Child Support Exclusion Not Reduced By Expense Deduction

Posted by NCBRC - April 27, 2015

The Seventh Circuit rejected the trustee’s argument to limit the debtor’s child support exclusion to those expenses that are not otherwise deductible under section 1325. In re Brooks, No. 14-2856 (7th Cir. Apr. 23, 2015).

Stephanie Brooks was an above-median debtor receiving $400/month from her ex-husband in child support. After calculating her CMI as reduced by the child support payments, and then taking her expense deductions, Brooks was left with negative disposable income. She proposed a plan which would pay arrearages on secured debts as well as trustee and attorney fees. The plan proposed zero payment to unsecured creditors.

The trustee objected to confirmation arguing that a categorical exclusion of child support could lead to double deductions because child support payments typically cover many of the same expenses the debtor is able to deduct in the means test. The trustee sought to have the court exclude only those child support payments that were not otherwise accounted for in the means test.

The bankruptcy court overruled the objection, finding that the entire amount of child support may be excluded unless the amount is so excessive that its exclusion would be an abuse of the bankruptcy system. In re Brooks, 498 B.R. 856, 863 (Bankr. C.D. Ill. 2013). The district court affirmed.

On appeal, the Seventh Circuit found “the trustee’s proposal [of excluding only that portion of the child support payments not otherwise covered by the allowable expense deductions] both unnecessary and unworkable.” Under BAPCPA, approval of a chapter 13 plan for an above-median debtor contemplates a two-step formula in which the debtor first calculates her disposable income, from which child support is specifically excluded, then takes expense deductions from the income calculation. The trustee’s proposal would disrupt this two-step process in every case involving child support by requiring a fact-intensive inquiry at the income calculation stage taking into account expected expense deductions.

In addition to being contrary to the procedure set forth by the means test, the court found that “[t]he trustee’s proffered interpretation of § 1325(b)(2)—which would essentially treat child support payments as simply another source of funds available to a custodial parent and, in turn, vulnerable to claims by unsecured creditors—is in tension with Congress’s evident concern for the welfare of child support recipients.” The trustee’s anxiety about a windfall to custodial parents by reason of the potential for “double dipping” was “vastly overstated,” as child support payments may go to fund many child-related expenses not otherwise covered by the expense deduction in the means test. As a practical matter, the court pointed to studies indicating that child support payments are notoriously inadequate, rarely covering all the actual expenses of child care.

While the court rejected the trustee’s automatic review of actual child care expenses, it also rejected the debtor’s contention that once the state court orders child support under a state law requiring a finding of reasonability and necessity, the bankruptcy court cannot independently determine that the award does not meet the bankruptcy Code’s comparable standard for exclusion. While the court found that the state determination that the child support award is reasonable and necessary should be given great weights, an irrebuttable presumption of reasonableness would render the Code’s language to that effect redundant. The court also found that it was important to permit the bankruptcy court to exercise independent judgment as to the reasonableness of a child support award. In the rare case that “those payments are so excessive in comparison to acceptable expenditures that they cannot be deemed reasonably necessary,” the bankruptcy court retains its discretion to alter the calculation.

The court did not address the argument raised by NACBA in its amicus brief that, based on the text of the Code, the issue of whether a given child support award is reasonable or necessary is never properly before the bankruptcy court. Specifically, the parenthetical in section 1325(b)(2) provides for the exclusion of “child support payments, foster care payments, or disability payments for a dependent child made in accordance with applicable nonbankruptcy law to the extent reasonably necessary to be expended for such child.” NACBA argued that the qualifier “to the extent reasonably necessary to be expended for such child” applies only to disability payments for a dependent child. Under the “rule of the last antecedent,” a limiting or qualifying phrase at the end of a statutory list only modifies the last item on the list. For this reason, a bankruptcy court need never address the “reasonably necessary” qualification with respect to child support payments (or foster care payments) and such payments should be categorically excluded from disposable income for purposes of subsection 1325(b)(2).

Brooks 7th Cir opinion

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  1. By Bankruptcy News Briefs 4/30 | NACBA Now on April 30, 2015 at 6:08 pm

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