The Mystery Of The Disappearing Means Test Deduction

Just when you thought you figured out the means test, a debtor throws you a curveball.

Like the Naked City, there are eight million means test stories out there. This is one of them.

Last night, I’m reviewing a petition that a young lawyer I mentor was prepared to file. The debtor is recently married and he and his bride each make about $5,000 a month gross. Schedule A shows no real estate, yet there’s a mortgage listed on Schedule D, and a mortgage payment deducted on the means test.

The rookie lawyer confirms that the debtor doesn’t own real estate but, in the inimitable fashion of a couple of years ago, he’s on the mortgage loan to his sister’s house. And being a mortgage loan, she has deducted the monthly payment from the debtor’s current monthly income.

Ooops. Remember that a claim is secured when it is secured by property of the bankruptcy estate. Here in the 9th Circuit, that point was made in IRS v. Snyder with reference to a tax lien on a retirement account.  The account wasn’t property of the estate. Therefore, it wasn’t a secured claim and the debtor couldn’t pay off the lien through a Chapter 13 where the collateral wasn’t property of the estate.

Second problem in our case was that the debtor didn’t actually make the mortgage payment nor did he live in the house. As much as I like a difficult argument, I can see no reason why the debtor’s unsecured creditors should get less because he’s essentially guaranteed his sister’s home loan.

So, it was back to the drawing board on the means test. We spotted some expenses that offered the possibility of larger deductions that merit further investigation.

The moral of the story – and there’s always one of those – is that the means test offers hope to some and challenges to others, particularly given the odd lending practices of the past few years.  Deductions disappear upon investigation, and others appear only upon the closest of examinations.

There is no bright-line rule in the U.S. Bankruptcy Code, only hints like a trail of breadcrumbs.  Follow the trail without knowing the pitfalls and you end up on the losing end of an argument.  

But if you take the time to understand not only the means test but the way in which it plays with reality and other laws, you may find yourself avoiding those same traps.