Winter 2007 • Issue 27, page 6

What Does "Means" Mean in Deducing the "Plain" Meaning of Means Testing Under Bankruptcy Code 707(B)(2)?

By Joseph, James*

(Mr. Joseph, a senior bankruptcy attorney of counsel to the Los Angeles firm Danning, Gill, Diamond & Kollitz, LLP and 26-year member of the Panel of Bankruptcy Trustees in the Central District of California, explores the status of judicial interpretation of a key provision of the recent overhaul of the bankruptcy laws impacting the issue of who may remain a debtor under Chapter 7 of the Bankruptcy Code.)

INTRODUCTION
The focus of what follows is a controversy which has sprung up in the bankruptcy courts in interpreting a portion of Section 707(b)(2) of the Bankruptcy Code [11 U.S.C. § 707(b)(2)], enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, or BAPCPA, which became effective (as to most of its provisions) on October 17, 2005.

The power to dismiss debtors’ Chapter 7 bankruptcy cases for “abuse” if their debts were primarily consumer debts is nothing new. Before the headline generating passage of BAPCPA, that power resided in Section 707(b) and it continues to reside there today, after BAPCPA’s enactment. What has changed the landscape so markedly after the passage of BAPCPA are the crucial shifts in the matters of substantiality of abuse and presumption of abuse. Section 707(b) used to mandate that the court presume debtors were entitled to the bankruptcy relief they sought and permitted dismissal only for “substantial abuse.” BAPCPA eliminated presumption of entitlement to relief and added a new subsection (2) to 707(b) which requires that debtors’ finances be submitted to a “test” which, if failed, causes a reverse presumption to arise – that the continued pendency of such cases would constitute “abuse” and subject cases to dismissal. The “abuse” which would justify dismissal no longer needs to be “substantial” after BAPCPA.

The “test” designed by the drafters of BAPCPA in Section 707(b)(2) and which is the lynch-pin to effectuating one of the key purposes of the legislation, namely that debtors who can “pay something” to their creditors either do so through a Chapter 13 plan or have their Chapter 7 cases dismissed, is mechanical and one suspects that those who designed it and passed it into law had the same hope all legislators harbor for their legislation – that it be so clear in its language and required application that judicial interpretation would be uniform.

Yet, as to a crucial part of the “test” designed to cull from the mass of consumer debtors those who are presumed to be abusing the system and whose cases should therefore be dismissed, any such hopes for judicial uniformity have been rather clearly been disappointed.

THE WORKINGS OF THE MEANS TEST
Present Section 707(b)(2) contains four sub-paragraphs, ten sub-sub-paragraphs, and thirteen sub-sub-sub-subparagraphs.

Subject to the disclaimer that no summary of such a complex piece of drafting can possibly be precisely accurate and that recourse must be had to the statute itself, Section 707(b)(2) is supposed to work something like this.

Consumer debtors first must calculate their “current monthly income”, a term defined in Section 101(10) of the Code, generally their income (taxable or not) from all sources during the six months preceding the filing divided by six. If that figure multiplied times twelve is equal to or less than the median annual income for single persons or families, as appropriate, in the state where the debtors live, then the inquiry ends (usually) and the debtors get to remain in their bankruptcy case (usually).

The complexities arise when the debtors’ annual income exceeds the state median.

If the state median income is exceeded, then the debtors are subjected to what is called “means testing”, a term not found in the Code but rather in Official Form 22A entitled Chapter 7 Statement of Current Monthly Income and Means – Test Calculation which was promulgated as the primary analytical tool to determine whether Chapter 7 consumer debtors are or are not permitted to proceed with their cases. I have included several pages of the six page Official Form 22A for a single debtor without dependents in Southern California (name and bankruptcy case number redacted) to illustrate.

For means testing, the Code takes “current monthly income” as the starting point and then permits deduction of a series of monthly expenses to determine whether after all permitted deductions, debtors still have sufficient money left over to “pay something”, that a presumption should therefore arise that they not be permitted to remain in Chapter 7 cases and that their cases should be dismissed unless they convert to a Chapter 13 case where they must propose a plan to pay their creditors at least a portion of what they owe.

