Bankruptcy Law and Practice: 13.4.5.3.5 Deduction for expenses to maintain safety from domestic violence

The debtor may also deduct reasonably necessary expenses to maintain the safety of the debtor and the family of the debtor from domestic violence, as identified under section 309 of the Family Violence Prevention and Services Act or other applicable federal law.218 The debtor’s use of this deduction must be kept confidential by the court, but it is unclear how this confidentiality provision will be implemented. As the court is to keep these expenses confidential, will the trustee, for example, be permitted to review them?

Consumer Bankruptcy Law and Practice: 13.4.5.3.6 Deduction for support of elderly and disabled family members

Other expenses that may be deducted include the “continuation of” actual, reasonable, and necessary expenses for the care and support of an elderly, chronically ill, or disabled household member or an immediate family member (parent, grandparent, sibling, child, grandchild, other dependent, or spouse in a joint case if not a dependent).219 This deduction is broader than the similar IRS Other Necessary Expense category, as it is not limited to dependents.220 It includes not simply care, but suppo

Consumer Bankruptcy Law and Practice: 13.4.5.3.7 Deduction for administrative expenses

If a debtor is eligible to file chapter 13, the debtor may deduct administrative expenses that would be incurred in a chapter 13 case in the district where the debtor resides, subject to a cap on such expenses of ten percent of projected plan payments.222 This amount should include payments for attorney fees to debtor’s counsel. If the debtor is not eligible to file a chapter 13 case, the debtor can argue that chapter 11 administrative expenses should be deducted as a special circumstance.

Consumer Bankruptcy Law and Practice: 13.4.5.3.8 Deduction for education expenses

The debtor may deduct actual public or private school educational expenses of up to $2275 per each child under eighteen years of age.224 The debtor must provide documentation of such expenses and a detailed explanation of why such expenses are reasonable and necessary, and why such expenses are not already accounted for in the IRS national standards, local standards, or other necessary expenses.

Consumer Bankruptcy Law and Practice: 13.4.6.1 Presumption of Abuse

A presumption of abuse arises under the means test if the debtor’s current monthly income after all monthly allowed expenses are deducted, multiplied by 60, is the lesser of $15,150 or 25% of non-priority unsecured debt, as long as that 25% is at least $9075.227 For debtors with $60,600 or more in general unsecured debt, a presumption of abuse arises if the amount is $15,150 ($252.50 per month) or more.

Consumer Bankruptcy Law and Practice: 13.4.6.2 Rebutting the Presumption of Abuse

To rebut the presumption of abuse if a motion to dismiss or convert is filed, section 707(b)(2)(B)(i) states that the debtor must demonstrate that “special circumstances” exist that would cause the debtor to fall below the presumed abuse tolerances set by the means test formula. The special circumstances must “justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.”228 This standard is essentially a reasonableness test and significant discretion is vested in the court.