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It started as a means test question:  could emergency medical expenses be deemed non consumer debt.  It ended up as a step back to get the bigger picture.

Well seasoned bankruptcy counsel brought the fact pattern to a list serve of colleagues.  The prospective debtors’  income in a small consulting corporation is declining,  his health crisis raises not only income issues but issues of  end of life expenses; and there’s apparent money on the bottom line.   What to do? read more


Reprint from K&L Gates article, Phoebe S. WinderRyan M. TosiStacey GormanEmily Mather March 30, 2020 (intended for educational purposes only)

On March 27, 2020, the President signed into law the historic Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or “Act”), a $2.2 trillion stimulus package designed to mitigate the widespread economic effects of the novel coronavirus (“COVID-19”). The Act includes several temporary modifications to chapter 7 and chapter 13 of the U.S. Bankruptcy Code.[1] This alert details these modifications as follows:

Certain Federal Payments Excluded From Definition of “Income”

For cases under chapter 7 and 13, the CARES Act modifies the definition of “current monthly income” in 11 U.S.C. § 101(10A)(B)(ii) to expressly exclude payments made under federal law relating to the national emergency declared by the President under the National Emergencies Act with respect to COVID-19. Similarly, the Act provides that any payments made to individuals under federal law relating to the COVID-19 pandemic do not constitute “disposable income” required to be committed to a chapter 13 debtor’s plan pursuant to 11 U.S.C. § 1325(b)(2). The amended definition of “disposable income” will benefit both current chapter 13 debtors who did not have confirmed plans as of the date of enactment of the CARES Act, as well as future chapter 13 debtors.

Modifications and Plan Period Extensions for Chapter 13 Debtors with Confirmed Plans

The CARES Act also permits chapter 13 debtors with plans that were confirmed as of the date of enactment of the CARES Act to seek modifications of their plan due to COVID-19-related hardships. Specifically, the Act adds subsection (d)(1) to 11 U.S.C. § 1329 to permit a debtor to modify a confirmed plan, after notice and a hearing, if such debtor is experiencing a “material financial hardship” due, “directly or indirectly,” to the COVID-19 pandemic. Under the Act, a plan also may be modified to extend the plan period up to seven years after the first payment under the original confirmed plan became due.[2] A bankruptcy court may approve such a modification upon request of a debtor. Until the amendment sunsets one year from March 27, 2020, chapter 13 debtors with plans confirmed prior to the enactment date will be able to seek to modify their plans consistent with this provision.

The Act does not define the scope of an “indirect” hardship arising from the COVID-19 pandemic or what type of proof will be required of a debtor to show indirect hardship. Further, it is unclear what bankruptcy courts will deem to be “material financial hardship” sufficient to justify a plan modification. Given the uncertain and unprecedented times, it is likely that many debtors with confirmed plans will meet the qualifications for “material financial hardship” directly or indirectly arising from COVID-19, but how expansively bankruptcy courts interpret this requirement remains to be seen.

Impact of CARES Act Provisions on Chapter 13 Creditors

At this juncture, it is still unclear what types of plan modifications chapter 13 debtors will propose pursuant to § 1329(d)(1), what types of modifications courts will ultimately permit, and the full extent of what types of consumer loans may be impacted. It is foreseeable that chapter 13 creditors will need to work with debtors and trustees to memorialize and seek court approval for a large volume of payment deferments and that they will need to do so on an expedited basis.

The Act specifically provides that 11 U.S.C. §§ 1322(b) and 1322(c) apply to any modifications pursuant to the § 1329(d)(1). Under § 1322(b)(2), a plan may not modify the rights of holders of claims secured only by real property that is the debtor’s principal residence. However, § 1322(c)(1) permits a debtor to cure defaults with respect to liens on his or her principal residence, notwithstanding §1322(b)(2). It is unclear how courts will treat the interplay between these two subsections and a proposed deferment, but it is quite possible that courts may allow a deferment of ongoing payments in conjunction with a plan to repay post-petition arrearages over an extended plan term. On the other hand, if a debtor is paying his or her ongoing mortgage directly to the creditor outside of the plan, the new § 1329(d)(1) may not apply. Seemingly, the debtor could amend the plan to provide for ongoing payments to be made through the trustee or to propose that post-petition arrearages be paid through the plan. Otherwise, the debtor would appear to have to work directly with the creditor to secure a loan modification or other relief (e.g., secure a forbearance or deferment). Ultimately, what modifications debtors propose and what courts allow will likely involve fact-intensive considerations that will need to be addressed on a case-by-case basis.