One of the more controversial features of the means-testing process is that many of the permitted expenses are not debtors’ actual expenses, but are rather derived from National and Local Standards developed by the Internal Revenue Service. Line 19 of the form sets forth the permitted National Standard for “food, clothing, household supplies, personal care and miscellaneous”, the sum of $621.00. It is of no consequence to the test that the debtor may actually spend $721.00 a month on these items; only $621.00 is a permitted deduction for test purposes.

That means testing employs, in many categories of expense, a national or local norm as opposed to the debtors’ actual expenses is hardly surprising. It would not serve the intent of the BAP (Bankruptcy Abuse Prevention) portion of BAPCPA if a hypothetical single debtor were spending $2,000.00 a month for food on account of a predilection for beluga caviar and were allowed such an expense, as opposed to the $621.00 permitted by Section 707(b)(2)(A)(ii)(I).

Though many permitted expenses are pre-set and may not exceed IRS National Standards and Local Standards, certain expenses that constitute permitted deductions are actual and among those are payments on secured debt. Section 707(b)(2)(A)(iii) permits deduction for monthly payments on secured debts, including on a primary residence, motor vehicles and other household property, including presumably, televisions, washing machines, and other consumer electronics where the lender or seller has retained a lien to secure payment.

The sample form reflects that our consumer debtor does not have a house on which he is making mortgage payments nor a car on which he is making payments, so he is permitted only the IRS Local Standard for housing expense on line 20Ba, $1,395.00 and the Local Standard transportation ownership expense on lines 23a and 24a for the two cars he owns free and clear. But if he were buying a house and had a $3,000.00 a month mortgage payment and if he were making $1,200.00 a month car payments on two cars, then he would place these monthly payments on lines 20Bb, 23b and 24b, and deduct them, thereby wiping out the IRS Local Standards deductions permitted from his monthly income but would then place the very same amounts on line 42, “future payments on secured claims” resulting in permitted deductions of $4,200.00 versus $2,188.00, approximately double the amounts allowed if he were not making payments on a house or cars.

THE CONTROVERSY
Homebuyers and car purchasers, as a general matter, are going to have a much easier time “passing” the test than renters and those who own their cars free and clear, but what if the facts show that the debtors are going to be surrendering their houses and cars to the lenders because they cannot keep up the payments? The issue now dividing the bankruptcy courts with the United States Trustees in the various regions of the country on one side and debtors’ lawyers on the other is simply put: are debtors entitled to deduction for payments on secured debts on their houses and cars if, at the time they file their bankruptcy cases, they are behind on their payments, will in all probability lose these assets through foreclosure or repossession, and will not be making payments on them in the future? Should our debtor be entitled to a $3,000.00 deduction for his mortgage payment rather than the $1,395.00 monthly deduction a renter is permitted when, in a couple of months after filing his bankruptcy case, his house will likely be lost through foreclosure and he will be a renter again?

Despite the fact that Chapter 7 trustees and creditors have standing to seek dismissal of a case for presumed abuse under 707(b), the United States Trustees are the primary enforcers of these provisions of BAPCPA.

Section 707(b)(2)(A)(iii)(I) permits deduction from monthly income for payments on secured debts “scheduled as contractually due . . . in each month of the 60 months following the petition date.” As far as statutory construction in bankruptcy matters is concerned, the starting point since 2004 has been the U. S. Supreme Court case of Lamie vs. United States Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023, 1030, 157 L.Ed.2d 1024 (2004): “It is well established that when the statute’s language is plain, the sole function of the courts – at least where the disposition required by the text is not absurd – is to enforce it according to its terms.”

Debtors being means-tested are entitled to deduct from their monthly income payments on secured debt “scheduled as contractually due”; the language seems “plain”, but has proven to be anything but plain to the bankruptcy courts trying to apply it.

