PLAN SHOULD CORRESPOND WITH DISPOSABLE INCOME OF MEANS TEST

There is always a conflict between actual expenses and expenses allowed in the means test. Actual expenses are usually more than those allowed by the means test. As between actual and means test expenses, the latter prevails when computing disposable income. Disposable income is net income minus allowable deductible expenses using IRS standards of the means test. Recently, my client’s proposed plan payment was $1,400 based on pay stub net income and actual expenses. Her gross income was $12,000 a month. The problem was she had actual expenses which included college tuition and expenses for her son of $1,500. The means test only allows $137 monthly for education expenses of a child under 18. In addition, she owned an S corporation which a yearly profit of $30,000. According to her, even though the $30,000 profit is declared as part of her gross income, she does not receive any portion of it because the money is kept by the business for salaries.

 These figures create a major obstacle in the Chapter 13 plan for two reasons. The $1,500 college expenses for her son are not deductible under the means test and the $30,000 profit results in $2,500 monthly as additional pass through income for her. Therefore, as expected, the trustee disputes her net income and wants a lot more as plan payment. The profit income adds $2,500 a month to the plan. On this issue alone, the trustee wants $1,400 plus $2,500, or $3,900 as plan payment. If all disposable income is not proposed by debtor, a good faith issue arises, and the trustee will argue that the plan is proposed in bad faith. And the college expenses if not allowed as a deduction, will add another $1,400 to the plan, so $3,900 plus $1,400, is $5,300. That’s the plan payment that the trustee really wants from debtor because that is the amount of disposable income that the means test says debtor has. Unfortunately, actual expenses of the debtor are almost irrelevant in arriving at the final plan payment.

In Re Grabarczyk, the debtors had three children, ages nine, seven, and four. They initially filed for Chapter 7 relief on 2010 but converted their case to Chapter 13 on March 16, 2011. The debtors’ plan proposed payments of $565 monthly for 11 months, then $1,100 per month for 49 months. The court determined that unsecured claims be $123,065. Their plan proposed to pay $30,766 to unsecured creditors, or about 24% of their unsecured debt. The trustee objected to confirmation of the plan asserting that it did not satisfy Section 1325(b)(a)(B)’s, disposable income test. According to the debtors’ Form B22C, the means test, they had monthly disposable income of $1,037. Thus, without considering any of the trustee’s challenges to the Form, the debtors’ plan did not satisfy Section 1325(b)(1)(B) because it paid less than $62,221. In other words, the plan was $32,000 short of what debtor proposed. Under the means test, debtor should be proposing a 48% plan, not 24%. After the court considered the trustee’s challenges, the amount the debtors needed to pay to unsecured creditors increased to $78,587! The debtors had taken a means test deduction of $443 for their children’s education expenses, but the court agreed with the trustee that this deduction was overstated by $213. In addition, the debtors added $59 to the food and clothing deduction on the basis they had three growing children who loved to eat a lot of meat. Thus, they had to bring their children to “Home Buffet” at least 5 times a week so they could eat all they wanted to. Feeding children that weighed 300 lbs each did not come cheap. The waiters at the buffet had to spray their children with cooking oil so they could be pushed through the entry and exit doors of the buffet. Each child was charged 3 adult prices. The court said this fact was not persuasive evidence justifying an additional expense deduction over and above the IRS standards.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than five thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.