Putting a child through college — even at a rock-bottom tuition — can make someone ineligible for chapter 7 and simultaneously incapable of funding a chapter 13 plan, as demonstrated in an opinion by Chief Bankruptcy Judge Elizabeth D. Katz, sitting in Worcester, Mass.
The debtor filed a chapter 7 petition, but his wife did not. The U.S. Trustee moved to dismiss the case for an unrebutted presumption of abuse under Section 707(b)(1).
The economics worked out liked this:
The debtor had about $115,000 in unsecured, nonpriority debt. Including his nonfiling wife’s income, his current monthly income was about $15,150. From her income and from her own bank account, the wife was paying about $5,500 a year for her own credit cards, some $1,000 a year for their daughter’s dance lessons, and about $10,000 a year for their son’s college tuition.
If the wife’s payments and the debtor’s other actual expenses were deducted from current monthly income, the debtor calculated that his disposable monthly income on the means test was negative by $55.
In her July 5 opinion, Judge Katz explained that when a debtor’s income is above the median, the expenses “are not simply the Debtor’s actual expenses, but are dictated by §§ 707(b)(2)(A)(ii), (iii) and (iv), which limit certain expense amounts to those specified under National and Local Standards issued by the Internal Revenue Service and allows for the debtor’s actual monthly expenses for certain specified categories. 11 U.S.C. § 707(b)(2)(A).”
“Consequently,” Judge Katz said, “the Court must analyze the means test to determine whether the case should be dismissed,” even if the “above-median income debtor’s Schedules I and J reflect actual negative monthly.”
Judge Katz explained why all of the nonfiling wife’s income must be included in current monthly income. The wife’s expenses are deducted from the wife income, she said, “to the extent that the income is used to pay non-household expenses, i.e., expenses that are purely personal to the non-debtor spouse.” [Emphasis in original.] Citing a 2015 decision by Bankruptcy Judge Robert E. Grossman of Central Islip, N.Y., she held “that because the Debtor and the Spouse do not maintain separate households, all of the Spouse’s income is presumed to be contributed to household expenses” and is thus included in monthly income. See In re Montalto, 537 B.R. 147, 149 (Bankr. E.D.N.Y. 2015).
Judge Katz then analyzed whether the wife’s expenses were household expenses. The debtor contended that he was entitled to a marital adjustment, but Judge Katz held “that the marital adjustment is limited to a non-filing spouse’s expenses that are purely personal to the non-filing spouse.”
Judge Katz ruled that the son’s tuition, the daughter’s dance lessons and the wife’s credit card payments were all household expenses because they were not “purely personal to the Spouse.”
Even were the tuition, dance lessons and the wife’s credit cards subtracted, Judge Katz calculated that the debtor’s adjusted monthly income still resulted in a presumption of abuse under Section 707(b)(2)(A)(i), given the wife’s income.
The debtor countered by contending there were “special circumstances” to rebut the presumption of abuse. Judge Katz responded by saying that “the Spouse’s refusal to contribute funds to pay the Debtor’s debts does not constitute a special circumstance.”
On the bottom line, Judge Katz held that the debtor had failed to rebut the presumption of abuse, warranting dismissal of the case because the debtor declined to convert the case to chapter 13. Evidently, conversion to chapter 13 would be futile because the debtor could not fund a plan.
Judge Katz ended her opinion by laying out the “quandary” confronting debtor. She said,
[T]his Court is not suggesting that it may order a non-filing spouse to contribute to a debtor’s Chapter 13 plan and is aware that some debtors may find themselves in the unenviable quandary of being legally ineligible for relief under Chapter 7 but unable to fund a Chapter 13 plan in reality. However, a debtor’s inability to confirm a hypothetical Chapter 13 plan does not render the debtor entitled to relief under Chapter 7.
The Debtor’s Quandary
The case demonstrates how Congress has made chapter 7 inaccessible for a married debtor living in the same household with a nonfiling spouse who has substantial income.
The case before Judge Katz was a no-asset case, had it remained in chapter 7. Were the non-filing wife’s expenses deductible, the debtor would have had negative disposable income and would not been subject to the presumption of abuse. In other words, the $10,000 a year that the wife was paying for the son’s tuition along with her credit card payments kept her husband from being eligible for chapter 7.
With regard to a child’s educational expenses, Section 707(b)(2)(A)(IV) only allows a deduction of $2,275 a year for elementary or secondary education of a child under 18 years of age, if the debtor can show that the expenses are reasonable and necessary.
Perhaps Congress should consider that some amounts are reasonable and necessary for an older child’s college education. Otherwise, a parent’s need for chapter 7 relief could preclude the child from attending college.
Putting a child through college — even at a rock-bottom tuition — can make someone ineligible for chapter 7 and simultaneously incapable of funding a chapter 13 plan, as demonstrated in an opinion by Chief Bankruptcy Judge Elizabeth D. Katz, sitting in Worcester, Mass.
The debtor filed a chapter 7 petition, but his wife did not. The U.S. Trustee moved to dismiss the case for an unrebutted presumption of abuse under Section 707(b)(1).