Kenneth R. Sanders. Leading Edge Consulting

Transcription

1 The Chapter 7 Means Test Searching for the Gold Mines and Avoiding the Land Mines by Kenneth R. Sanders Leading Edge Consulting PO Box , Sacramento, CA Phone: kenneth_sanders@sbcglobal.net Providing Bankruptcy consulting services to more than thirtyfive law firms in the greater Sacramento Valley area. Advising on resolving complex issues related to case filings. Training case managers and attorneys on preparation of cases. Designing and/or modifying form templates, pleadings, and other documents to streamline case production and processing. Reviewing cases to ensure compliance with all legal requirements with an emphasis on the Means Test. 1

2 The Chapter 7 Means Test Searching for the Gold Mines and Avoiding the Land Mines by Kenneth R. Sanders Introduction... 3 Disclaimers, Caveats, and Assumptions... 3 Chapter 1 Exclusions... 5 Chapter 2 Filing Status and All Reportable Income... 6 Chapter 3 1st Level Comparison to IRS Standards... 8 Chapter 4 IRS Standard deductions... 9 Chapter 5 Additional Living Expenses and Deductions for Debt Payment Chapter 6 2nd Level Comparison to IRS Standards Conclusion DISCLAIMER: The following materials and accompanying Access MCLE, LLC audio program are for instructional purposes only. Nothing herein constitutes, is intended to constitute, or should be relied on as, legal advice. The author expressly disclaims any responsibility for any direct or consequential damages related in any way to anything contained in the materials or program, which are provided on an as-is basis and should be independently verified by experienced counsel before being applied to actual matter. By proceeding further you expressly accept and agree to Author s absolute and unqualified disclaimer of liability. 2

3 The Chapter 7 Means Test Searching for the Gold Mines and Avoiding the Land Mines By Kenneth Sanders I am not opposed to sensible Bankruptcy law reform, but this Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 is a reverse Robin Hood squeeze the down-on-their-luck middle class and impoverished and give the proceeds to the financial services industry US Senator Jack Reed The government solution to a problem is usually as bad as the problem. Noted Economist Milton Friedman Introduction The passage in 2005 of the Bankruptcy Abuse Prevention and Consumer Protection Act (commonlyknown as BAPCPA ) was a watershed event in American Bankruptcy law. The impact to the US Bankruptcy Code brought about by the enactment of this law cannot be understated. The changes in both legal perspective and in procedure were so dramatic and so fundamental that, in certain regions, upwards of 20% of the attorneys practicing Bankruptcy law simply left the arena. These attorneys just didn t want to deal with all of the changes. Some of these Attorneys said that completing the Means Test made them feel more like tax return preparers than Bankruptcy attorneys. The creation and required use of the Form 22-A Means Test was one of the principal cornerstones of this new law. The Means Test is an objective and coldly-impersonal test; it doesn t care about the reasons for the Bankruptcy, it hasn t heard the Debtor cry; it can t understand the impact of the pending foreclosure, it only counts the numbers. That objectivity is both the strength and the curse of the Means Test. As we all know, the Means Test gathers the adjusted average gross income of the Debtor and compares it to a set of national data standards maintained by the IRS. If the Debtor s income is less than the IRS standard, the Debtor is free to file a Chapter 7. If the Debtor s income is greater than the IRS standard, the Debtor is presumptively deemed to be abusing the provisions of the Bankruptcy Code and the US Trustee s Office has standing to seek the outright dismissal of the case or the conversion to Chapter 13. I will be discussing how certain sections of the Form 22-A Means Test for Chapter 7 can be used to the Debtor s advantage and how other sections can be disastrous for the Debtor, for the case and sometimes even to the Debtor s attorney. Along the way, I will also be adding my own observations about the importance and inter-relationship of certain sections to the overall Bankruptcy case as filed. Disclaimers, Caveats, and Assumptions Before I go any further, there are some disclaimers, caveats and assumptions that need to get settled. First, I am not an attorney and nothing in this presentation should be construed as giving legal advice. However, I was a Chapter 7 Bankruptcy Trustee from 1989 to 2007 in the Eastern District of California. Technically, I m still a Trustee on 2 remaining cases and I am now a consultant to a number of law firms in Northern California on Bankruptcy issues, in particular, resolving Means Test problems. In addition, while I worked closely with the US Trustee s Office, nothing in this presentation should be interpreted as being endorsed, approved or sanctioned by the US Trustee s Office or by the US Department of Justice. However, I know from personal experience that how the Means Test is used and 3

