Kentucky Bankruptcy Law

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Justifying additional rent to pass the means test

To file a Chapter 7 bankruptcy (where your unsecured debts and secured debts where you are giving up the collateral are discharged), one must “pass” the means test. The means test is for persons who have primarily consumer debts (as opposed to business debt) and it can be passed in two ways. The easiest way to pass the means test is to have a household income for your family size that is less than the median for the region in which you live. For example, for a family of four (two parents and two children) in Kentucky, the median income right now is $63,097.00. If your family income is less than that then you can file a Chapter 7 without a presumption of abuse arising.

The other way to pass the means test, if your income is higher than the median, is to go through and show what secured debts on property you wish to keep are costing you and to claim various other living expenses. Many of the expenses are standardized for each region in the IRS guidelines. If after going through the math your disposable income is over $167.00 per month, the presumption of abuse arises (there are some wrinkles to this that I won’t get into right now, but if your disposable income is under $100.00 then you are pretty safe).

There are some other complexities to this that I mention here, but I will save the details for other posts. First, it is not completely accurate to say you have to pass the means test to file a Chapter 7; one can always file a 7 but if you do not pass the means test, then there is a presumption that your filing is an abuse of the bankruptcy system and you will have to prove otherwise to remain in the 7 and receive a discharge. Second, whether or not your debts are primary consumer debts can be an issue to argue in court. Third, who gets counted as being in your family or not is not defined in the bankruptcy code. Fourth, there are a number of issues about secured debts that need to be explored. Lastly, whether you file jointly with a spouse or as an individual can also have a bearing on filing. Given those
variations that need closer attention, the basic idea remains that if you pass the means test, then you can file a Chapter 7 and most likely get debts discharged.

The Bankruptcy Code and the means test does allow for “Other Necessary Expenses” to be claimed. 11 U.S.C. 707(b)(2)(A)(ii). One couple attempted to use this provision to claim a rent expense of $1,500.00 which was $658.00 over what the IRS quidelines stated. In re Shinkle, 382 B.R. 85 (Bankr. E.D. Ky. 2008). Unfortunately, the Shinkle’s made over $83,000.00 for their family of two and so they could only pass the meanst test if they could justify this additional rental expense. They attempted this by arguing that Ms Shinkle had to live in Boone County, Kentucky due to her work, that they planned to purchase this home once they obtained financing, and that they had been a family of four until recently and it would cost too much to move. The United States Trustee did not agree and argued that they simply wanted to live in a more expensive place and shift the cost to their creditors. In this instance, the Trustee won and the Shinkle’s either had to convert to a Chapter 13 or have their bankruptcy dismissed.

The case, In re Shinkle, does give some illumination to the kinds of additional rent expenses that might count. The Court mentions a Colorado case, In re Scarafiotti, 375 B.R. 618, 631 (Bankr.D.Colo.2007), where additional living expenses were justified because the debtor’s child had mental health issues that could best be addressed in a particular school. Another case the Court points to was In re Graham, 363 B.R. 844, 847 (Bankr.S.D.Ohio 2007) where the debtor husband had to move hundreds of miles away for employment, but debtor wife had to remain behind due to custody arrangements with her other children. Bascially, the bankruptcy courts are going to look to for some really special circumstance, such a serious medical problems or some other very unusual happenstance, to justify additional rental expenses in the means test. It cannot be the sort of scenario where the debtors have some readily available alternative, but choose to stay where the rent is higher due to personal preference or to avoid inconvenience.

January 25, 2009 - Posted by | Bankruptcy

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