Ch. 7 Debtors Can Claim Maximum Standard Expenses

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By Daniel Gill

Individuals filing bankruptcy may claim the full Internal Revenue Service’s official National and Local Standard amount of expenses for complying with the “means test,” even if their actual expenses are less ( Lynch v. Jackson , 2017 BL 1125, 4th Cir., No. 16-1358, 1/4/17 ).

Judge Stephanie D. Thacker of the U.S. Court of Appeals for the Fourth Circuit answered a question that the Supreme Court declined to resolve in 2011: whether Section 707(b)(2) of the Bankruptcy Code permits a debtor to take the full IRS National and Local Standard amounts for expenses even though the debtor’s actual expenses are less than the standard amounts. The Fourth Circuit answered yes.

The court explained that the Bankruptcy Code’s plain language dictated that result, and it also was the logical result. The court said to rule otherwise would punish frugal debtors who spent less than the IRS standard amounts.

Gabriel and Monte Jackson filed a Chapter 7 petition on April 6, 2015. In Chapter 7 bankruptcy, a debtor’s nonexempt assets are liquidated by a trustee, and the proceeds are distributed to creditors. Subject to certain exceptions, the debtor is awarded a discharge, effectively wiping out dischargeable debts (that is, those debts not subject to an exception).

Means Test Calculation

In order to qualify as a debtor in Chapter 7, an individual or married couple must pass a “means test.” As described by the court, “The means test is a standardized mathematical formula used to determine the amount of a debtor’s disposable income. If the means test reveals disposable income above a certain level, then the Chapter 7 petition will be presumed to be an abuse of the bankruptcy code and a debtor will not be allowed to proceed in Chapter 7.”

The Jacksons followed the instructions in the bankruptcy court’s official form for the means test to deduct the IRS National and Local Standards for expenses, “regardless of your actual expenses,” the court said.

However, even though the Jacksons followed the instructions properly, the Bankruptcy Administrator moved to dismiss the Jacksons’ bankruptcy case as an abuse, since their actual expenses in some categories were less than the IRS National and Local Standard amounts. The Bankruptcy Administrator oversees bankruptcy cases and bankruptcy trustees in the judicial districts located in North Carolina and Alabama, the only two states in which the Office of the United States Trustee, a branch of the Department of Justice, does not operate.

The bankruptcy court denied the motion, and the Bankruptcy Administrator appealed. By agreement of the parties and the courts, the appeal was certified directly to the Fourth Circuit, rather than being heard first by the local district court.

The court noted that the Supreme Court interpreted 11 U.S.C. § 707(b)(2)(A)(ii)(I) in Ransom v. FIA Card Servs., N.A. , 562 U.S. 61, 2011 BL 6640, U.S., 1/11/11 , wherein it ruled that debtors can claim a National and Local Standard expense only if it actually incurred an expense in that category. The high court deliberately did not answer the question of what amount would apply if the actual incurred expense were less than the amount allowed by the IRS standard.

The Fourth Circuit held “that a debtor is entitled to deduct the full National and Local Standard amounts even if they have actual expenses below the standard amounts.” The court explained that the plain language of 11 U.S.C. § 707(b)(2)(A)(ii)(I) dictated that result.

The court also said it was the logical result. “Moreover, interpreting ‘applicable’ to mean ‘actual,’ as the Bankruptcy Administrator urges, would create an absurd result: punishing frugal debtors.” To rule as the administrator wished would incentivize a debtor to spend up to the amount of the National and Local Standards, the court said, and a frugal debtor who spent less would be punished.

Judges Diana Gribbon Motz and Barbara Milano Keenan joined in the decision.

The debtors were represented by Robert Lee Roland, IV, Law Offices of John T. Orcutt, P.C., Raleigh, N.C. Brian Charles Behr argued for the Office of the Bankruptcy Administrator, Raleigh, N.C.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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