The Means Test in Bankruptcy - Part II Allowable Expenses
In our previous article, we discussed the basics of the Means Test. This Means Test is intended to prevent the filing of a Chapter 7 Bankruptcy case by high wage earners making above the median wage in their state. Similarly, the Means Test is used in a Chapter 13 case to decide which Chapter 13 Debtors must use a 60 month repayment plan vs. a 36 month plan, and to determine the amount of their payment plan. The Means Test is a two-part test, with the first part comparing your current monthly income to the Median Income for your jurisdiction. While many debtors end their inquiry here, there are more and more debtors nowadays who find themselves above the median income, who cannot pass the first part of the means test. Using a skilled Falls Church, Arlington, Fairfax or McLean Bankruptcy Attorney like those at The Strong Law Firm, many debtors whose income puts them over the Means Test can still use a Chapter 7 or lower the time and amount of their payment plans in Chapter 13 Bankruptcy. To do that, we use the second part of the Means Test in a creative but allowable way – by subtracting their actual and/or “allowable” expenses from their Current Monthly Income to stay below the Means Test.
Married couples who are not filing jointly have one additional step that other individuals do not have at this point. Single debtors and debtors who are married but maintain a separate residence simply consider their own income and expenses, and debtors who are filing jointly consider their mutual income and expenses, but married debtors who file separately are treated as somewhere between the two. They consider their own income and their spouse’s income, but may back out any income made by the non-filing spouse used for that spouse’s own benefit instead of the household expenses. According to the Office of the Trustee, any money withheld to pay taxes, used to make payments on their student loans, paid towards personal support obligations, or paid towards debts which only the non-filing spouse owes and only the non-filing spouse benefitted from may be subtracted; the rest must be considered. The Courts have not been so strict; Courts in the Eastern District of Virginia have ruled that the key consideration is whether or not the debtor or any dependents benefit from the funds. Hence, a life insurance policy with the debtor’s dependents as beneficiaries must be included, but a gym membership exclusive to the debtor’s spouse would not be.
Subpart A: Standard Expenses
When calculating what expenses will be used to determine your disposable monthly income, the Bankruptcy Code allows for three general categories of general deductions – Expenses allowable under the Standards of the IRS, Other Expenses, and Debt Repayment. The first category is itself divided into two parts – the monthly expenses amounts specified under the National and Local Standards issued by the Internal Revenue Service, and additional necessary expenses allowed under the IRS standards. Each year, the IRS creates a list of all applicable expenses for a given family size, and uses this to determine what the reasonable amount a tax debtor would have left over to repay a tax lien would be; these same numbers are used when determining what a bankruptcy debtor would have to pay their creditors. Regardless of your actual expenses, whether higher or lower, the Means Test uses these numbers, although in certain cases you may be able to use your actual expenses with documentation and explanation. While these standards change each year, information for 2013 will be provided for each category.
Food, Clothing, and Other Items
The IRS provides a table of standard expenses that a family of a given size may expect to spend on their most basic household expenses, in five broad categories: Food; Housekeeping Supplies; Apparel and Services; Personal Care Products and Services; Miscellaneous Personal Expenses. Each of these categories is relatively broad, and incorporates a number of peripheral expenses. According to the IRS standards, food covers meals at home and dining out; apparel and services covers shoes, clothing, laundry services, dry cleaning, and repairs; Housekeeping supplies covers home laundry supplies, cleaning supplies, postage, stationary, lawn and garden supplies, and miscellaneous household products such as paper towels and napkins; Personal Care Products and Services covers hygiene products, hair care products, haircuts, salons, oral hygene supplies, shaving supplies, cosmetics, perfume, and repair of personal care appliances. Miscellaneous expenses may be used for any expenses incurred that are not already included, or such as bank fees, reading material, and school supplies, but are more generally used to cover an expense which is higher than the standards provide. A table of expenses, applicable in all 48 contiguous states (but NOT Alaska or Hawaii) is provided below:
For all families larger than four people, you may add an additional $281.00 to the household expenses. This is not added to any one category, but simply to the total.
