The Marital Adjustment: What Is It, and Should It Be Fixed?

By Julie Philippi

Prior to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), a chapter 7 case could be dismissed if the filing was deemed to be a substantial abuse of the process.1 It was a subjective, fact-intensive determination made by the judge after considering all relevant factors.2 In chapter 13 cases, the plan payment was determined by a fact-specific review of actual income, and reasonable and necessary expenses.3

When BAPCPA was passed, Congress believed that many debtors who obtained chapter 7 relief had an ability to repay at least some of their debt in a chapter 13, and those in chapter 13 could repay more.4 Therefore, BAPCPA created the “means test” in § 707(b), which purported to be an objective formula for determining whether a consumer debtor should be in chapter 7 or 13, and how much should be paid in a chapter 13 plan to general unsecured creditors.5

The means test starts with a calculation of the debtor’s current monthly income (CMI) to determine whether the debtor is above or below the applicable median income. CMI has a detailed definition,6 which includes not only the debtor’s income but also “any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor’s spouse), on a regular basis for the household expenses of the debtor or the debtor’s dependents (and, in a joint case, the debtor’s spouse if not otherwise a dependent).”7 While awkwardly phrased, this means that a married debtor who has a nonfiling spouse can assert that some of their spouse’s income is not paid on a regular basis for the household expenses of the debtor or the debtor’s dependents, and this amount can be excluded from the calculation of either CMI or disposable income. This exclusion has become known as the “marital adjustment.”8

9101112The means test is calculated using Official Forms 122A-19 and 122A-210 in chapter 7, and Official Forms 122C-111 and 122C-212 in chapter 13. In chapter 7, Form 122A-1 instructs the debtor to complete Column B with the nonfiling spouse’s income when the spouses are living in the same household and not legally separated.13 If the CMI is above the applicable median income, the debtor completes Form 122A-2, which in Part 1, Question 3, instructs the debtor to “subtract any part of your spouse’s income not used to pay for the household expenses of you or your dependents” (i.e., the marital adjustment). Examples are “income used to pay your spouse’s tax debt or to support people other than you or your dependents.” Depending on the end calculation on Form 122A-2, the filing could be deemed an abuse of chapter 7.14

In chapter 13, on Form 122C-1, the debtor also includes all of the nonfiling spouse’s income in Column B, but pursuant to § 1325(b)(4), the marital deduction is taken on Line 13 of Form 122C-1 before determining whether the debtor is above or below the applicable median income, which then determines the applicable commitment period (ACP).15 Unfortunately, § 1325(b)(4) is poorly worded and has led to confusion: “For purposes of this subsection, the [‘ACP’] — (A) ... shall be — (i) [three] years; or (ii) not less than [five] years, if the [CMI] of the debtor and the debtor’s spouse combined, when multiplied by 12, is not less than....”16 This could be interpreted to require that the entirety of the nondebtor spouse’s income be added to the debtor’s CMI in determining the ACP. However, the nonfiling spouse’s contributions are already included in the debtor’s CMI, so adding the spouse’s income a second time to determine the ACP makes little sense.17 One case goes so far as to conclude:

[T]he more reasonable interpretation of § 1325(b)(4) is that Congress inadvertently failed to include the qualifier that the spouse’s [CMI] must only be “combined” with the filing debtor in a joint case by putting those words in parenthesis (or elsewhere) as it did in the definition of [CMI].18

In chapter 7, the question of what is properly excluded as a marital deduction is brought before the court in the context of a motion to dismiss under § 707(b)(2)(A) alleging that the filing is an abuse of chapter 7.19 It does not arise in dismissal motions under § 707(b)(1) or (b)(3) because CMI is only used in § 707(b)(2).20 The movant has the burden of establishing a prima facie case, but then the burden shifts to the debtor to prove what expenses have been properly deducted.21

In chapter 13 cases, the question comes before the court in the form of an objection to confirmation, alleging that the debtor is not paying all their projected disposable income for the ACP.22 The burden is on the plan proponent (which is always the debtor in a chapter 13 case)23 to prove that the marital adjustment is proper.24

Generally, the disputed expenses are children’s tuition and extracurricular costs, debt payments on debt solely in the spouse’s name, and expenses of the spouse that are typical household expenses. Tuition and other expenses for children are routinely disallowed as marital adjustments.25

While § 101(10A) is clear that CMI includes household expenses of the debtor or debtor’s dependents,26 debtors have argued that these deductions should be allowed because the spouse is the only one that signed the contract for the expense,27 or that the expense is not what would be a normal household expense.28 These arguments have been unsuccessful; if the child is the debtor’s dependent, the deduction will not be allowed.29

