Bankr. W.D.N.C.: In re Davis- Private School Educational Expenses for Individualized Educational Program are not a Special Circumstance under Chapter 7 Means Test
Bankr. W.D.N.C.: In re Davis- Private School Educational Expenses for Individualized Educational Program are not a Special Circumstance under Chapter 7 Means Test Ed Boltz Mon, 09/22/2025 - 17:06 Summary: The debtor, earning more than $200,000 annually, sought Chapter 7 relief but was met with a presumption of abuse once the Bankruptcy Administrator corrected her means test. She attempted to rebut that presumption under § 707(b)(2)(B) by asserting “special circumstances,” namely her fourteen-year-old daughter’s sensory processing disorder that, according to the debtor, required enrollment in a private school costing $24,000 per year. Despite extensive testimony and documentation, the Court found that the debtor had not exhausted available alternatives, particularly by failing even to request a Section 504 plan from Charlotte-Mecklenburg Schools. Because the IDEA requires public schools to provide a “free appropriate public education,” the Court held the debtor had not shown that there was “no reasonable alternative” to the private school expense. The motion to dismiss was therefore granted, with 30 days to convert to Chapter 13. Commentary: In re Davis underscores the difficulty debtors face in using the “special circumstances” exception: courts demand exhaustion of reasonable alternatives, especially when statutory protections like the IDEA exist. Could these expenses have been considered under § 707(b)(2)(A)(ii)(II)? It may have been a strategic misstep here to frame the expense as “ special circumstances” rather than as an allowed deduction under § 707(b)(2)(A)(ii)(II). Section 707(b)(2)(A)(ii)(II) allows deduction of expenses “ reasonable and necessary for care and support of an elderly, chronically ill, or disabled household member or member of the debtor’s immediate family.” The debtor’s daughter clearly fits the definition of a disabled member of the Debtor's immediate family. Unlike the narrow “special circumstances” exception in § 707(b)(2)(B), this provision is built into the means test itself, so arguably not as stringent a requirement. That said, the statutory language still requires that the expenses be both “reasonable and necessary.” Courts generally place the burden on the debtor to establish that reasonableness, though some case law (e.g., In re Sorrells on post-confirmation modifications) illustrates that once the trustee raises an objection, the ultimate burden of persuasion may shift. Here, the Court’s skepticism that the debtor had even attempted to utilize public school accommodations strongly suggests that the same expenses would have failed the § 707(b)(2)(A)(ii)(II) test as not “reasonably necessary.” Future planning: ABLE accounts and the NC exemption Effective September 1, 2025, North Carolina law exempts ABLE accounts without limitation. That exemption may provide a more viable path for families in situations like Davis. Contributions to an ABLE account for a disabled child could be treated as expenses “for care and support” and—if reasonably calculated—pass through the means test under § 707(b)(2)(A)(ii)(II). Unlike private tuition, ABLE contributions carry the imprimatur of federal and state policy, providing tax-advantaged savings specifically for disabled dependents’ present and future needs. Creditors and trustees may still challenge the amount as excessive, but courts are likely to be more receptive given the statutory framework. Education Attorney Fees as a Deductible Priority Expense Section 330(a)(4)(B) provides that in a Chapter 12 or 13 case, “the court may allow reasonable compensation to the debtor’s attorney for representing the interests of the debtor in connection with the bankruptcy case,” without the requirement—present in Chapters 7 and 11—that the services benefit the estate. That broad phrasing opens the door to compensation for legal services that help a debtor navigate obligations and expenses that are central to the debtor’s ability to propose and perform under a plan. From there: §503(b)(2) elevates compensation awarded under §330 to an administrative expense. §507(a)(1)(A) grants administrative expenses first-priority status. §707(b)(2)(iv), in the means test, explicitly allows deduction of “the total of all amounts…for priority claims” spread over 60 months. Thus, if Ms. Davis’s converts to Chapter 13 and hires an education attorney to pursue an adequate IEP under the IDEA—or to document that no adequate IEP is available—those attorney’s fees could be approved under §330(a)(4)(B), paid as an administrative expense, and deducted in full as a priority claim in the means test or diverting much of any dividend to nonpriority unsecured creditors to the priority administrative expense of hiring an education attorney. Strategic Impact This approach flips the posture of the case. Rather than trying (and failing) to shoehorn private school tuition into the “special circumstances” exception of §707(b)(2)(B), or risk rejection under §707(b)(2)(A)(ii)(II) for lack of reasonableness, the debtor channels resources into obtaining a legal determination. That determination either: Produces an adequate IEP – which may satisfy the Bankruptcy Court that public school is a reasonable alternative, eliminating the tuition issue. Or, Proves no adequate IEP is available – bolstering the case for private school tuition as a “reasonable and necessary” expense, now grounded in legal documentation rather than parental assertion. Either way, the attorney’s fees are deductible as a priority administrative expense, reducing disposable income available to unsecured creditors in Chapter 13. Potential Pathway Back to Chapter 7 If the IEP process confirms that no public alternative is reasonably available, the debtor may then move to convert back to Chapter 7. At that point, the private school tuition would be far better positioned to qualify under §707(b)(2)(A)(ii)(II) as a reasonable and necessary expense for a disabled dependent. In effect, the Chapter 13 detour—funded in part by deductible attorney’s fees—lays the evidentiary foundation for a successful rebuttal of abuse under Chapter 7. Given the case law in the W.D.N.C., including In re Siler, 426 B.R. 167 (Bankr. W.D.N.C. 2010), where Judge Whitley held that even though a 401k contribution was not deductible in a Chapter 7 means test, since it would be deductible if the case was converted to Chapter 13 forcing that conversion was pointless, which has historically taken a more pragmatic view of the Chapter 7 Means in seeking to " avoid absurd results", it seems in Ms Davis' case there many be not only an absurd result, but a rather unkind one as well. With proper attribution, please share this post. To read a copy of the transcript, please see: Blog comments Attachment Document in_re_davis.pdf (337.51 KB) Category Western District
