10: dismissal for abuse and the
“means test,” cont.
© Charles Tabb 2010
May have to pay to play
Blausey
• Issue:
• are private disability benefits, for which the
DR has paid the premiums, “income” within
the meaning of “current monthly income”?
holding
• Court held = “income”
– Under 101(10A)(A)
– Did not decide whether was income under
101(10A)(B) as an amount received from another
entity on a regular basis for household expenses
Relevance of IRS concepts?
• Dr argued should NOT be “income” because
under IRC, private disability benefits for which
taxpayer paid the premiums are NOT “gross
income”
Court rejected IRC analogy
• Court rejected the DR’s profferred IRC analogy
• Rely on Bankruptcy Code dfn that says CMI is
determined “without regard to whether such
income is taxable income”
• And, in Bk Code Congress “knew how to”
incorporate IRC rules where wanted (cites
means test expenses)
Gross v. taxable
• DRs were arguing that the private disability
benefits were not “gross” income under IRC
• And that Bk Code “income” should adopt IRC
“gross” income tests
• Under IRC, “gross” income and “taxable”
income are 2 very different concepts
“Taxable income” disavowal?
• The Blausey court’s reference to Bk Code’s
disavowal of “taxable income” as basis for
determining “income” under BK Code thus is
totally meaningless here
• Court did not understand that gross income
and taxable income are not the same thing!
It still has to be INCOME
• Under 101(10A), dfn. still requires that what
Dr receives must be “income”
• And thus must have some way of figuring out
what Income means
 Need a positive theory
Question 2.a
• Using the Blausey court’s approach, would it
count as CMI if in the six months prior to
bankruptcy the Debtor was paid $2,000 by her
employer to reimburse her for expenses she
incurred on business trips on behalf of the
Company?
“Every dime”?
• What about this approach?
 CMI includes “every dime a debtor gets
during the relevant period except for those
specifically excluded”?
See In re DeThample, 390 B.R. 716, 721 (Bankr. D. Kan. 2008)
Reimbursement of expenses?
• Does the “every dime” theory really extend to
reimbursement of expenses?
• Surely not
• But if not – on what theory?? How do we
conceptualize that expense reimbursement is
not “income”?
Gross income IRC
§ 61. Gross income defined
(a) General definition.--Except as otherwise provided in this subtitle, gross income means all income
from whatever source derived, including (but not limited to) the following items:
(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;
(2) Gross income derived from business;
(3) Gains derived from dealings in property;
(4) Interest;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Alimony and separate maintenance payments;
(9) Annuities;
(10) Income from life insurance and endowment contracts;
(11) Pensions;
(12) Income from discharge of indebtedness;
(13) Distributive share of partnership gross income;
(14) Income in respect of a decedent; and
(15) Income from an interest in an estate or trust.
“income” under IRC 61
• Need to have concept of “income”
• under IRC 61, Supreme Court has held:
“’Income’ for tax purposes is the gain
derived from capital, from labor, or from
both combined”
Workable definition in bankruptcy?
• Would that “gain” definition under IRC be a
workable basis for defining “income” under Bk
Code 101(10A)(A)?
Reimburse expenses?
• Under that Dfn of “income,” whereby look to
gain derived from capital or labor, surely
reimbursing expenses does not qualify
Disability benefits:
Why possibly NOT income?
• Under IRC, why might it be the case that
private disability benefits for which the Dr
paid the premium are not counted as “gross
income”?
No “gain” to dr/taxpayer
• Simply recovering benefit that he has already
paid for, via the premiums
• i.e. – no “gain”
• Which is why IS part of income if employer,
rather than dr/taxpayer, paid the premiums
Capital sale?
• What if a month prior to bankruptcy the
Debtor sold her BMW (which she had
purchased five years ago for $45,000) for
$20,000? Is that CMI?
Only if a gain
• Sale of an asset = “income” only if is a gain
• So answer depends on what DR’s basis was
before $20K sale
• But surely the entire $20K (even though is
200,000 “dimes”) is NOT “income”
Tax refund?
• What if Debtor received a tax refund of $4,000
two weeks before she filed bankruptcy?
Is that CMI?
See In re Curcio, 387 B.R. 278 (Bankr. N.D. Fla. 2008)
is 40,000 dimes!
Tax refund ≠ “income”
• Held ≠ income
• Why not?
• No “gain”  simply repayment of debt the
govt owes the taxpayer
What about “income”
under 101(10A)(B)?
