Debtor with No Mortgage May Take Housing Expense Deduction

Posted by NCBRC - November 3, 2015

May a bankruptcy debtor with no mortgage payments nonetheless take the deduction for “Local Standards: Housing and Utilities; mortgage/rent expense” when calculating her disposable income on the Means Test? The Bankruptcy Court for the Central District of Illinois said, “yes.” In re Currie, No. 14-71331 (Sept. 17, 2015). Ms. Currie, an above-median debtor, owned her home, valued at $16,000, with no mortgage indebtedness. She proposed a plan that would pay the trustee’s commission, her attorney’s fees, and her priority IRS claim in full, with the remainder distributed pro rata to unsecured creditors. The trustee objected to the plan arguing that because she had no mortgage, Ms. Currie was not entitled to deduct the mortgage expense in her disposable income calculation. With the expense deduction, Ms. Currie had negative monthly disposable income. Without it she had monthly disposable income in the amount of $572.95. At the court’s invitation, the UST weighed in on the issue taking the debtor’s side.

Addressing the trustee’s challenge to the debtor’s proposed plan, the court began with section 1325(b)(1)(B) which provides that, in the event of an objection, the chapter 13 plan must provide for contribution of all the debtor’s projected disposable income. Disposable income is defined in terms of income “less amounts reasonably necessary to be expended” as determined, for above-median debtors, in accordance with the “means test” in section 707(b)(2). Section 707(b)(2)(A)(ii)(I) provides that monthly expenses “shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor’s actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides . . .” The IRS describes the Local Standards: Housing and Utilities as “includ[ing] mortgage or rent, property taxes, interest, insurance, maintenance, repairs, gas, electric, water, heating oil, garbage collection, residential telephone service, cell phone service, cable television, and internet service.” IRS COLLECTION FINANCIAL STANDARDS, Individuals/Collection-Financial-Standards.

Discussing the impact of Ransom v. FIA Card Services, N.A., 562 U.S. 61 (2011), where the Supreme Court determined that a car owner with no lease or rent expenses could not take the “ownership expense deduction,” the court found the reasoning of that case inapplicable. The Ransom Court was dealing with the vehicle expense deduction which the IRS had separated into ownership expenses and operating expenses. Because the IRS drew that distinction it was logical that the ownership expense deduction could not be expanded to encompass operating expenses. In contrast, though the bankruptcy schedules (pre-2014 and the new 22C form) separates household expenses from mortgage/rent costs, those categories were established by the UST: the IRS standards do not make that distinction. Rather, the court found that “The Local Standards: Housing and Utilities provide only one category of expenses upon which a determination of applicability need be made—if a debtor has any expenses related to ‘housing and  utilities’ then the Local Standards apply.”

The court rejected the trustee’s cases in support of his position finding that they relied on a marital adjustment issue in which the mortgage was being paid by the non-debtor spouse and, though the cases discussed the Local Standards: Housing and Utilities, they did not provide any guidance on the issue in this case. The one case the trustee offered that was on point, In re Wilson, 454 B.R. 155 (Bankr. D. Colo. 2011), erroneously found that the separation of housing and mortgage expenses in the means test was part of the IRS standards. The Currie court said: “There is no question that the IRS Local Standards: Housing and Utilities provide for only one housing deduction based on a debtor’s county of residence and household size. The deduction includes all ownership and other housing related expenses; it makes no distinction between ownership costs and other expenses. The division of the Local Standard: Housing and Utilities on the B22C and 22C-2 forms was made by the Rules Committee at the suggestion of and with the assistance of the EOUST to facilitate the calculations required in both Chapter 7 and Chapter 13 cases.” (The court noted that in Bankruptcy, the housing expense is separated to prevent the loss of housing expense deductions for such things as utilities, when the debtor’s actual mortgage exceeds the Local Standards.)

Recognizing that the UST opposed the trustee’s objection in this case, the court stated: “Specifically, the UST notes that the Trustee ignores the fact that ‘the Debtor actually incurs applicable expenses for property taxes and homeowners insurance – which is all that the Supreme Court has stated section 707(b)(2)(A)(ii)(I) requires.’ This is strong criticism of the Trustee by the UST who appoints the Trustee to his position and retains supervisory authority over the Trustee and all Chapter 13 cases. See 28 U.S.C. §586(a)(3)(B).”

Currie Bankr. SD Ill opinion


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  1. By Bankruptcy News Briefs 11/3 | NACBA Now on November 3, 2015 at 4:05 pm

    […] Debtor with No Mortgage May Take Housing Expense Deduction […]

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