4 enforced by the US Trustee s Office can vary dramatically, depending on which office is reviewing the case. A particular Means Test deduction may be of only minor consequence at the Seattle US Trustee s Office, but can cause red flags to pop up all over the place at the Chicago Office, or vice-versa. I can also tell you that the individual case Trustees as well as the staff at the US Trustee s Office are encouraged to look for inconsistencies. If I m reviewing a case and the Debtor has pet care expenses in Schedule J but no pets in Schedule B, I get suspicious. For an analyst at the US Trustee s Office, claiming a mortgage deduction in the Means Test when there are no secured debts in Schedule D gets them suspicious. Remember to make the Means Test an integrated part of the overall case documents. This presentation assumes that you are somewhat familiar with the standard Form 22 Means Test as it is used in Chapter 7 and that you are also somewhat familiar with the Bankruptcy processing software used by your firm that generates the case documents. This presentation also assumes that there have been no major changes in the Means Test and no amendments to Title 11, US Codes since June of 2010, which is when this presentation was recorded. During this presentation, I ll let you know about those sections of the Means Test that can be GOLD MINES. These are unexpected or unusual sections that can be very beneficial to the Debtor in passing the Means Test. I will also be telling you about those sections of the Means Test that can be LAND MINES. These are deceptive sections of the Means Test that look helpful. However, unless you use them just right, the Office of the US Trustee can require that you prove up or document the deduction. If you can t prove the amount, the deduction can get disallowed by the US Trustee s Office, the case can go to an adversary proceeding to deny Discharge and you may end up having to explain to a very upset Debtor why they cannot get a Discharge in Chapter 7 Bankruptcy. You can take it for granted that I will not be telling you about questionable or provocative deduction techniques that some law firms practice. This presentation is about getting your client and you safely through the Means Test. As we go along through this presentation, I encourage you, at first, don t try to make sense of the Means Test. Run with it, play with it, get used to it, but don t try to understand all of the thinking that went into its creation. As I tell my clients, It isn t logical, it isn t ethical, it isn t moral, it s just Bankruptcy. Finally, I d like to pass along a warning. There is a maxim in the Sacramento Bankruptcy arena and probably in lots of other jurisdictions as well, Pigs get Fat, Hogs get Slaughtered. Complete the Means Test as safely as possible. Don t try to push the envelope in too many directions and don t get too greedy. Remember that the Court can decide sua sponte to deny Discharge and dismiss a case on a subjective It just smells wrong determination that has nothing to do with the objective and impartial numbers of the Means Test. 4

5 Chapter 1 Exclusions At this point, it might be a good idea for you to pause the recording and either call up a display of a standard Chapter 7 Means Test on your computer monitor or to get a hard copy print out. I ll be referring to various parts of the Means Test by the section numbers and it will help if you can follow along and see where I m going. So let s take a look at the Means Test. The entire first page of the Means Test is devoted to the 3 Ejection Seats ; 3 exclusions by which the Debtor can get out of the Means Test altogether. The first exclusion, 1A, is for disabled veterans. Candidly, of the literally thousands of Means Tests that I have personally reviewed, I have not yet found a Debtor who could meet all the requirements shown here and thereby get excluded under this section. This is not to say that there aren t such individuals, but in my experience, they are few and very far between. However, the second exclusion, 1B, is far more useful. This is a GOLD MINE. This allows the Debtor whose debts are primarily business-related to skip the Means Test entirely. This can be used more frequently than might be imagined. If, for example, the Debtor has a rental property that has a mortgage of $200,000 and the total of all debts in the case is $375,000, then the rental mortgage business debt is 53% of the overall debt load and the case qualifies as a business case. You and the Debtor can forget about the rest of the Means Test. The minimum threshold is 50% plus $1 of all debts in the case. In addition, if the Debtor guaranteed or co-signed a debt owed by a corporation or a partnership or an LLC, these debts should be listed in Schedule D, E, or F as necessary; designated as Business Debt in the comments and included in the calculation of business debts. If this situation exists, go into your Bankruptcy software and change the Nature of Debt for the Debtor from Consumer/Non-Business to Business. The software should then make the necessary adjustments to the Petition and other documents. Once the case is filed, you may get an inquiry from the US Trustee s Office as to how you decided that this case is a Business Case, so make sure each of the Business Debts is designated as Business Debt in the comment field of the particular debt. Incidentally, income taxes are not considered Consumer/Non-Business debts by most US Trustee s Offices; so they can be counted as business debts as well. There is a secondary effect to designating the case as a Business case. Take a look at the wording of Statement of Financial Affairs - #3b. If the case is designated as a Business Case, the minimum threshold for reporting the pre-petition payments made within the 90 days preceding the filing of the case to almost all creditors jumps from a mere $600 to a very generous $5,850. This can be of real benefit in pre-petition Bankruptcy planning when it comes to certain debt payments. If the case is a Business case, the Trustee cannot use 547 of the Bankruptcy Code to avoid a payment made to a creditor where the total of payments made in the last 3 months is less than $5,850. Turning to the third exclusion, 1C, since 2005, I have seen maybe 2 cases where the criteria for exclusion under this section were properly in place. You might want to make a change in your Bankruptcy questionnaire to gather such information, but don t count on seeing it too often. 5