We expect that the plan amendment provision permitted by the CARES Act will cause debtors to include requests for deferred payments on various types of consumer debt, such as mortgage loans, auto loans, credit cards, and student loans. Although payments may be deferred, there does not presently appear to be any reason why a chapter 13 creditor would be relieved of its obligation to file timely Notices of Mortgage Payment Change pursuant to Bankruptcy Rule 3002.1 in the event of a future payment change, since the rule does not carve out any exception for forbearance agreements or similar types of deferred payment agreements.





(A) EXCLUSION FROM CURRENT MONTHLY INCOME.—Section 101(10A)(B)(ii) of title 11, United States Code, is amended—

(i) in subclause (III), by striking “; and” and inserting a semicolon;
(ii) in subclause (IV), by striking the period at the end and inserting “; and”;
(iii) by adding at the end the following:

“(V) Payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the coronavirus disease 2019 (COVID–19).”.

(B) CONFIRMATION OF PLAN.—Section 1325(b)(2) of title 11, United States Code, is amended by inserting “payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the coronavirus disease 2019 (COVID–19),” after “other than”.

(C) MODIFICATION OF PLAN AFTER CONFIRMATION.—Section 1329 of title 11, United States Code, is amended by adding at end the following:

“(d) (1) Subject to paragraph (3), for a plan confirmed prior to the date of enactment of this subsection, the plan may be modified upon the request of the debtor if—

“(A) the debtor is experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID–19) pandemic; and
“(B) the modification is approved after notice and a hearing.

“(2) A plan modified under paragraph (1) may not provide for payments over a period that expires more than 7 years after the time that the first payment under the original confirmed plan was due.

“(3) Sections 1322(a), 1322(b), 1323(c), and the requirements of section 1325(a) shall apply to any modification under paragraph (1).”.


(i) The amendments made by subparagraphs (A) and (B) shall apply to any case commenced before, on, or after the date of enactment of this Act.
(ii) The amendment made by subparagraph (C) shall apply to any case for which a plan has been confirmed under section 1325 of title 11, United States Code, before the date of enactment of this Act.

(2) SUNSET.—


(i) EXCLUSION FROM CURRENT MONTHLY INCOME.—Section 101(10A)(B)(ii) of title 11, United States Code, is amended—

(I) in subclause (III), by striking the semicolon at the end and inserting “; and”;
(II) in subclause (IV), by striking “; and” inserting a period; and
(III) by striking subclause (V).

(ii) CONFIRMATION OF PLAN.—Section 1325(b)(2) of title 11, United States Code, is amended by striking “payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et seq.) with respect to the coronavirus disease 2019 (COVID–19),”.

(iii) MODIFICATION OF PLAN AFTER CONFIRMATION.—Section 1329 of title 11, United States Code, is amended by striking subsection (d).

(B) EFFECTIVE DATE.—The amendments made by subparagraph (A) shall take effect on the date that is 1 year after the date of enactment of this Act.


[1] An excerpted copy of the bankruptcy-specific amendments is included as an addendum at the end of this alert.

[2] The modification must otherwise comply with the requirements of 11 U.S.C. §§ 1322(a), 1322(b), 1323(c), and 1325(a).


Link to the US Trustee’s position on legal issues arising in a chapter 7. Dated 4/23/2010.

  1. Link to the US Trustee’s position on legal issues arising in a Chapter 13 means test. Dated April 20, 2010
  2. The Complete Guide to Means Testing: A Compendium of Cases and Other Authorities (warning: 2010)
  3. Good article explaining the interplay of Lanning (the means test is not to be inflexibly applied, but factual circumstances are legally relevant, such as change in income), and Ransom (ownership of vehicle: monthly payment and operation of vehicle: gas, maintenance, etc. Debtor cannot deduct ownership unless making secured payments). Lastly, surrendered property – can debt be deducted on means test – not as clarified in Lanning and Ransom.

Means Test and Child Custody

Burden of proof – In re Rodriguez, 606 B.R. 410 (Bankr. E.D. Cal. 2019)

The only circuit level case to address the household size conundrum is Johnson v. Zimmer, 686 F.3d 224, 230-40 (4th Cir. 2012).
The courts have crafted three distinct approaches to household size.

Economic Unit Approach – This approach defines a household as all individuals who live and operate as a single economic unit. This approach has been used by many courts including, but not limited to, Johnson v. Zimmer, 686 F.3d 224, 236-37 (4th Cir, 2012); In re Robinson, 449 B.R. 473, 482-83(Bankr. E.D. Va. 2011); In re: Morrison, 443 B.R. 378, 387-88 (Bankr. M.D.N.C. 2011)

Census Bureau Approach – this approach counts “heads on beds” to determine household size and includes unrelated people and roommates in determining household size. This approach is used by many courts including, but not limited to, In re: Ellringer, 370 B.R. 905 (Bankr. D. Minn. 2007); In re Epperson, 409 B.R. 503 (Bankr. D. Ariz. 2009), In re: Smith 396 B.R. 214 (Bankr. W.D. Mich. 2008), In re Bostwick, 406 B.R. 867, 872-73 (Bankr. D. Minn. 2009)