• Blausey court did not have to decide if private
disability benefits were “CMI” under
101(10A)(B)
• Brings into CMI “any amount paid by any
entity other than the debtor … on a regular
basis for the household expenses of the
debtor”
“amount” ≠ “income”
• Use of word “amount” in 101(10A)(B) is
distinct from “income”
• Indeed word “income” is not found anywhere
in 101(10A)(B)
So what limits?
• Does that mean that ANY $ that Dr receives on
a “regular basis” is included in CMI under
101(10A)(B)?
• Blausey court might say yes – in last full ¶ said
that focus is on whether is $ that Drs can use
to repay their debts
“for the household expenses”
• But that might be too expansive a reading of
the statute
• Statutory language is that Dr receives the
“amount “ on a regular basis “for the
household expenses” of the Dr
- would private disability benefits for which Dr
has paid premium satisfy this functionality
test? Not clear
Problem 2.7(a)
“CMI” under 101(10A):
 Debtor’s salary of $5,000 per month from
the previous year as an employee of Company,
Inc.
Answer 2.7(a)
• Salary of $5k /month for 6 full months pre-bk
is included
Even if no longer have the job
• Purely historic income calculation
• Does not matter if DR no longer has that job
b/c laid off
• Would have to raise via rebuttal
2.7(b)
• CMI?
• A one-time bonus of $2,000, paid on
December 31.
Answer 2.7(b)
• One-time bonus counts
• Was received in last full 6 month period prebankruptcy
• Fact was one time only would only be relevant
for rebuttal
2.7(c)
• CMI?
• Debtor will be starting a new job on January
15 in which he will earn $30,000 a month.
Answer 2.7(c)
• New job does NOT count
• Again only historic
• Could come up under 707(b)(3) bad faith or
totality
• But not under means test
2.7(d)
• CMI?
• Debtor’s spouse earned $30,000 in the
previous six months. Debtor files a non-joint
case. Do you need more information?
Answer 2.7(d)
• Non-filing spouse’s income will not count
under 101(10A)(A)
• Might count under subsection (B) IF is
regularly contributed toward household
expenses
2.7(e)
• CMI?
• Social security benefits of $1,800 received by
the Debtor from July through December of the
prior year.
Answer 2.7(e)
• Social security benefits are expressly excluded
2.7(f)
• CMI?
• Non-taxable municipal bond income of
$3,000, paid on December 31.
Answer 2.7(f)
• Bond income IS included as CMI
• Fact is excluded from “taxable income” is by
statute expressly made irrelevant
• And otherwise is “income”
2.7(g)
• CMI?
• Debtor’s elderly mother lives with the debtor.
Debtor’s mother is financially independent and
has a sizeable estate which generates income of
$8,000 per month. However, mother is
chronically ill and has trouble getting around,
which is why she lives with debtor. What portion,
if any, of the debtor’s mother’s income should be
included? Do you need more information?
Answer 2.7(g)
• Part of Grandma’s income might be included
in CMI under 101(10A)(B) on “regular
contribution” basis
• Simply a fact Q of how much Grandma chips in
Code § 707(b)(2)(A)(ii)-(iv)
• In the Code, the allowable expense
deductions are found in
 §707(b)(2)(A)(ii)-(iv)
- (ii): Living expenses (IRS) (subsec. (I))
miscellany ((I)-(V))
- (iii): secured debts
- (iv): priority debts
Form B22A
Official Form B22A
http://www.uscourts.gov/rules/BK_Forms_08
_Official/B_022A_0108f.pdf
Part V
IRS living expenses (National, Local)
• § 707(b)(2)(a)(ii)(I)
• Part V, subpart A
–
–
–
–
–
Line 19A: National Std – food, clothing, etc
Line 19B: National Std – health care
Line 20A: Local Std – housing: non-mortgage
Line 20B: Local Std – housing: mortgage or rent
Line 22A: Local Std – transportation: operating, public
transportation
– Line 22B: Local Std – transportation: additional public
transportation
– Line 23, 24: Local Std – transportation: ownership
“Amounts specified”
• For National Standards and Local
Standards, Dr may deduct the “applicable
monthly expense amounts specified,”
even if greater than DR’s actual expenses
Deduct payments for debts
• “the monthly expenses of the debtor shall not
include any payments for debts.”
