The Ninth Circuit Court of Appeals has agreed to hear an appeal whether the bankruptcy court erred in ruling that a Chapter 13 debtor, in calculating projected disposable income, is not permitted to deduct the amount of voluntary retirement plan contributions even where the debtor was making the contributions prepetition. The debtor’s appeal from adverse decisions below.
Court Rejects Nonstandard Provision for Retention of Tax Refund
The Chapter 13 debtor was not permitted to include a nonstandard plan provision to retain her tax refund where the refund was not reasonably necessary for the support of the debtor or her dependents. Penn v. Viegelahn, 2018 WL 5984844, No. 18-354 (W.D. Tex. Nov. 13, 2018). [Read more…] about Court Rejects Nonstandard Provision for Retention of Tax Refund
Fourth Circuit Side-Steps Retirement Contribution Issue
Finding that the trustee did not raise the statutory issue of whether and when a chapter 13 debtor may make voluntary contributions to his retirement account, the Fourth Circuit found no clear error in the bankruptcy court’s factual finding of good faith. Gorman v. Cantu (In re Cantu), No. 17-1034 (4th Cir. Dec. 18, 2017) (unpublished).
Ricardo Cantu’s chapter 13 plan proposed to pay $51,240 toward his $148,346 unsecured debt over five years. The plan payments were based on a disposable income calculation which contemplated $338 in monthly repayments to two retirement accounts which Mr. Cantu had taken out against his government-backed Thrift Savings Plan. The trustee argued that one of the loans from the TSP would be paid off shortly after commencement of the plan, and applying the forward-looking approach, the anticipated reduction in retirement contributions should be considered in calculating Mr. Cantu’s disposable income. The trustee also objected to Mr. Cantu’s inclusion of domestic support payments in the amount of $1,625 per month, when his divorce decree ordered monthly payments of $1,500. Mr. Cantu countered that once he paid off the loan from the TSP he intended to resume making contributions in the same amount to that Plan. He also maintained that the discrepancy between the divorce decree and his actual payments was a result of a scrivener’s error in the divorce decree.
With respect to Mr. Cantu’s voluntary contributions to his retirement account, the bankruptcy court adopted the majority view that such payments may be deducted from the disposable income calculation under section 1325(b), so long as they are made in good faith. The court rejected the two contrary approaches under which 1) voluntary retirement contributions may be made only if they were being made prior to bankruptcy and in the same amount, and 2) voluntary contributions are prohibited in all circumstances. The court then addressed the factual issues of whether the contributions were proposed in good faith and whether the domestic support payments were accurate. The court resolved both issues in Mr. Cantu’s favor. In re Cantu, 553 B.R. 565 (Bankr. E.D. Va. 2016). The district court affirmed.
On appeal, the Fourth Circuit side-stepped the statutory issue of which approach to voluntary retirement plan contributions to adopt, concluding that the trustee did not appeal the bankruptcy court’s application of the majority view, but instead, limited his argument to whether the bankruptcy court correctly resolved the factual issue of good faith. The circuit court found that the bankruptcy court did not commit clear error. Mr. Cantu had been making regular contributions to his TSP until he was forced to stop when he took out hardship loans against the account. In addition, the amount of his contributions was far less than the allowable contribution amount.
The court also found that the bankruptcy court did not commit clear error in accepting Mr. Cantu’s testimony, supported by a pre-divorce Separation Agreement, that the divorce decree did not accurately reflect the agreement between the ex-spouses.
Finding that the bankruptcy court’s factual conclusions were supported by the evidence, the circuit court affirmed.
Judge Thacker concurred in part and dissented in part. She maintained that the trustee in fact raised the issue on appeal of whether and when a debtor may make voluntary contributions to a retirement account, and the court should have taken the opportunity to take a position on the issue. With respect to the domestic support payments, Judge Thacker opined that the bankruptcy court was bound to apply the only court-ordered payments, to wit: those specified in the divorce decree, and that it overstepped by applying, instead, an amount not reflected in that document.