In Vollen, the debtor sought to exclude not only payment of the daughter’s college tuition but also a loan payment solely in the spouse’s name for a car used by the daughter.30 Since the daughter was the debtor’s dependent, the court held that both the tuition and car loan payment were household expenses that could not be excluded from CMI.31 For most other expenses sought to be deducted as a marital adjustment, courts tend to fall in one of two camps: whether the expense should be evaluated from a (1) household-centric view, or (2) debtor-centric view.32

The household-centric courts look to the purpose and nature of the expense or underlying debt.33 If the household benefited, then it will not be included as a marital adjustment.34 Only those expenses “purely personal” to the spouse are allowed to be deducted, even if the expense is a debt solely in the spouse’s name.35

The Vollen court found that the spouse’s credit cards and other debts were used for household expenses and could not be excluded.36 The court found no reason to treat the expense of meals that the spouse ate out any differently from the expense of meals made at home.37 However, the court also found that since the 401(k) loan repayment was deducted directly from the spouse’s income, it was never part of the household income stream and was properly deducted as a marital adjustment regardless of the purpose.38 Similarly, payment on a mortgage solely in the nonfiling spouse’s name but for property in which the debtor or their dependents reside will not be excluded as a marital adjustment because housing is a household expense of the debtor or their dependents.39

In Trimarchi, the debtor deducted the mortgage payments as a marital adjustment on Form 122C-1 and also deducted the standard mortgage allowance on Form 122C-2.40 The chapter 13 trustee objected to the double-dipping.41 The court agreed with the trustee, finding that the mortgage payments were household expenses and could not be excluded from CMI.42

Debtor-centric courts focus on whether the expense is that of the debtor (or their dependents) to determine whether it should be excluded.43 In Toxvard, the court found that since the debtor did not own the residence and was not liable for the mortgage payments, it was not an expense of the debtor and had been properly excluded from CMI as part of the marital adjustment.44

In In re Gregory, the debtor deducted expenses paid by the nonfiling spouse to maintain a jointly owned former residence.45 The court agreed with the debtor that household expenses included only those expenses related to a debtor’s primary residence, essentially day-to-day expenses.46 Thus, expenses associated with real property that was not the family residence had been properly deducted as marital adjustments.47

For other household expenses, the Toxvard court determined first whether the expenses were joint or solely that of either the debtor or the spouse.48 The cost of feeding the debtor’s horse was an expense solely of the debtor, so the spouse’s payment for that could not be deducted.49 The household utilities and car loan payment were joint expenses paid by the spouse, so the court allowed a deduction for the spouse’s half of the utilities and car loan.50

Toxvard highlights a fundamental flaw in the marital adjustment: the apportionment of expenses. A nonfiling spouse is included as a member of the debtor’s household, so when the expense side of the means test is calculated on either Form 122A-2 or 122C-2, the spouse’s day-to-day expenses (e.g., food, clothing, miscellaneous, etc.) are included as expenses of the debtor. However, debtor-centric courts allow what the spouse spent on those items to be excluded from either CMI or disposable income.

In re Travis also acknowledged this defect.51 The court agreed with the U.S. Trustee that the amounts that the spouse contributed for food and utilities could not be included in the marital adjustment, but then held that the spouse could include her expenditures for clothing and other personal items, even though the means test already provided a standard deduction for those items:52

If the nonfiling spouse spends his [or] her income on his [or] her own expenses, those are legitimate [marital deductions], regardless of whether those expenses could also be generally categorized as household expenses.53

The court did not explain why food and utilities were different from clothing and personal items. Perhaps the reasoning is that food and utilities are harder to separate by person, whereas clothing and personal items tend to be person-specific.

In re Hammock involved a chapter 7 debtor whose nonfiling spouse earned almost five times more than the debtor, yet the debtor deducted approximately 80 percent of the spouse’s income as a marital adjustment, claiming that the spouse contributed little to the household expenses.54 Without analysis, the court did not question the amount of the marital deduction but found that the applicable standard deductions on Form 122A-2 should be reduced by the amount being claimed for those same categories as part of the marital deduction.55

Conclusion

Given the stated BAPCPA objective of having more debtors repay more of their debts, the marital adjustment should be narrowly construed to include only those amounts that are clearly not for household expenses, such as the spouse’s tax liabilities, support for others who are not part of the debtor’s household (e.g., elderly parents, children from another relationship, etc.), student loan payments or criminal restitution payments. The Official Forms have a debtor add all the spouse’s income, then only deduct their expenses.

If the nonfiling spouse’s separate expenses were meant to be broadly interpreted, there is no reason for the marital adjustment at all. The nonfiling spouse’s contribution to household expenses could be included on the same line with every other nonspouse contributor. Unfortunately, until Congress reconsiders the means test, courts will remain divided, and debtors, their counsel and trustees will have to continue to litigate what was meant to be a straightforward objective test.

Julie Philippi is the chapter 12 trustee and standing chapter 13 trustee for the Buffalo, N.Y., division of the Western District of New York.