If the trustee or an unsecured creditor objects to the debtor’s plan, the court may not approve it unless it provides that all of the debtor’s projected disposable income for either a three-or five-year period, depending on the debtor’s income level, is applied to pay unsecured creditors. (11 U.S.C. §1325(b)(1)(B)). The Bankruptcy Code, as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), calculates disposable income by deducting permissible personal expenses from the debtor’s current monthly income (CMI). If a debtor’s CMI exceeds the median income (adjusted for family size) in his/her state, then the deductions for computing disposable income are those found in tables published by the Internal Revenue Service (IRS) for use by its agents in determining a taxpayer’s ability to pay a delinquent tax. For personal spending categories such as food, clothing and miscellaneous expenses, the IRS maintains national standard expense tables. For transportation and housing, the tables are adjusted for regional cost differences. Under BAPCPA, a debtor may also deduct certain other expenses such as payments for health care, schooling and care for elderly or ill relatives. Finally, a debtor is permitted to deduct the amounts necessary to maintain payments on secured property from his or her income. These expense categories are formalized in official form B22C, which was developed by the Advisory Committee on the Bankruptcy Rules for use by a chapter 13 debtor.
Projected vs. Disposable Income
In In re Hardacre, the bankruptcy court first investigated the effect of the differences in the language of the statutory requirement that a plan, in order to gain confirmation, distribute all of a debtor’s “projected disposable income” (11 U.S.C. §1325(b)(1)), contrasted with the definitional language of “disposable income” in 11 U.S.C. §1325(b)(2). Under that subsection, disposable income begins with a calculation of a debtor’s CMI, which looks at a six-month average of pre-petition income. Finding the terms to have different meanings, the court construed projected disposable income to be based on a debtor’s income that is reasonably anticipated over the life of the plan. The court reasoned that, had Congress intended for “projected disposable income” to be the same as “disposable income” for purposes of plan confirmation, it would have used the same words for each. Second, the income referred to in §1325(b)(1) is income “to be received” during the term of the plan and thus is forward-, not backward-, looking. Finally, the debtor must commit all disposable income “as of the effective date of the plan,” a further indication that projected disposable income is not the same as disposable income, which is calculated at or near the time of filing. The court pointed to the harsh result of using CMI, strictly as defined in §101(10A), as a starting point in this context. For example, a debtor’s income may drop after filing, creating hardship for the debtor in making the plan payments. Conversely, there is an obvious opposite consequence of inequitable underpayment to creditors by a debtor whose income increases after filing. CMI is not superfluous, however, as it still defines what must be included in a debtor’s calculation of income and retains its application to means testing.
The Double Dips
Next, the bankruptcy court turned its attention to the debtor’s deductions. In this case, the court thwarted the debtor’s attempt to gain confirmation of her chapter 13 plan that would have provided no return to her unsecured creditors, as determined by her form B22C calculations. Specifically, by her construction of the statutory calculations for disposable income, she attempted to deduct her residential-mortgage-debt service and the cost of servicing the purchase-money security interest in her automobile in addition to the IRS’ Housing and Transportation Allowable Living Expense schema. Such “double dipping” effectively reduced the debtor’s disposable income by approximately $1,000 per month. Such monies would otherwise, if committed to her plan, have paid the unsecured creditors in full. Also, shortly before her confirmation hearing, the debtor claimed an “ownership expense” for a car that she owned, but that secured no debt.
The chapter 13 trustee objected to confirmation of the debtor’s plan, citing the “double dip” the debtor had taken on her housing and auto expenses as impermissible. The debtor opposed the trustee and argued that, by virtue of the plain language of BAPCPA, she was entitled to the “standard” housing and transportation allowance, as well as a full deduction for her debt payments.
IRS Standard Expenses – A Minimum Allowance
The bankruptcy court denied the double deductions. Instead, it interpreted the statute to allow the greater of deductions of the actual amounts for home mortgage and automobile loans secured by the property, or the IRS allowances. (This is also the formula contemplated by official form B22C, which the debtor did not follow strictly). The court arrived at this conclusion by observing that the IRS’ Collection Financial Standards and the Internal Revenue Manual allow, for its purposes, either standardized amounts (from its tables) or actual expenditures, but not both. In addition, the court interpreted the language of 11 U.S.C. §707(b)(2)(A)(ii)(I) (“Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts.”) as an instruction to reduce the standard deductions by the debtor’s average (calculated per 11 U.S.C. §707(b)(2)(A)(iii)) actual debt service for home mortgage and automobile ownership. By finding no legislative intent to reduce a debtor’s deduction to less than zero, the court arrived at the conclusion that allowable deductions for home and automobile ownership debt service are the larger of actual payments or IRS standards amounts. The court found its interpretation to be statutorily correct as well as demonstrably harmonious with legislative intent.
Expenses for Unencumbered Vehicle
The bankruptcy court further ruled that the debtor-owner of an unencumbered automobile might show an “operating expense” for the vehicle. In this case, the debtor also attempted to claim, an “ownership” expense for an unencumbered vehicle on the theory that she was entitled to the expense since she owned the car. The court disallowed this deduction because the IRS manual, which accompanies the list of standard deductions, explicitly limits the “ownership deduction” to the cost of lease or purchase of an automobile.
Hardacre is the first case to interpret a debtor’s use of official form B22C and clearly attempted to strike a balance between a debtor’s need to maintain adequate funds to pay ordinary living expenses and a creditor’s expectation that its claims will be paid to the greatest extent possible under the law.
In re Hardacre, No. 05-95518-DML-13, 2006 Bankr. LEXIS 275 (Bankr. N.D. Tex. March 6, 2006).