THE MEANS TEST IN BANKRUPTCY - Part III Additional Expenses to Avoid "Failing" the Means Test in Your Bankruptcy Case
In the previous two parts to this article, Fairfax, Arlington, McLean and Falls Church Bankruptcy Lawyers Michael Strong and Ben Upton discussed ways to overcome the Means Test formula in Bankruptcy. We try to take advantage of allowable deductions from that income to keep you qualified to file a simpler and cheaper Chapter 7 Bankruptcy and avoid the possibly unnecessary use of chapter 13 payment plan bankruptcies, unless necessary to save a home from foreclosure or similar problem. In this part, we add some little known secrets that advanced Northern Virginia bankruptcy attorneys like ourselves are well versed in, and that can be used in the more complicated household budgets, to avoid a chapter 13 payment plan, or reduce its required term and/or payment amount.
Other Necessary Expenses
As stated in our last article in this series, the Means Test in Bankruptcy uses some IRS Standards to limit allowed amounts for certain necessary household expenses in your bankruptcy budget. But, other expense items, besides those standardized deductions, may vary from debtor to debtor in a way that prevents a standard allowance from being applied to certain allowable deductions. Some debtors may also have additional categories of expense that are too infrequent or unusual to formulate into a standard allowance, unlike the typical rent or utilities categories, and some debtors are subject to substantial variations in their ordinary expense items in a way that requires use of specific figures instead of standard allowances. In some categories of expense, you will be permitted to take your actual monthly expenses for these categories, rather than being bound to whatever the median debtor expends. However, in all cases, your expenditures must be necessary for the health or welfare of yourself or your dependents to qualify.
The first category of allowed variable expenses are your total income taxes – the amount of your income that you actually surrender to the Federal and State government each year. These include both Federal Income Tax, State Income Tax, FICA deductions, and FUTA deductions, and local income taxes, if applicable. When deducting these taxes, make sure you deduct the actual monthly amount of tax that you owe, not that you have taken out of your paychecks – if you regularly receive a tax refund, you will need to pro-rate this refund and reduce your taxes paid by that pro-rated amount. On the other hand, if your deductions are insufficient to cover your taxes each year, you can pro-rate the additional amount you have to pay and add it to your taxes instead.
Remember that you cannot double-count any expenses, and this includes your tax deductions. If you are married and not filing jointly, but already removed your spouse’s taxes in the marital income adjustment category, you cannot “re-remove” the same amount here.
Involuntary Deductions for Employment
This category covers most of the other expenses deducted from your paycheck each month by your employer, as long as it is mandatory. This deduction includes any required retirement contributions, any union dues, uniform costs, or similar payroll deductions. However, voluntary retirement benefits, charitable contributions, donations to the United Way, profit-sharing, or similar deductions cannot be considered here, due to their voluntary nature. Even loan repayments on a retirement account, which must be made each month, have been rejected by the Trustee’s office. In addition, this does not include voluntary insurance benefits; however, most insurance benefits will be covered by one of the later lines, whether voluntary or mandatory, so for simplicity’s sake even mandatory insurance should be included in a later category as applicable.
Under Bankruptcy law, you are permitted to deduct the costs of a life insurance policy covering you personally, whether through your employer or personally purchased by yourself. No other life insurance policy may be deducted here, which means a spouse’s life insurance may only be deducted in a joint bankruptcy case. In addition, the position of the Office of the United States Trustee, the 4th Circuit Court, and possibly courts in other jurisdictions, that whole life insurance policies are more akin to savings accounts than term life insurance; while the premiums you pay for a whole life insurance policy may be partially deducted, only the portion of the premium which goes to term coverage is deductible.
If you are required by court order to pay child support or alimony, then you are entitled to deduct the amount that the court has ordered you to pay each month from your Disposable Monthly Income. However, you are only permitted to deduct the amount you are ordered to pay each month – any voluntary payments to dependents or a spouse are nondeductible. Under Virginia law, settlement agreements are incorporated into the final divorce decree, which makes mediated support mandatory; other jurisdictions may wish to consult an attorney if there is any question. Please also bear in mind that you may only deduct the amount you are required to pay each month on this line; any past-due support amounts must be deducted later in the Means Test.
Education for Employment or a Physically or Mentally-Challenged Child
This line considers two very different categories of expense which have nevertheless been combined together. If only one or the other applies to your situation, you may add those funds alone to the means test; if you spend money on both categories, combine the average monthly expense together.
First, you are permitted to deduct any amount which you actually spend per month on education for yourself, as long as those funds are a condition of your current employment. These expenses may be needed to maintain your status (such as money spent on Continuing Legal Education, which is required to remain in good standing to practice law), salary (in some states, the amount of money a teacher receives is commiserate with their education credits), or position (if, for example, your employer requires you to receive certification to retain your job), but CANNOT be optional – you cannot deduct money you spend on education you will need to get a better job.
Second, you are permitted to deduct any amount which is necessary for the education of a physically- or mentally-disabled child, to the extent that this expenditure is necessary for that child’s health and welfare. Under the US Trustee’s guidelines, you cannot deduct any funds you expend which could be covered by free services provided by the local public school system; if your school system already provides for the care your child needs, it is unnecessary for you to pay these expenses out-of-pocket.
Debtors with dependents may be able to deduct the actual amounts that they spend on child care each month, if such expenses are reasonable and necessary. This includes all amounts actually expended on babysitting, daycare, or pre-school, and may even include premium daycare services if they are truly necessary. Unfortunately, the United States Trustee’s position is that child care expenses are usually unnecessary with a stay-at-home parent, although in some cases you may still show necessity.
Additional Health Care Expenses
While Line 19B provides for $60.00 per debtor and dependent age 64 and under, and $144.00 per debtor and dependent age 65 or higher, some debtors spend far more on medicine than others. If you have additional expenses, and can provide proof of these expenses, you can claim the additional amount that you spend for the health and welfare of yourself and your dependents as a deduction on this line. If you have health insurance or a health savings plan, these expenses must be out-of-pocket, such as co-pays, deductibles, medication, or therapy, or otherwise unreimbursed by your insurance. Additionally, these expenses must truly be necessary – elective treatments, including elective dental work and cosmetic surgery, cannot be included. Finally, once again, this does not cover insurance or health savings accounts.
Additional Telecommunications Expenses
As mentioned above, the IRS standards cover the amount that the median debtor must spend on all necessary utilities, including basic telephone and cell phone services. However, many debtors have telecommunications expenses above and beyond these basic services – long-distance plans, pager or call waiting services, caller ID services, and basic cable and internet. In addition, depending on the ages of your children, using a family cell phone plan may be the most expedient way to keep tabs and to stay in touch with teenagers during the workday.
To the extent that you can demonstrate any of these services are necessary for the health and welfare of yourself and your dependents, you are permitted to deduct these expenses as well. However, this will be a difficult burden to meet with more advanced systems – in the Eastern District of Virginia, courts have rejected deductions for high-speed internet and expanded cable, holding that the additional costs simply were not necessary.
Once these expenses and the “standardized” allowance expenses in the prior section have all been entered, you will have your first set of deductions under the Means Test – at which point many cases will have a determined outcome on whether a chapter 7 case can be filed, or whether a chapter 13 is required, and if so, how much to pay and for how long a term. However, this is only the first of three categories of expenses, although by far the longest. In our next article, we will discuss the remaining two primary categories of expense which you may deduct as a part of the Means Test.