6 Chapter 2 Filing Status and All Reportable Income At the top of page 2 of the Means Test, we come to the Filing Status. Be sure that the proper filing status of the Debtor is shown here. As a side note, there are certain instances where a married couple may elect for only one spouse to actually file a Chapter 7. It may turn out that the non-filing spouse adjustments provide more benefit to the overall case than otherwise. I ll be talking more about the Marital Adjustment in just a little while in Chapter 2. There is a case out of the 9 th Circuit Bankruptcy Appellate Panel that supposedly addresses the effects of the Debtor s Discharge on the non-filing spouse. It s called In Re: Kimmel K-I-M-M-E-L. It was decided and published in November I recommend that you download and review that decision, then decide for yourself if your married clients should consider this alternative. It might just come in handy in certain cases. Having determined the filing status of the case, we now come to the most data intensive portion of the Means Test reporting the income. It has been said that a Bankruptcy case has more raw data about the proponent of the case than any other pleading in the federal registry. Gathering the raw income data is a good example of this fact. In this part of the Means Test, we have to report every source of revenue that the Debtor has received in the 6 months preceding the month that the case will be filed. Well,.almost every source of income. Income tax refunds should not be included; proceeds from loans should not be included and any check with the Social Security Administration logo printed on the check should not be included. Everything else and this includes gambling winnings, inheritances, gifts from family, the profit on the sale of assets over and above the original basis, Domestic Support Obligations, lawsuit settlements, insurance settlements and even roommates contributions everything else has to be listed. If the Debtor is married and if the Debtor s spouse is living with the Debtor, even if the spouse is not filing, we have to report the spouse s income sources just as scrupulously as the Debtor s. In Section 3, you will have to list the average gross wages earned during the past 6 months. So, it s important that you make sure you are working with solid, reliable numbers here. If push comes to shove and the US Trustee s Office asks you to produce the supporting documents of the Debtor s income, you should have those paystubs immediately at hand. Don t rely on what the Debtor thinks they make per month, don t extrapolate based a few sample paychecks; get the paystubs and either keep copies or scan them into the digital folder for the Debtor; and make sure you have all of the paystubs for the entire 6 months period. Gathering paystub data is a prime example of how timing the filing of a case can sometimes make or break a Means Test. For example, if the Debtor got a large bonus check five months ago, it might make a lot of sense to delay the filing of the case for 2 months, wait until the bonus check drops off the 6- month look-back period and then file the case. In Section 4, you will have to show the 6-months average Gross business receipts and then subtract the 6-months average business expenses. When you are computing the average business expenses, do NOT include any lease payments or secured debt payments; we ll deduct those later in the Means Test, if need be. 6

7 Here again, do not rely on the Debtor s guesses and vague numerical hunches. Get the solid data, make the Debtor complete a Profit and Loss, or better yet, get it from the Debtor s CPA. Don t let the Debtor shift the responsibility of preparing the Profit and Loss over to you and your staff. Ultimately, this is the Debtor s case, and we need to hold the Debtor responsible for the data we use. It is also an example of the role that due diligence plays in the Bankruptcy process. Both Rule #9011(b) of the Federal Rule of Bankruptcy Procedure as well as 707(b)(4)(C) in the Bankruptcy Code require the Debtor s attorney to exercise due diligence in gathering information for the Bankruptcy case. There are some Debtors whose paychecks from their employers include reimbursements for job-related expenses. This can be a small GOLD MINE. A worker s paycheck that gets reported in Section 3-Wages that includes, say, $200 for repayment of gas and meals on the road is artificially inflated. The resolution to this problem is to remove the reimbursements from the rest of the gross wages. List the amount of the reimbursement here in Section 4 as gross business income and then deduct the expenses relating to the reimbursements. So, hypothetically, Section 4 would show the gas and meals reimbursement of $200 as gross business receipts and then also show $200 in business expenses for those same items, leaving a Net Profit of $0.00. The adjusted wage income shown up in Section 3, now shows the true amount of the Debtor s actual wages because it no longer includes the amount of reimbursement. There are Debtors who are involved with third party business entities such as small scale Corporations, LLC s or even partnerships. At one time, these individuals may have been self-employed, sole-proprietor businessmen and women. Now, they continue to do their business, but through the separate business entities. These Debtors may be the sole shareholder or a business partner. This is fine, but we should NOT report the gross business income for the separate business entity. After all, if I hold stock in, say, General Motors and I file Bankruptcy, I am not required to show the Profit and Loss of GM. If I get draws or dividends from the separate business entity, I ll show it in Section 6. Section 5 requires you to show the 6-month average gross receipts from rental properties and the incidental expenses related to property maintenance, utilities and upkeep. Remember that you cannot deduct the mortgage payments at this stage of the Means Test. If need be, that comes much later on. Section 6 requires you to report interest and dividends. As mentioned earlier, this includes revenue from the Debtor s interest in any corporations, LLC s or partnerships, especially from those separate business entities where the interests are majority or sole ownerships. It can also include the dividends from limited partnerships in which the Debtor invested. Section 7 requires you to show the Debtor s pension and retirement incomes. Do not include any Social Security income and do not show any revenues coming from loans taken against the Debtor s 401(k) Plan. Section 8 includes income from Domestic Support Obligation (such as child support and alimony) as well as the roommate s contribution to the overall housing costs. Section 9 includes all unemployment income. Be careful about claiming that the unemployment is derived from Social Security and is therefore not to be counted. THIS IS A LAND MINE. Most of the cases that I ve heard about that tried this maneuver have failed. The Social Security exclusion has been disallowed by the US Trustee s Office and the entire unemployment compensation ended up being counted. 7