Debtor’s Chapter 7 Fails 707(b)’s “Smell Test”
Sara Lianne Hamilton-Conversano filed for Chapter 7 bankruptcy with the sole purpose of dealing with a $46,669.52 credit card debt on a credit card she and her non-filing spouse used to pay all household expenses. Finding that Ms. Hamilton-Conversano underreported contributions from her non-filing spouse on her Statement of Current Monthly Income, Form 122A-1, and took too large a deduction for private school tuition on Form 122A-2, the court granted the Bankruptcy Administrator’s motion to dismiss for abuse under section 707(b)(1). In re Hamilton-Conversano, No. 17-128 (Bankr. E.D. N.C. Sept. 28, 2017). [Read more…] about Debtor’s Chapter 7 Fails 707(b)’s “Smell Test”
Nice Win for Debtors on Means Test Expense Issue
Section 707(b)(2) permits a debtor to take the full National and Local Standard amounts for expenses even though the debtor’s actual expenses are less. Lynch v. Jackson, No. 16-1358 (4th Cir. Jan. 4, 2017).
When above-median debtors, Gabriel and Monte Jackson, filed for chapter 7 bankruptcy they complied with Form 22A’s instructions to list their expenses using the IRS National and Local Standard amounts rather than their actual expenses which were less. The bankruptcy administrator moved to dismiss their case as abusive under section 707(b)(2)(A)(i). The bankruptcy court denied the motion to dismiss. In re Jackson, 537 B.R. 238 (Bankr. E.D. N.C. 2015), and the Fourth Circuit accepted direct appeal.
The administrator argued that Form 22A’s instructions are erroneous and that the expense deduction amounts listed in the IRS Standards represent a cap on how high an expense amount may be claimed for certain expenses, but that if the actual amount is less, the debtor must use the lesser amount.
In Ransom v. FIA Card Servs., 562 U.S. 61 (2011), the Court addressed application of the IRS Standard expense deductions in the context of abuse under section 707(b). That Court held that, in order to take the IRS Standard expense deduction, a debtor must actually incur the type of expense designated, i.e. the “vehicle ownership” expense requires that the debtor have lease or loan payments on the vehicle. But that Court left open the question of whether, once the expense is found to be “applicable,” the debtor may take the full IRS Standard amount regardless of actual expenses.
The Fourth Circuit found the answer in the plain language of the statute: “[t]he debtor’s monthly expenses shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards. 11 U.S.C. § 707(b)(2)(A)(ii)(I).” The fact that Congress used the word “actual” elsewhere in the same statute indicates that it made a distinction between applicable and actual. The court also recognized the absurdity of punishing a frugal debtor should the bankruptcy administrator’s interpretation of the statute be accepted.
As a procedural matter, the court held that the time to file a petition for direct appeal in section 158(d)(2)(A) is not a jurisdictional constraint and, therefore, the parties’ late filing did not deprive the court of jurisdiction over the appeal where other substantive factors favored direct appeal.
Congratulations to Lee Roland who represented the Jacksons, and to Erik Heath who authored NACBA’s amicus brief in support of the debtors.
Lynch v. Jackson, No. 16-1358 (4th Cir.)
Type: Amicus
Date: July 5, 2016
Description: Whether the Means Test calculation requires the debtor to use expense deductions, as those amounts are specified in the National and Local Standards published by the Internal Revenue Service (IRS).
Result: Affirmed, January 4, 2017, debtor won.
Wilkerson v. Niklas, No. 15-7152 (D.C. Cir.)
Type: Amicus
Date: March 8, 2016
Description: Whether the debtor is entitled to a deduction in the amount specified by the IRS Standards or must deduct actual expenses for Housing/Rent and Transportation Ownership.
Result: Voluntarily dismissed, April 5, 2016
Debtor with No Mortgage May Take Housing Expense Deduction
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). [Read more…] about Debtor with No Mortgage May Take Housing Expense Deduction
Sale of Assets Results in Disposable Income
Gliding over the crucial question of whether the sale of an asset results in income, a Florida bankruptcy court ordered the debtors, Mr. and Mrs. McMillan, to distribute a portion of their sale proceeds to their creditors as disposable income. In re McMillan, No. 11-5348 (Bankr. M.D. Fla. July 2, 2015). [Read more…] about Sale of Assets Results in Disposable Income
Contributions to Retirement Plan Excluded from CMI
Contributions to an employee retirement plan are to be excluded from the calculation of current monthly income rather than deducted from disposable income in the Means Test. In re Vu, No. 15-41405 (Bankr. W.D. Wash. June 16, 2015). [Read more…] about Contributions to Retirement Plan Excluded from CMI