In In re Skaggs, 349 B.R. 594 (Bkrtcy. E.D.Mo. 2006), the United States Trustee moved to dismiss the debtors’ case for substantial abuse, contending that their taking deductions for monthly payments due on their encumbered motor home and automobile was impermissible because the debtors had stated in their bankruptcy papers, specifically in their Statement of Intention, Official Form 8 (which although it must be completed and filed to commence a bankruptcy case is not a “schedule”, such as Schedule “A”, where debtors are to list any real property they own or Schedule “F” where they are to list their unsecured creditors) that they intended to surrender the motor home and automobile back to the lenders.

The court agreed, holding that “scheduled” meant how the debtors treated the contractually due payments in the bankruptcy “schedules” which they filed: “Accordingly, the Debtors’ schedules and statements form the basis from which the Court should determine whether a debt is ‘scheduled as contractually due.’” Id. at page 599. Because the debtors’ Statement of Intention indicated the mobile home and vehicle were going to be returned, the payments were not “scheduled” to be made, were not proper deductions from monthly income, resulting in the debtors having enough income to render their case presumptively abusive and subject to dismissal.

The court in In re Walker, 2006 WL 1314125 (Bkrtcy, N.D.Ga. 2006) faced with virtually the same facts as the court in In re Skaggs came to a completely opposite result on the issue of what “scheduled as contractually due” means. The debtors had taken deductions on their means test for mortgage payments on their house and payments on one of their vehicles. On their Statement of Intention, they indicated they were going to surrender these items to the lenders. The United States Trustee moved to dismiss, contending that the mortgage payments and car payments were not proper deductions, and that without them, the debtors would have sufficient monthly income to make payments to creditors subjecting their case to the presumption of abuse.

The court in Walker believed that the proper resource to determine the plain meaning of “scheduled” was Webster’s Dictionary – “Webster’s Dictionary defines the word ‘schedule’ as ‘to plan for a certain date’...” Accordingly, payments that are ‘scheduled as contractually due’ are those payments the debtor will be required to make on certain dates in the future under the contract.” Id. at page 2. The court held that the debtors’ deduction of the payments was proper.

To the United States Trustee’s argument that permitting means test deductions for payments that probably were not actually going to be made undermined Congressional intent that debtors who had disposable future income be required to devote that income to creditors in a Chapter 13 or suffer dismissal of their cases, the court rejoined that the means test was not designed to produce a prediction of what debtors could, in the real world, afford to pay their creditors in the future, pointing out that the means test requires that debtors must use a presumed monthly income amount which is the average of six months’ income preceding the bankruptcy filing, not what they are earning at the time the bankruptcy is filed, let alone what they will likely earn per month in the future. On the expense side, the court noted that many of the basic expense deductions permitted by the means test are hypothetical, not actual – “The means test also relies on the use of living expenses set by the IRS National and Local standards, which may be either significantly less than or greatly in excess of the debtor’s actual expenses.” Id. at page 6.

The court in In re Osborne, 374 B.R. 68 (Bkrtcy. W.D.N.Y. 2007), decided on August 28, 2007, permitted the deduction of payments on secured debt for means test purposes even if the collateral securing the debt was going to be surrendered after conducting a survey of all the cases it could locate on the issue and opined that the Walker reasoning was the majority view and that a minority of decisions reached the same result as In re Skaggs.

CONCLUSION
It is likely that the United States Trustees throughout the country will continue to advance what appears to be the minority position represented by In re Skaggs, supra. unless and until the appellate courts settle the issue in favor of the majority position. They will also attempt to have cases dismissed under the “totality of the circumstances” standard in Section 707(b)(3) whose operation is outside the scope of this discussion, but whose provisions, while permitting the court to dismiss debtors’ cases for abuse, do not accord the United States Trustees with the extremely powerful presumption of abuse to which they are entitled when debtors flunk the means test.

*Mr. Joseph was admitted to the California Bar in 1972. Mr. Joseph has specialized in insolvency matters during the period of his practice, and is qualified for appointment as a trustee and receiver in the United States District Court, United States Bankruptcy Court, and Superior Court of the State of California. He is a member of the State Bar of California.