8 In Section 10 you ll need to disclose every other sort of income that the Debtor has received in the last 6 months. Here is another potential LAND MINE. When preparing the rest of the Bankruptcy case, take a look at the various income sources shown in the Means Test. Then, compare it to what is shown on Schedule I- Income. There should be some correlation between these two sets of numbers. If they re markedly different, I recommend that you add a comment at the bottom of Schedule I discussing the discrepancy. Remember that a Bankruptcy case should be internally consistent. Chapter 3 1st Level Comparison to IRS Standards (3:18) The third part of the Means Test totals the Debtor s annualized average adjusted gross income to the IRS standards. Your software should easily make the conversion and gather the IRS standards data. The crucial element in this comparison is the size of the household. The larger the number of people living in the home, the larger the IRS standard income figure. Many attorneys use the so-called Headson-Beds approach and report the total number of people living with the Debtor. This can get a bit challenging. If there are people living with the Debtor who are not related by family or by marriage, be careful about counting them. This can be a LAND MINE. How long have they been living in the house? Does the Debtor actively participate in supporting them? Do these other roommates contribute all or a portion of their own funds to the overall household expenses? If so, we need to include it in Section 8. It can get a little confusing. In Section 15, we come to the first level Means Test comparison. If the Debtor s adjusted average gross income is less than the IRS standard, you can stop right here and the Debtor can file a Chapter 7. If the Debtor s adjusted average gross income is greater than the IRS standard, the Debtor has breached the first level Means Test comparison and we have to move on through the rest of the Means Test. Then we come to the Marital Adjustment. If the Debtor is legally married and living with their spouse and if the spouse is not joining the Debtor in the filing, the obligations of the non-filing spouse can be listed here and used as a deduction to the Debtor s adjusted gross income. There are all sorts of deductions that can properly be claimed here. This can be a real GOLD MINE. You have to make sure that the expenses are the sole and separate expense of the non-filing spouse, but here are some of the kinds of items we re talking about. a. The average income tax withholding that is deducted from the non-filing spouse s wages. b. Payments on 401(k) loans taken out by the non-filing spouse. c. Mortgage Payments on real property held solely in the non-filing spouse s name. d. Student loan payments owed by the non-filing spouse. e. Payments to other unsecured creditors owed solely by the non-filing spouse. f. Domestic Support Obligations (child support and alimony) owed by the non-filing spouse. g. Whole Life or Universal Life insurance premiums paid by the non-filing spouse and insuring the life of the non-filing spouse. 8