Income Tax Dependent Approach – This approach looks to the number of dependents shown on a tax return to ascertain the proper number of dependents for use in the means test. This approach is used by courts including but not limited to In re: Bridgeforth, 556 B.R. 121 (Bankr. M.D. Pa. 2016), In re Skiles, 504 B.R. 871, 874-86 (Bankr. N.D. Ohio 2014) (applying economic unit test with a rebuttable presumption that dependents on a tax return are included in the household).  But see In re: Rodriguez, 620 B.R. 92 (9th BAP 2020)(court not bound by IRS sources when interpreting the means test).

Can there be fractions of humans living in a home for the purpose of the means test?

In re Wolstad, 18-41152 (W.D. Wash. Aug. 10, 2018)  Judge Lynch of Tacoma follows Idaho’s Judge Pappas in determining the size of a ‘household’ when someone is a part-time resident.  According to the judge the courts are all over the map when it comes to arriving at the size of a “household,” a critical factor in deciding whether an individual debtor is subject to the means test and whether a chapter 13 plan will endure for three or five years.

Facts: The debtor said he had a household of 4 – counted himself and his two sons who lived with him full time, plus his daughter who lived in his home on alternate weekends and holidays. The debtor paid child support and medical insurance for his daughter.

Discussion: The judge said that “household” is not defined in the Bankruptcy Code. Courts have taken at least three different approaches, even within the Ninth Circuit.

  1. First – Census Bureau’s “heads on the beds” approach and count everyone in the house, regardless of the economic relationship.
  2. Second, other courts follow the Internal Revenue Service’s definition of “dependent,” and
  3. Third, follows the “economic unit” approach by evaluating the financial relationships between the people residing in the debtor’s house.  Someone who is financially dependent on the debtor or whose expenses are intermingled with the debtor’s will be part of the economic unit, he said.

Judge Lynch concluded that the “economic unit” approach is “the most realistic,” following a 2012 opinion by Bankruptcy Judge Jim D. Pappas of Idaho, who focused on the person’s financial dependence on and residence with the debtor. In re Kops, 2012 WL 438623, 2012 BL 37703 (Bankr. D. Idaho Feb. 9, 2012).

The judge said there was “an additional layer” of difficulty because the daughter only lived with the debtor part time.  Some courts take “different approaches to counting part-time household members.”  Such as dividing a part-time resident into fractions based on the number of days the person resides with the debtor. Other courts fully count part-timers, as did Judge Pappas in Kops.

Like Judge Pappas, Judge Lynch said that Congress adopted “a means test that relies on uniform standards,” choosing to “‘tolerate the occasional peculiarity that a brighter-line test produces,’” again quoting Judge Pappas. Judge Lynch said that an “occasional peculiarity [is] less concerning than the alternative – getting into the weeds of trying to [make] the fractional household member determinations.”

Conclusion: The judge decided that the daughter was part of the debtor’s economic unit. He confirmed the plan because she was his “financial dependent” and resided “with him more than a de minimis portion of each month.”


The debtor, who shared a rental house with an unrelated person who had a separate bedroom and garage space and a separate lease with the owner, had a household size of two. Because Code § 101(39A)(A) defines “median family income” as “the median family income both calculated and reported by the Bureau of the Census,” it is only fair to use the Census Bureau’s definition of household: “all of the people, related and unrelated, who occupy a housing unit.” See In re Ellringer, 370 B.R. 905 (Bankr. D. Minn. 2007). Generally, a single-family home shared by unrelated persons was a single housing unit whose occupants comprised a single household, and the residence shared by the debtor and her roommate was no exception. The relationship among residents was not a consideration in the Census Bureau’s definition, and nothing in the Bankruptcy Code compelled unique treatment for households comprised of unrelated members. In re Bostwick, 406 B.R. 867 (Bankr. D. Minn., June 23, 2009) (case no. 4:08-bk-46026) (Bankruptcy Judge Robert J. Kressel)

Link to a Tax Tutorial on “Dependents” published by the IRS. There are two types of dependents who may be claimed, a Qualifying Child Dependent or Qualifying Relative Dependent. The Tax Tutorial outlines all tests that must be passed in order for someone to be claimed as a dependent for tax purposes.

Continuing contributions to college child: It is 707b2(a)(II) which is line 40 of the Form 22C … (II) In addition, the debtor’s monthly expenses may include, if applicable, the continuation of actual expenses paid by the debtor that are reasonable and necessary for care and support of an elderly, chronically ill, or disabled household member or member of the debtor’s immediate family (including parents, grandparents, siblings, children, and grandchildren of the debtor, the dependents of the debtor, and the spouse of the debtor in a joint case who is not a dependent) and who is unable to pay for such reasonable and necessary expenses.