• Get to deduct secured debts as well, see
707(b)(2)(A)(iii)
• BUT only count once (under secured debts)
 Subtract secured debt payments from IRS
allowances for mortgage, car ownership
Websites for National and Local
• National (food, clothing):
http://www.justice.gov/ust/eo/bapcpa/20100315/bci_
data/national_expense_standards.htm
• National (health):
http://www.justice.gov/ust/eo/bapcpa/20100315/bci_
data/national_oop_healthcare.htm
• Local (housing) [by state, county –Illinois ex.]:
http://www.justice.gov/ust/eo/bapcpa/20100315/bci_
data/housing_charts/irs_housing_charts_IL.htm
• Local (transportation) [by region – Midwest ex.]:
http://www.justice.gov/ust/eo/bapcpa/20100315/bci_
data/IRS_Trans_Exp_Stds_MW.htm
IRS – “Other Necessary Expenses”
• The IRS defines these as “the allowable
payments you make to support you and your
family's health and welfare and/or the
production of income.”
“Other Necessary Expenses”
• Only ACTUAL expenses are allowed here,
unlike for National and Local Standards
Examples of “Other Nec. Exp.”
• Examples see Internal Revenue Manual, § 5.15.1.10,
http://www.irs.gov/irm/part5/irm_05-015-001.html#d0e1302
and Form B22A (lines 25-32):
– income and social security taxes
– involuntary deductions for employment (e.g., mandatory
retirement contributions)
– term life insurance
– court-ordered payments (e.g., child support or alimony)
– child care
– health care
– education (if required for one to keep her job)
– telecommunication services.
Secured debts
• §707(b)(2)(A)(iii)
• Form B22A, part V, subpart C
– Line 42: scheduled payments due next 60 months
– Line 43: cure amounts on house, car, or other
–
items necessary for support (e.g., refrigerator)
Secured – no limit!
• For purposes of the means test, there is NO
LIMIT on the $ amount of secured debt deduct
• Only issue is whether is actual debt scheduled
to be due in next 60 months, + cure amounts
 reason: would have to pay secured debt in
chapter 13, and means test is sorting whether
DR “can pay” unsecured debts in chapter 13
Caveat: bad faith/totality
• very large secured debt payments may help
DR pass means test
• But Ct may find that DR is in “bad faith” or
that “totality of circumstances” requires
dismissal for abuse, see 707(b)(3)
Priority debts
• DR may deduct all priority debts due,
projected over 60 months, see 707(b)(2)(A)(iv)
• Form B22A, part V, subpart C
– Line 44: note is for prepetition obligations pastdue
– Line 28 “other necessary expenses” brings in
support obligations that will come due during the
next 60 months
priority
• See § 507(a) for priority debts
• Rationale for allowing same as for secured debts
 have to pay all priority debts in chapter 13 plan,
see 1322(a)(2)
Chapter 13 expenses
• actual chapter 13 administrative expenses in
district where the debtor resides
http://www.justice.gov/ust/eo/bapcpa/20100
315/bci_data/ch13_exp_mult.htm
• District allowance, up to 10% cap
• § 707(b)(2)(A)(ii)(III)
• Same rationale as for secured, priority 
would have to pay in a chapter 13 plan
Charitable contributions?
• “the court may not take into consideration
whether the debtor has made, or continues to
make” charitable monetary contributions to a
qualified religious or charitable organization. §
707(b)(1).
• Form B22A, line 40
• Charity exclusion does not specify any limit on
the amount of charitable contributions a debtor
may make for means test and dismissal purposes.
Problem 2.8(a)
Debtor’s monthly paycheck includes deductions for
the following items.
She wants to know if the expense is deductible under
the means test.
a. Income tax withholding
Income taxes
• Yes, of course, deduct
• “Other Necessary Expenses,”
707(b)(2)(A)(ii)(I)
• No doubt Dr has to pay these!!
• Line 25 on Form B22A
• See Internal Revenue Manual 5.15.1.10
http://www.irs.gov/irm/part5/irm_05-015001.html#d0e1302
2.8(b)
Debtor’s monthly paycheck includes deductions for
the following items.
She wants to know if the expense is deductible under
the means test.
b.
Term life insurance
Term life
• Same answer as for income taxes
• Yes, allow as “Other Necessary Expenses”
• See line 27 on Form B22A
2.8(c)
Debtor’s monthly paycheck includes deductions for
the following items.
She wants to know if the expense is deductible under
the means test.
Mandatory contribution of 8% of
salary to state retirement plan
c.
Mandatory retirement
• Yes, allow as “Other Necessary Expense”
• Line 26 on Form B22A
2.8(d)
Debtor’s monthly paycheck includes deductions for
the following items.