9 Chapter 4 IRS Standard deductions For the most part, the IRS standard deductions in Sections 19, 20 and 21 are computed and generated automatically by your Bankruptcy software. There are a few comments that should be noted, however. Remember that the County of the Debtor s residence can have an impact on the case. The IRS standards for a household of 4 living in Marin County are dramatically different from the standards for the same household living in Yolo County; make sure the Debtor s county of residence is correct. In Section 19B, remember that senior citizens get counted separately for health care deductions. Be sure that your Bankruptcy questionnaire asks the age of the Debtors and anyone else in the household. You get an extra $84 boost for anyone over 65. In Section 20B, if you are going to claim the mortgage payments, be sure to only claim the mortgage payments on the Debtor s residence. At this point in the Means Test, we cannot deduct the mortgage payments on any rental property. In Section 21, you can deduct the Home Owner s Association dues on the residence as well as the related average monthly property taxes and house insurance premiums that are not included in the 1 st mortgage payment impound account. It is important that you identify the amounts and the kinds of adjustments. In Section 22A, we come to another GOLD MINE. Normally, we can claim the IRS standard auto ownership and maintenance deduction for the one or two cars in the Debtor s possession. However, IF a. The vehicle is owned free and clear and has more than 75,000 miles on it OR b. The vehicle is owned free and clear and is at least 6 model years old c. Then you can claim an additional $200 for each auto that meets these requirements. Here s an example. Let s say that the Debtor lives in Solano County and has two autos; each one meeting these requirements. So, instead of being able to claim the IRS standard of $306 per auto for this county, you can override the standard deduction in your Means Test software and increase the amount to $506 per auto for a total deduction of $1,012. This Older Auto deduction is not printed anywhere, but I personally checked with the Assistant US Trustee locally and got it confirmed that this is national policy. By the way, if you re going to claim the extra older auto deduction, make sure that you ve got the automobiles listed in Schedule B that can meet the criteria. Section 22B doesn t get much publicity, but it can be a GOLD MINE in hiding. If the Debtor occasionally takes a bus to work or if the Debtor s dependents take a bus to school, you can claim a $182/month deduction for using public transportation. You can even claim this deduction on top of any other transportation deduction. But again, if you re going to claim this public transportation deduction, account for it somewhere in Schedule J. In Section 23 and 24, remember that IF there is a secured auto debt, then we can claim the contractual payment OR 1/60th of the balance, whichever is less, against the $496 standard. But if there is no auto contract, we can t claim anything and the net amount is $0.00. I ve heard that this issue is currently up on appeal to the 9 th Circuit Bankruptcy Appellate Panel, but there has been no decision as of June Section 25 is where all your hard work in gathering each and every one of the Debtor s paystubs over the past 6 months pays off. Go through the paystubs and add up all the payroll tax deductions, including Social Security, IRS, Franchise Tax Board, State Disability Insurance, Worker s Compensation and MediCal. 9

10 In addition, don t forget that if the Debtors are self-employed and pay their IRS 1040 estimated income tax through quarterly direct payments, the 6-month average of these quarterlies gets deducted here as well. In Section 26, some so-called Mandatory payroll deductions are easy to identify on the paystubs: union dues, many retirement plans of government employees, etc.. Some are not so easy to figure out. Here s a small LAND MINE to avoid. Do not claim any payroll deduction for the repayment of a debt owed directly to the employer, either as an employee purchase account or repayment of a wage advance. Technically, these are debts owed to the Debtor s employer that either should be listed in Schedule F or prudently resolved before the filing of the case. The Life insurance deductions in Section 27 are only for policies insuring the life of the Debtors, not their dependents; and then only for term life policies. We cannot deduct the Whole Life or Universal Life insurance premiums. In fact, other than in the Marital Adjustment when only one spouse is filing Bankruptcy, Whole or Universal Life premiums can t be claimed anywhere in the Means Test. Section 28 allows a deduction for Court-Ordered Payments ; and usually this means Domestic Support Obligation such as Child Support and Alimony. Such payments can be made either directly by the Debtor or as a payroll deduction. If you list the Debtor s payment of Domestic Support Obligation, I have a request on behalf of my fellow Trustees. Once the case is filed, please provide the full name and address of the Domestic Support recipient to the case Trustee. For any case where the debtor is paying Domestic Support Obligation, the Trustee is required under 704(c)(1) to mail 4 different letters to the ex-spouse or parent of the supported dependent as well as to the state Division of Child Support Enforcement for the state in which the recipient lives. As before, make sure the expense shows up either in Schedule I for payroll deductions or in Schedule J as a direct payment. Here s another little twist in Section 28 that just might be a GOLD MINE. Normally, we think of Section 28 as relating only to Child support and alimony. But, in reading the actual text, it allows a deduction for any payment that the Debtor is required to pay, pursuant to the order of a court or administrative agency. If the Debtor was ordered to make monthly payments to an unsecured judgment creditor, even in a Small Claims Court action, or if the Social Security Administration has directed the Debtor to make monthly payments for an overpayment in Social Security Benefits, would that constitute Court Ordered Monthly Payments according to the text of this section? I think so, but check with the local US Trustee s office to get their opinion. If the Debtor is a licensed professional (such as a doctor, nurse, accountant, insurance broker, etc.) Section 29 can be a bit of a GOLD MINE. The Debtor s costs associated with the periodic so-called continuing education courses (including the cost of the course, the travel and hotel costs associated with taking the course) that are needed for re-certification of the Debtor s license can be averaged out and included here if the Debtor actually pays the costs. However, if the Debtor s employer pays the costs, there is no deduction. In Section 30, if you are going to claim a deduction for the Debtor s dependent child care, make sure a. There are dependents shown in the Heads-on-Beds count in Section 14, b. There are dependents listed in Schedule I, c. There are Child Care expenses shown in Schedule J, and 10