Health Care and Medicine
The National Standards for health care and medicine depend on the total number of individuals and the household, and their age. Any individual of age 64 or under is considered to expend $60.00 per month on health care and medicine; any individual of age 65 or over is considered to expend $144.00. Note that this includes all expenditures on medication and doctors’ visits, but not on maintaining health insurance; this is separate, and considered later. Note also that if your expenses are greater than this allows, you may be able to claim them in a later section as well.
Housing and Utilities
Unlike the National Standards used above, the IRS compiles its housing and utility costs based on Census Data for each individual County and Family Size. As such, no table will be provided, but the figures for Virginia may be accessed at this URL. The total expenses allowed are split between two categories. The first of these categories is non-rent expenses, which includes standard utilities, such as home maintenance and repair, HOA dues, condominium fees, gas, electricity, water, heating oil, trash and garbage collection, fuels, septic cleaning, basic telephone, and cell phone services. However, they do not include cable and internet services, which are covered in a separate category. Please make sure that you use the actual county in which you reside for this calculation – there is nearly a $200.00 difference between the highest and lowest county-based deduction for the individual alone.
The second category of expenses for housing and utilities is rent or mortgage expenses, which includes homeowners’ insurance and local property taxes. If you rent your primary residence, then you simply use whatever the standards for your County are for a family of your size, without any adjustments for your actual rent. On the other hand, if your primary residence is secured by one or more mortgages, and you intend to keep this residence, you will be deducting your mortgage payments at a later point in the means test. As such, to keep you from double-counting, you are required to subtract your mortgage payments from this allowance; if you wind up with a negative number, you do not get a rent or mortgage expense under the National Standards. In effect, this allows you to take the greater of your actual mortgage payment or the national standards for your mortgage payment as a deduction, without allowing you to double-count.
Transportation – Vehicle Operation
As long as you own, lease, or operate a vehicle, you may take a deduction for vehicle operation and maintenance. Unlike either of the above categories, the IRS determines operation expense based on a division of the country into four Regions, and then a sub-division within each region based on the local major metropolitan area. Any county or city n those areas uses their own standardized transportation expenses, and all other areas use a general region-wide transportation expenses. Based on the standards for your region or metropolitan area, you are given a standard deduction per vehicle you own, up to two.
In Washington DC, which includes the counties of Arlington, Clarke, Culpepper, Fairfax, Fauquier, King George, Loudoun, Prince William, Spotsylvania, Stafford, and Warren, and the cities of Alexandria, Fairfax, Falls Church, Fredericksburg, Manassas, and Manassas Park, you are given a deduction of $270.00/month if you operate one vehicle, and $540.00/month if you operate two or more. Outside of those counties, the deduction for Virginia is $244.00/month and $488.00/month, respectively.
In addition, you are permitted to take a deduction for funds necessary to utilize public transportation, which is solely a national standard of $182.00/month. If you do not operate any vehicles, you may take this deduction as a matter of course. Additionally, if you operate a vehicle and utilize public transportation, such as a person who drives to the Washington Metrorail and then takes it to work, then you may claim both deductions. However, this must be reasonable and necessary for your health and welfare or production of income.
Transportation – Vehicle Ownership
Unlike the Vehicle Operation Expense, which you may always claim if you operate one or more vehicles, the Supreme Court has held that the Vehicle Ownership Expense may only be applied if you own a car which is subject to a secured loan, or if you lease a car. In such case, you may claim an additional ownership expense of $517.00, or $1,034.00 if you own to such vehicles. However, just as with your rental expense, this expense is designed to take into consideration the actual amount that you pay to your secured creditor each month, and so would potentially double-count these payments. As such, you subtract your secured payment on each vehicle from the $517.00 per vehicle, getting $0.00 per vehicle if the secured payment is higher. If, on the other hand, you own a vehicle with neither lease nor lien, this category of expense simply does not apply to your case.
Next time, we will conclude our discussion of the additional expenses permitted under the IRS Standards, reviewing the additional necessary expenses that the IRS allows.