South Carolina Bankruptcy Lawyer Blog

Written by Columbia Bankruptcy Lawyer, Lex A. Rogerson, Jr.

Several years ago a then U.S. Secretary of Defense opined publicly, if confusingly, about foreign affairs, saying there are known unknowns and unknown unknowns.  The list of questions involved in the everyday application of the bankruptcy means test – some now resolved and some still waiting for answers – reminds us of that somewhat tortured speech.

To put these issues in context, remember that the means test is intended to calculate a debtor’s disposable income.  It begins by calculating gross monthly income based on the last 6 months.  Then it subtracts the debtor’s expenses: fixed allowances in some categories and actual expenditures in other categories.  The difference – the debtor’s disposable income – helps determine whether the debtor is a candidate for Chapter 7 or how much he must pay to creditors in Chapter 13.

Here are the top 5 questions we have faced since the means test came into effect in 2005:

1.    When do I have “primarily consumer debts”?  If a debtor has primarily non-consumer debts, he can usually file Chapter 7 even if he has a fair amount of disposable income he could pay to creditors.  Lots of case law says that “primarily” means over half the total dollar amount of debt.  It’s also clear that a consumer debt is one incurred for personal, family, or household purposes and not for a profit motive.  But so far we have only partial answers on how to classify special debts such as student loans, taxes, and certain domestic obligations.

2.    What all is excluded as social security?  The means test directs us not to include as income any payments “under the Social Security Act.”  Clearly this keeps out payments such as social security retirement, disability, and SSI.  But the courts are about evenly split on the inclusion of unemployment benefits, which don’t come from the Social Security Administration but were mandated by legislation linked to the Social Security Act.  And a few courts have held that only the debtor’s social security benefits are excluded, not those of other members of his household.

3.    Can I claim a deduction for vehicle ownership expense if my car is paid for?  Many courts, including ours in South Carolina, answered this question yes.  But in January 2011, the U.S. Supreme Court decided a debtor can deduct ownership expense only if paying on a car loan or lease.

4.    Can I deduct payments on a secured debt if I intend to surrender the collateral?  In the District of South Carolina, the answer is no based on a 2007 decision.  But the code section involved allows deductions of “amounts scheduled as contractually due,” a phrase that seems to have nothing to do with the debtor’s intention.  And a 2009 court of appeals decision from New England says the majority of cases disagree with our court.  But until a higher court decides differently, we can’t take the deduction in this district.

5.    What happens if something is going to change after I file?  For above-median debtors filing Chapter 13, the means test, at least in theory, determines how much they must pay unsecured creditors.  But what if the debtor knows for sure that things will be different in the future than they have been leading up to bankruptcy?

In June 2010, the U.S. Supreme Court decided that changes to the debtor’s income or expenses that are known or reasonably certain at the beginning of the case will change the means test calculation of disposable income.  In that case, the debtor received a one-time buy-out from her employer a few months before she filed her case.  Because her future earnings would not reflect this bump in income, the court said it should not be included in calculating her payment obligation.

This rule can help or hurt a debtor.  For example, if a debtor is paying off a retirement account loan, that is a deductible expense in Chapter 13.  However, if the loan is paid off while his case is pending, his plan must probably increase (“step-up”) the plan payments at that point.

Hopefully in the next couple of years, several more of the unknowns will become knowns.  Stay tuned.

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