11 d. You impress upon the Debtor that you may need canceled checks or receipts for this expense if this deduction is challenged by the US Trustee s Office. For the Debtor with severely- or chronically-ill family members that live with the Debtor, Section 31 Health care can be a GOLD MINE. Average out the actual medical costs that have been spent in the last 6 months and then subtract the IRS standard deduction for medical costs up in Section 19B. As an example, if the Debtor s average out-of-pocket medical costs for the last 6 months are $400/month and the IRS standard in Section 19B is $240, you can claim the $160 excess here. Remember to list the $400 in Schedule J, or at least account for the discrepancy between what was spent in the past and what will be spent in the future. As a final observation to this part of the Means Test, please look carefully at the actual requirements of Section 32. When you start adding up telecommunication costs, remember that you cannot deduct the cost of the total cell phone or cable bill. You can only deduct specific portions of those costs. You are limited to Caller ID, basic Internet access, any call-waiting on the cell phone and any long-distance service packages. Chapter 5 Additional Living Expenses and Deductions for Debt Payment The time you took in gathering up the paystub data from the Debtor can come back yet again to help you here in Section 34 for health and disability insurance. Remember that you can only claim the medical, dental and vision insurance premiums that are withheld from the Debtor s paycheck; you cannot claim the insurance premiums that the employer directly pays on the Debtor s behalf. Sometimes these will show up on the paystubs and it can get a bit confusing. Some Debtors pay their health, dental, vision and disability insurance premiums directly; so make sure that your Bankruptcy questionnaire includes this expense category in the Debtor s Budget. Section 35 looks inviting, but it can be a LAND MINE. You can deduct the moneys that the Debtor sends to needy family members that are elderly, chronically ill, or disabled. If you re going to claim this deduction, be sure you show an on-going expense in Schedule J or account for any changes in the amount. The longer that the Debtor has been sending money to needy family members, the better. Remember that, if the US Trustee s Office challenges you on this deduction, you may have to prove up the expense, using receipts, canceled checks, etc. You may also have to prove that the family members are specifically elderly, chronically ill, or disabled. In all the thousands of Means Test reviews, I can t remember any case ever claiming anything in Section 36 Protection against family violence. This section is not for claiming a standard home security system; and claiming the guard dog costs will not be acceptable. This is for the costs of family violence prevention, such as might arise in a restraining order against an abusive ex-spouse. Section 37 home energy costs, can be used in much the same way as Section 31. If the Debtor s average utility costs are significantly higher than the IRS standard and you can explain why they should be higher than average, you can deduct the difference here. Here s an example. The Debtor lives up in the mountains and provides energy to his home from a generator for his electricity and propane for heating and cooking. Back up in Section 20A, the IRS Standard for utilities for his household of 1 in Del Norte County is $396/month. If you and the Debtor can prove the actual average is $500, you can deduct the $104 excess here. As always, be sure to correlate this utility expense with the projected utility expenses in Schedule J. 11

12 The Child Education deduction in Section 38 can be very useful, but it can be both a GOLD MINE and a LAND MINE. Because it allows a deduction of school-related costs of a son or daughter, to the maximum of $ per child, it is a GOLD MINE. But read the fine print of Section 38; read what the Debtor is required to provide to the case Trustee. Here is the LAND MINE lurking in the shadows. The Debtor is required to prove up the expense with actual receipts and also substantiate that these educational expenses are reasonable. Whether or not the Debtor has to provide this substantiation is a judgment call from the US Trustee s Office. Call the local office and find out how much prove-up may be required in your area. Also, be sure that if you claim an expense here, that there is some kind of correlating school expense shown in Schedule J. Remember, analysts at the US Trustee s office are trained to look for discrepancies. Claiming a deduction for after-school activities that are only marginally educational in nature should be attempted with caution. Some US Trustee analysts will argue that Karate lessons and horse riding lessons are not truly educational and will disallow such deductions. One other comment about the Educational Deduction in Section 38 is that it should only be used for dependent school-age children between the ages of 5 and 17. If you claim $147.92/month for the educational costs of a 15 month-old toddler or the 19 year-old son going off to college, you should expect to get an inquiring letter from the US Trustee s Office and the expense will usually be disallowed. The 5% boost in food and clothing expense in Section 39 can usually be added on without too much fuss, but if the Debtors show up at the 341 meeting in common clothes because their job doesn t require it and have no dietary restrictions (either medical or religious) and are skinny, you may find it a bit uncomfortable in trying to explain why the extra 5% boost is appropriate. There are a few comments I should make regarding charitable contributions in Section 40. a. First, You can only claim cash contributions. The Debtor giving clothes and used household goods to Goodwill or the Debtor donating his or her time to clean up the bike trail along a local river bank is noble and commendable but the value of the items and time donated cannot be claimed. Only cash contributions are allowed. b. Second, The longer the Debtor has been making these charitable contributions, the better. Read the actual text of this section. If the Debtor just Got Religion last month and now is donating $400/month, you may have trouble in persuading the US Trustee s Office that this is an amount that the Debtor will continue to contribute. c. Third, Churches, mosques and synagogues are not the only charitable organizations. The Debtor can make contributions to any number of groups assisting the environment, disadvantaged peoples, etc. and these contributions will qualify for this deduction under 26 US Codes 170(c)(1) and (c)(2). d. Four, Although the Debtor might think that some family members are Charity Cases, the recipient of the donation has to be a recognized charity organization. e. Finally Don t forget that if the Debtor is claiming charitable donations in the Means Test, the donation should be listed in Schedule J and, under most circumstances, the name and address of the recipient should be disclosed in Statement of Financial Affairs #7. For most cases, Section 42 is the largest single section of deductions. Here is where we deduct for secured debts owed by the Debtor. Here we, can deduct for a. The monthly payment of any mortgage on any real property in the Debtor s possession that is listed in Schedule D b. The monthly payment of any mortgage payment on any real property where the Debtor is a co-signer to the principal obligor, regardless of who s making the payments, as long as the debt is listed in Schedule D. 12