She wants to know if the expense is deductible under
the means test.
d. Voluntary contribution to 401(k)
retirement plan.
Voluntary retirement
• NOT allow
• Lots of cases so hold
• Note line 26 on Form B22A expressly excludes
• Would have to demonstrate why meets basic
test of supporting family’s health or welfare or
the production of income
2.8(e)
Debtor’s monthly paycheck includes deductions for
the following items.
She wants to know if the expense is deductible under
the means test.
e.
Charitable contribution to United Way
charity
• Allow
• “the court may not take into consideration
whether the debtor has made, or continues to
make” charitable monetary contributions to a
qualified religious or charitable organization.
707(b)(1)
• Line 40 on Form B22A
Problem 2.9(a)
When Debtor files chapter 7, she owns a Ferrari automobile.
How much can she deduct under the means test with regard to her
ownership of the Ferrari in the following cases:
a. She has 60 remaining payments of $900 per
month
Ferrari
• Deduct $900 per month as secured debt
contractually due over next 60 months.
707(b)(2)(A)(iii)(I)
• What about also claiming IRS Local Standard for
transportation, ownership expense?
– $496 per month
– Better (and majority) view  zero – wiped out by
deduction for secured debt payments
– Minority view  also get the $496 (under this view,
thus get $1,396 month!)
2.9(b)
• When Debtor files chapter 7, she owns a Ferrari automobile.
How much can she deduct under the means test with regard
to her ownership of the Ferrari in the following cases:
b. She has 10 remaining payments of
$900 per month
Less than 60 payments left
• For secured debt deduction, take total
remaining ($900 x 10 months = $9000) and
divide by 60 months = $150 month
Plus also
• Get IRS Local Standard transportation
ownership expense (= $496) minus secured
debt payment ($150) = $346 month
• For grand total of $496 month
– Which = transportation ownership expense
Minority views:
Relationship Secured/Local Standard
• In 2.9(b), minority views on how the secured
debt deduction and the allowance for IRS
Local Standard (transportation) interact:
1. In addition to secured debt ($150 month), also
get full IRS Local Std transportation ownership
($496)  thus would be $646 month allowed
2. Once secured debt paid off (i.e. after 10
months), no longer get any Local Std allowance
b/c not “applicable” (thus only $496 for 10
months)
2.9(c)
When Debtor files chapter 7, she owns a Ferrari automobile.
How much can she deduct under the means test with regard
to her ownership of the Ferrari in the following cases:
c. She has 60 remaining payments of $300
per month
Secured debt < local std
• Under secured debt deduction, get the $300
per month for 60 months
• Issue – how interact with Local Std
transportation ownership allowance of $496?
• Majority view  must deduct the $300
secured debt payments from $496 Local Std
– Thus get total of $496 ($196 Local, $300 Secured)
2.9(d)
When Debtor files chapter 7, she owns a Ferrari automobile.
How much can she deduct under the means test with regard
to her ownership of the Ferrari in the following cases:
d. She owns the car free and clear
Free and clear
• Majority view  Dr still can claim entire
“amount specified” under Local Std, i.e., $496
• Minority view – no “applicable” amount, so
deduct nothing for car ownership
– But if owed even $1, get full $496!
• More sensible economically  majority view
– Either paying off current car or saving for new car
2.10
• Debtor and his spouse live alone.
• First, two of their grown children, who have
lost their jobs, move back into the house.
• Then Debtor’s 80-year old mother moves in.
• At the end of his rope, Debtor files chapter 7.
 How much can Debtor deduct as living
expenses under the National Standards?
5-person family
• All 5 of the people in this problem would be
considered part of the Dr’s “household”
• For 4-person family, get $1,611 per month
– $1371 food etc, + health (4 x $60 = $240)
• For extra person, get $262 + health care
– Here, since Mom > 65, health = $144
– So extra person = $406
 total = $2,017 per month
Problem 2.11
• Debtor owes alimony and child support payments
of $3,000 per month to his ex-wife. For a year
prior to filing chapter 7, Debtor does not make
any of the required alimony and child support
payments, and thus owes her $36,000 when he
files.
 May Debtor take any deductions on the
means test for the unpaid alimony and support?
If so, how much?
Priority claims
• Alimony & Child support are 1st priority
“domestic support obligations” (507(a)(1))
• Thus all $36,000 is a deductible expense
under 707(b)(2)(A)(iv)
• Divide over 60 months, so = $600 per month