Although a superficial reading of Official Form 122C-2 might suggest otherwise, Bankruptcy Judge Robert H. Jacobvitz of Albuquerque, N.M., ruled that an above median income chapter 13 debtor who has no mortgage or rent expense is nonetheless entitled to take the entire IRS local standard deduction for housing and utilities, as long as the debtor has at least one expense in that category, such as phone or utilities.
The debtor was unmarried with an adult daughter in her household. Her annual salary was about $105,000, making her above median income. She and her daughter lived in a home owned by the debtor’s fiancé. He paid the mortgage, amounting to $1,300 a month.
In addition, the fiancé paid the bills for most utilities, water and sewer. However, the debtor paid the cell phone expenses for herself, her daughter and her fiancé. In addition, the debtor paid several hundred dollars a year to fuel a pellet stove in winter and reduce heating costs.
For a two-person household, the IRS local standard deduction for housing was $1,804. On Form 122C-2, the debtor took a deduction for the entire $1,804, even though she only had small expenses under the subsection in the form for “insurance and operating expenses.” The debtor had no expenses in the subsection for “mortgage or rent expenses.”
The debtor did not include her fiancé’s income on Form 122C-1.
Taking the entire $1,804 deduction for housing, the debtor’s projected disposable income was negative by $236 a month, resulting in no payments under a 60-month plan for nonpriority, unsecured creditors.
If the debtor were not entitled to the entire housing deduction, the debtor’s projected disposable income would have been $1,567 a month, resulting in a payment totaling about $94,000 to nonpriority, unsecured creditors, or some 93% of claims in that category.
The chapter 13 trustee objected to confirmation of the plan, contending that the debtor was not entitled to take the entire housing deduction because she had no mortgage or rent expense.
For reasons explained in detail in his December 7 opinion, Judge Jacobvitz overruled the objection. The following report does not do justice to Judge Jacobvitz’s analysis of the question. We recommend reading the opinion in full text.
The Statute Governs
The decision by Judge Jacobvitz came down to a question of whether he would follow Form 122C-2 to the letter or be bound, instead, by Sections 1325(b)(3) and 707(b)(2). He came down on the side of the statute.
Section 1325(b)(3) defines “disposable income” by reference to “amounts reasonably necessary to be expended.” For debtors with income above median, “amounts reasonably necessary to be expended” are to be determined by Section 707(b)(2)(A) and (B). As Judge Jacobvitz said, that section “requires use of the IRS National and Local Standards in the calculation of the debtor’s monthly expenses in computing disposable income.”
However, Form 122C-2 is divided into two subdivisions. Item 8 calls for the debtor to list “insurance and operating expenses,” while item 9 asks for “mortgage or rent expense.” In the case before Judge Jacobvitz, the debtor only had small operating expenses but no mortgage or rent expense, thus raising the question of whether the debtor was entitled to the entire IRS local standard deduction of $1,804.
Judge Jacobvitz addressed the trustee’s objection to the use of the entire standard deduction by saying:
Neither § 1325(b)(3), § 707(b), nor any other provision of the Bankruptcy Code, authorizes courts, the Committee on Rules of Practice and Procedure of the Judicial Conference of the United States (“Rules Committee”), or the United States Trustee (“UST”) to alter the IRS National or Local Standards to accommodate their use in bankruptcy cases or to specify any amounts under the National Standards and Local Standards that are different from the amounts issued by the IRS.
Judge Jacobvitz explained that the breakdown into two categories in Form 122C-2 is not contained in the IRS standard deduction but was an invention by the drafters of Form 122C-2. He said that the “problem with the Trustee’s argument” is that “the IRS did not separate the Local Standard for Housing and Utilities into two categories.”
Judge Jacobvitz conceded that dividing housing and utilities expenses into two categories in Form 122C-2 “may further an overarching policy underlying” the 2005 amendments to the Bankruptcy Code. However, he said that the separation “conflicts with § 707(b)(2)(A)(ii)(I) of the Bankruptcy Code, which requires above-median-income debtors to use the applicable monthly expense amounts specified under the IRS National and Local Standards.” He observed that neither the U.S. Trustee “nor the Rules Committee has the statutory authority to materially affect substantive rights under the Bankruptcy Code.”
Judge Jacobvitz stopped short of saying that Form 122C-2 is unenforceable as written, because item 10 on the form permits a debtor to explain why “the U.S. Trustee Program’s division of the IRS Local Standard for housing is incorrect.”
As support for his conclusion that the debtor was entitled to the entire deduction, Judge Jacobvitz paraphrased In re Currie, 537 B.R. 884, 894 (Bankr. C.D. Ill. 2015), for “concluding that the debtor could deduct the entire IRS Housing and Utilities Standard despite the fact that the debtor’s only housing-related expenses were for insurance and property taxes associated with property that had no mortgage indebtedness.”
Judge Jacobvitz held that the debtor, “who does not have a mortgage or rent expense but does have cell phone and seasonal fuel expenses that fall within the IRS Local Housing and Utilities Standard, is entitled to deduct from current monthly income the full amount of the IRS Local Housing and Utilities Standard.” In a footnote, he added, “It is unnecessary for a debtor to have all the expenses within a particular category in order to claim the deduction.”
Although a superficial reading of Official Form 122C-2 might suggest otherwise, Bankruptcy Judge Robert H. Jacobvitz of Albuquerque, N.M., ruled that an above median income chapter 13 debtor who has no mortgage or rent expense is nonetheless entitled to take the entire IRS local standard deduction for housing and utilities, as long as the debtor has at least one expense in that category, such as phone or utilities.
The debtor was unmarried with an adult daughter in her household. Her annual salary was about $105,000, making her above median income. She and her daughter lived in a home owned by the debtor’s fiancé. He paid the mortgage, amounting to $1,300 a month.
In addition, the fiancé paid the bills for most utilities, water and sewer. However, the debtor paid the cell phone expenses for herself, her daughter and her fiancé. In addition, the debtor paid several hundred dollars a year to fuel a pellet stove in winter and reduce heating costs.