13 c. 1/60 th of the balance (or the monthly contract payment whichever is less) of any other secured debt listed in Schedule D d. 1/60 th of the balance of any delinquent real property taxes. If there are any such tax debts, they should be listed in Schedule D as well. e. Judgment liens, as long as they are properly listed in Schedule D, can also be included and 1/60 th of the balance of the judgment can be deducted here as well. f. Remember that we can use the entire balance of the debt, regardless of the value of the asset. If the 2 nd mortgage is totally upside down, we can still claim the payment. g. Lease payments can also be counted here. The calculation goes like this: Multiply the monthly lease payment by the remaining number of months on the lease and divide the result by 60. So a $200 monthly payment on a lease with 15 months left on the contract gives you a $3,000 result; divided by 60 months gives you a $50 deduction. Be sure to list the leaseholder in Schedule G and the on-going lease payments in Schedule J. Remember that we can only list the secured debt if the Debtor or another obligor is still in possession of the security. If the foreclosure sale has already happened and the Debtor is now essentially renting, if the car has already been repossessed, we cannot claim the mortgage payments. I d like to digress for a moment and talk about how the Means Test and Statement of Intentions can affect each other. Some attorneys are of the opinion that if the Debtors have announced their intention to surrender the collateral, the payments on that particular secured debt cannot be deducted. They essentially say, If you don t want it, you don t get to count the payments. Other attorneys read Section 42 literally and are of the opinion that if the asset is in the Debtor s possession as of the date of filing, then the payment deduction is valid, regardless of the Debtor s intentions. I tend to side with the latter point of view, If you got it now, you can count it now ; but this should be professional decision you make, tempered by the position of the local US Trustee s Office. Section 43 was designed to take into consideration the existing delinquency on the so-called Essential secured debts. If the Debtor is behind on the mortgage payments on their home or the secured payments on a car in their possession, we can deduct 1/60 th of the delinquency. This section can be a small, last-minute GOLD MINE, where the timing of the filing of the case plays a crucial role. For example, if the case is scheduled to be filed on the 12 th of the month and the $3,000 mortgage payment is due on the 1 st and delinquent on the 10 th, you can claim 1/60 th of the $3,000 delinquency as of the date of filing, or $50; even though the Debtor brings the account current on the day after the case is filed. Just as with the secured debts in Section 42, there are a few issues with the so-called Cure deductions. I take the position that if the Debtors have announced their intention to surrender the collateral, the Cure Amount payments on that particular secured debt cannot be deducted. You cannot deduct the Cure Amount on any secured debt where the asset is not in the Debtor s possession or where the asset is not essential to the Debtor. Therefore, you cannot claim a cure amount on the delinquencies on rental property mortgages, on time shares, on recreational vehicles, or on secured debts where the Debtor is just a co-signer. Section 44 is, by comparison to Sections 42 and 43, remarkably straight-forward. Take the entire balance of all debts properly listed in Schedule E and divide by 60. The trick is to make sure that the debts listed in Schedule E are properly there in the first place. Schedule E should include only those obligations as defined under 507 of the Bankruptcy Code, notably income taxes, any court-ordered Domestic Support Obligation arrearages, wages and benefits owed to present and former employees of the Debtor as well as deposits paid by the Debtor s customers for goods and services not yet provided. 13

