Although chapter 13 may not always accommodate the need to care for an indigent member of a debtor’s extended family, chapter 13 will permit a debtor to continue paying premiums on a whole life insurance policy, at least when the debtors are spending less than the IRS guidelines.
The Indigent Mother-In-Law
A wife in chapter 13 had monthly gross income of some $13,500. Her husband, who did not file, had monthly gross income of about $1,000.
For 10 years, the wife had been paying the monthly mortgage of approximately $1,500 on the home where her mother-in-law had lived for 50 years. The 87-year-old lady was “frail” and could not live in the home of her son and daughter-in-law because she could not negotiate the stairs. Her only income was a small disability check. The debtor-wife was liable on the mortgage secured by the mother-in-law’s home.
In her expenses on Schedule J, the wife listed the $1,500 monthly mortgage payment. The chapter 13 trustee objected to confirmation of the plan, contending that she was not devoting all of her disposable income to the plan.
In his November 22 opinion, Bankruptcy Judge Brian F. Kenney of Alexandria, Va., upheld the objection.
The case turned on the interpretation of Section 707(b)(2)(A)(ii)(II), which allows a deduction for “reasonable and necessary” expenses “paid by the debtor . . . for care and support of an elderly . . . household member or member of the debtor’s immediate family (including parents, grandparents, siblings, children, and grandchildren of the debtor, [and] dependents of the debtor) . . . and who is unable to pay for such . . . expenses.”
Judge Kenney denied the deduction, and thus declined to confirm the plan. He concluded that the mother-in-law was neither a member of the debtor’s household nor a member of her “immediate” family. The opinion is worthy of reading in full text to understand how the judge reached those conclusions.
The takeaway: The debtor may have been able to confirm a plan if her husband had joined her in chapter 13.
Life Insurance
A couple in chapter 13 with whole life insurance policies fared better.
Fifteen years earlier, the couple purchased three whole life policies with combined death benefits of $175,000. The monthly premiums totaled $222. The cash surrender value of the policies amounted to some $1,500.
In their schedule of expenses, the couple did not list the premiums because whole life policies do not qualify as necessary expenses under IRS guidelines. The chapter 13 trustee nonetheless objected to confirmation, contending that the couple were not dedicating all of their disposable income to creditors and that the plan had not been filed in good faith.
Bankruptcy Judge Robert L. Jones of Lubbock, Texas, overruled the objections and confirmed the plan.
In detail, Judge Jones explained how the 2005 amendments removed the court’s discretion in calculating disposable income. In the case before him, the debtors’ actual expenses were less than the IRS guidelines. Therefore, he said, the debtors may “use the extra income for something important to them.” How they spend the savings, he said, does not alter the calculation of disposable income under Section 1325(b)(1)(B).
To show bad faith, Judge Jones said there must be something in addition to the ability to pay more than the bottom line on the means test. There should “rarely” be a finding of bad faith, he said, when the plan complies with Section 1325(b).
Without any “aggravating” factors to suggest an attempt to “manipulate the bankruptcy process,” Judge Jones said “there cannot be a finding of bad faith,” even though the debtors “have more disposable income than calculated on their Form 122C-2.
Although chapter 13 may not always accommodate the need to care for an indigent member of a debtor’s extended family, chapter 13 will permit a debtor to continue paying premiums on a whole life insurance policy, at least when the debtors are spending less than the IRS guidelines.
The Indigent Mother-In-Law
A wife in chapter 13 had monthly gross income of some $13,500. Her husband, who did not file, had monthly gross income of about $1,000.
For 10 years, the wife had been paying the monthly mortgage of approximately $1,500 on the home where her mother-in-law had lived for 50 years. The 87-year-old lady was “frail” and could not live in the home of her son and daughter-in-law because she could not negotiate the stairs. Her only income was a small disability check. The debtor-wife was liable on the mortgage secured by the mother-in-law’s home.
In her expenses on Schedule J, the wife listed the $1,500 monthly mortgage payment. The chapter 13 trustee objected to confirmation of the plan, contending that she was not devoting all of her disposable income to the plan.
In his November 22 opinion, Bankruptcy Judge Brian F. Kenney of Alexandria, Va., upheld the objection.