The Means Test and the Marital Adjustment Deduction

Since the Bankruptcy Code was amended under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), a debtor needs to determine if they are subject to the Means Test before they can file for Chapter 7 Bankruptcy. See 11 U.S.C. § 707. The Means Test only applies to debtors with a majority of consumer debt whose household income is above median income for household size for the state in which they live. If a debtor is below the median income, the Means Test does not apply, and they may qualify for Chapter 7 bankruptcy. However, there are other factors including a debtor’s actual budget and non-exempt assets that may lead a debtor to choose Chapter 13 bankruptcy instead.

The purpose of the Means Test is to determine whether a debtor whose household income is above the median can afford to pay at least a portion of their debt back through a Chapter 13 bankruptcy plan as opposed to discharging their debt through a Chapter 7 filing. If a debtor is married and not separated from their spouse, they are required to include their non-filing spouse’s income in the calculation of household income.

Under §§ 707(b)(2)(A) and 101(10A), the income of a non-filing spouse which is regularly contributed to household expenses of the debtor, or the debtor’s dependents must be included in a debtor’s disposable income analysis.

In re Montalto, 537 B.R. 147 (Bankr. E.D.N.Y. 2015)

However, the Bankruptcy Code allows for a “marital adjustment deduction” which can offset at least some of that income with certain allowable expenses. Specifically, it allows a debtor to deduct certain separate non-household expenses of the non-filing spouse from their household income. According to the U.S. Trustee Program, which oversees bankruptcy cases for the Justice Department, all income of the non-filing spouse’s expenses should be included in the Means Test, except the following:

• expenses of the non-debtor spouse may be excluded:
• withholding taxes.
• student loan payments.
• prior support obligations.
• debt payments on which only the non-filing spouse is legally liable and where the consideration for the loan exclusively benefits the non-filing spouse. (Credit cards used to pay for household expenses may not be deducted).

See Statement of The U.S. Trustee Program’s Position on Legal Issues Arising Under the Chapter 7 Means Test (April 23, 2010)

The Marital Adjustment Deduction in Chapter 7 Bankruptcy

If you are married and filing for bankruptcy individually (without your spouse) and your household income is above the median, the marital adjustment deduction may help you qualify for Chapter 7 bankruptcy. While most of the debtor’s household expenses are replaced with IRS local standards on Official Form 122A – 2, there are some actual expenses that may be used in the marital adjustment deduction. Below please find some of the expenses that might help a debtor looking to file chapter 7 bankruptcy using the marital adjustment deduction. These expenses can only be used in the marital adjustment deduction if the non-filing spouse actually pays for them.

• payments on credit cards that are only in the name of the non-filing spouse.
• car payments, insurance, and car expenses for the non-filing spouse’s car.
• child support for your non-filing spouse’s children who do not live with you.
• alimony payments owed by the non-filing spouse.
• mortgage payments and other expenses for real estate owned solely by the non-filing spouse.
• non-filing spouse’s payroll deduction such as taxes, insurance, retirement contributions, and union dues.
• 401(k) loan repayments of the non-filing spouse.
• student loan payments for your non-filing spouse.
• business travel expenses of the non-filing spouse.
• attorney’s fees of the non-filing spouse.

The Marital Adjustment Deduction in Chapter 13 Bankruptcy

If you are married and filing for Chapter 13 bankruptcy individually, the marital adjustment deduction can help reduce the amount you pay back to your creditors. The marital adjustment deduction helps a debtor by reducing their total Current Monthly Income or CMI on Official Form 122C-1. By excluding the income that the non-filing spouse uses for the expenses above, a debtor can significantly reduce the amount they are required to pay every month to their unsecured creditors in a Chapter 13 repayment plan. Furthermore, if the marital adjustment deduction decreases your CMI below the state median, it may also reduce your commitment period from five years to three years.

Contact The Law Offices of David I. Pankin, P.C.

If you have any questions about filing for bankruptcy, the Means Test and how your spouse’s income will affect your filing, please contact the Law Offices of David I. Pankin, P.C. at (888) 529-9600 or by using our easy online contact form. We have been helping debtors obtain a fresh financial start for over 28 years. Contact us today to schedule a free consultation.