14 In Section 45, the calculation of the Chapter 13 administrative expenses should be approached with care. The structure and calculation of the Chapter 13 Plan varies from District to District. In some Districts, the Trustee pays the on-going mortgage payment as well as cures any mortgage delinquency. In other Districts, the Trustee only cures the mortgage delinquency and the Debtor maintains the ongoing payments. Because the Chapter 13 administrative costs are based on the monthly payment paid from the Debtor to the Trustee, it is difficult for me to tell you precisely how to compute a hypothetical chapter 13 Plan payment that would meet the confirmation standards of the Chapter 13 Court in your area. Your Bankruptcy software should be able to compute the minimum Chapter 13 payments for you. If you want to try your hand at computing the minimum Chapter 13 payment on your own, add up the total of the deductions in Section 44 for the priority debts, add the 1/60 th Cure Amount total in Section 43 and finally, from Section 42, add in the deductions for all of the secured debts except the debts secured by real property or that are being paid by a third party. Now multiply the sum by Yeah, I know. The result is the minimum Chapter 13 payment that could be proposed under normal circumstances. By multiplying the Payment by 0.096, you can find the Chapter 13 administrative cost. Now you see why it s best to let the software compute the payment. Chapter 6 2nd Level Comparison to IRS Standards Sections 46 and 47 are used to total up the deductions that have been claimed so far and then Section 48 recapitulates the 6-month average monthly gross income that was so carefully calculated way back up at Section 18. Section 49 shows the total of all the deductions. In Section 50 Monthly Disposable Income, the Means Test then subtracts the Deductions from the average monthly gross income. If the result less than $117.08, the Debtor passes the Means Test. Obviously, it s better if the Debtor passes the Means Test with less than $117.08; going into the negative is strongly preferred. Having a Monthly Disposable Income of -$100 to -$200 gives you a nice cushion in case the US Trustee s Office decides to challenge or disallow certain deductions. Even after the 2 nd level breach in Section 50, there are still two last ditch ways to try to get the Debtor past the Means Test. The first is in Sections If the Monthly Disposable is more than $117.08, but less than $195.41, you might still be able to get the Debtor past the Means Test, depending on the total unsecured debts shown in the Bankruptcy Schedules. It s fairly complicated and it s best to just let the Bankruptcy software do the computations for you. The second is in Section 56, what I like to call the Prayer for Mercy. This allows you to plead extenuating circumstances or unusual expenses that you feel should be taken into consideration. Theoretically, using this section can work; in my experience, it s not worth the effort in all but the most unusual circumstances. Let me take a few seconds before I finish up to tell you about how cases are generally reviewed at the US Trustee s Office. At the first level, one or more case analysts at the local US Trustee s Office review each and every case that gets filed locally. They act as a filter or a screen to review the cases and note any inconsistency, any unusual deduction, or any time the Section 51 has a Monthly Disposable Income of greater than $

15 These Cases of interest are then sent up to second level to be reviewed by the US Trustee staff attorneys or the staff accountants. These attorneys and accountants are good and they know their stuff. However, because of the sheer volume of cases that the first level case analysts have to process, certain items that might get slight notice at the first level get a more serious examination at the second level. It is usually at this stage that the letters to the Debtor s attorney start getting mailed out. These letters will usually identify the areas of concern that have been identified and ask for supporting documentation or further explanation. Sometimes the documented replies back from the Debtor s attorney are sufficient to resolve any further concern Sometimes the replies aren t. A representative from the US Trustee s Office has the right to appear at the 341 Meeting of Creditors and ask questions of the Debtor regarding certain aspects of the Means Test. As a good practice guide, any time the US Trustee s Office sends an inquiring letter, you should meet with the Debtor before the 341 Meeting and go over the troublesome areas. The US Trustee s Office has 10 calendar days from the conclusion of the 341 Meeting of Creditors to file a Notice of Abuse if it believes that the Debtor should be denied a Discharge because of a breach in the Means Test. If no Notice of Abuse is timely filed by the US Trustee s Office within that 10-day period, even though the case may have breached the 2 nd Level Abuse threshold on paper, the Debtor has passed the Means Test. If a Notice of Abuse is timely filed, an adversary proceeding is started. The US Trustee s Office will file an Objection to Discharge under 707(b) and the Debtors will come into the courtroom with 2 strikes against them. The Debtors are presumed to have abused the Bankruptcy process by virtue of the objective results of the Means Test. This presumption is rebuttable and the Court may over-rule the US Trustee s Office s Objection to Discharge; but the odds are usually not good Conclusion I hope you ve gained a better appreciation for the finer details of the Means Test from this presentation. The keys to a well-prepared Means Test are comprehensive data gathering, holding the Debtor responsible for providing documentation, prudent and well-informed deductions and an understanding of how the Means Test can be used to serve the best interests of the Debtor. I encourage you to develop a rapport with the local US Trustee s Office. Many of the case analysts can be very candid and very helpful if you ve got questions about how a certain deduction is viewed in your area. Finally, I hope you ll stay grounded in the realities of the Bankruptcy system. Sometimes, the Debtor just does not qualify to file a Chapter 7 and then you have to consider alternatives, such as Chapter 13, a delay in filing to change the balance of the income and the deductions, or other non-bankruptcy remedies. 15