One of the important questions in determining if a debtor must file a chapter 13 vs a chapter 7 bankruptcy is focused on the source of their debts.

So, what is the ‘means test’?

The means test, and other provisions of §707(b), are only for cases of “primarily consumer debts.” A “consumer debt” is “debt incurred by an individual primarily for a personal, family or household purpose.” The means test is a lengthy financial calculation which takes into consideration the gross income for the last six months, minus taxes, child care, charitable contributions, health expenses, life and disability insurance, secured debts, priority (back taxes), to name a few.  All of this is calculated by the state and county where the debtor lives and the family size.  At the end of this mathematical torture chamber it is decided whether it the appropriate bankruptcy is chapter 7 or chapter 13.

Why the Distinction Is Important?

Determining whether a debt is business debt or consumer debt is not always as easy as it would seem. To start the analysis – look at what the money was used for rather than where the money came from or how the debt was originally described (but this latter point can result in litigation).

  • Consumer debt is usually money used to pay a personal, family or household expense or purchase personal, family or household items, such as groceries, utilities, etc.
  • It is usually non-consumer (business) debt if the funds were used to pay for items with a profit incentive, such as running a business.

If the debt was incurred for personal or family use and later converted to business use – it is still a consumer debt.

If 51% or more of the debts are non-consumer or business debts (a profit based motive) then it is not necessary for the debtor to complete the means test.  This does  not necessarily mean they can avoid challenges to a chapter 7, but it is a good place to start.

Deeds of Trust or Mortgages:

used to purchase a residence = consumer.  Used to finance a business venture = non-consumer.

Credit cards:

used to purchase food and pay other household expenses = consumer.  Used to purchase business products = non-consumer.

Student Loans:

The courts look at how the student loan funds were spent.  If for family expenses then usually consumer.  If for profit (better education level, therefore better employment) then usually non-consumer.  But there is a split in the courts and until the Supreme Court addresses the issue it will continue to be unique to the Circuit. See In re Stewart, 175 F.3d 796 (10th Cir. 1999) [substantial portion used for family living expenses and not tuition & books = consumer]; In re Vianese, 192 B.R. 61 (Bankr. N.D.N.Y. 1996) [student loan for children’s education is a consumer debt].

If the funds were used for tuition and books and not household expenses, then some case law determines that portion to be non-consumer debt.  The problem is allocating how much of the student loans were used for tuition/books and how much were used for household expenses.  Sometimes student loan proceeds are transferred directly to the school to pay for school-related expenses, like tuition and books; which is good evidence of where the money went.  But, if the student receives the funds there may be problems determining what it was used for, unless they have proof, such as a check for tuition or books.


Income taxes are non-consumer, because they are not voluntary.  See In re Westberry 215 F.3d 589 (6th Cir. 2000). The Court found that personal income taxes were distinct from consumer debts for these reasons:

  1. Tax debts are not incurred like consumer debts. Consumer debts are incurred voluntarily. Taxes are imposed.
  2. Consumer debts are incurred for personal and household purposes. Taxes are assessed for the public wealth.
  3. Taxes arise from the earning of money. Consumer debts result from consumption.

See also In re Brashers216 B.R. 59 (Bankr. N.D. Okla1998) Further, “income tax liability is simply not a consumer debt because it is not incurred in the course of a consumptive activity”) See In re Gault, 136 B.R. 736, 738 (Bankr. E.D. Tenn. 1991)  See also In re Goldsby), 135 B.R. 611, 613 (Bankr. E.D. Ark. 1992) (section 1301 case) (citing extensive authority that “federal income taxes do not constitute a consumer debt”)  Also, in In re Traub, 140 B.R. 286, 288 (Bankr. D. N.M. 1992), the court held income taxes do not qualify as consumer debts for the purposes of section 707(b). Senate Report 95-989 notes the definition of “consumer debt” in section 101 “is adapted from the definition used in various consumer protection laws [which] encompasses only a debt incurred by an individual primarily for a personal, family, or household purpose.” See S. Rep. No. 989, 95th Cong., 2d Sess. 1978, 1978 U.S.C.C.A.N. 5787, 1978 WL 8531. Cases interpreting the “various consumer protection laws” have excluded taxes from their scope. See Staub v. Harris, 626 F.2d 275, 277-78 (3d Cir. 1980) (per capita tax was not a “debt” under the Fair Debt Collections Practices Act); Beggs v. Rossi, 994 F. Supp. 114, 116-17 (D. Conn. 1997), aff’d, 145 F.3d 511 (2d Cir. 1998) (personal property taxes assessed on motor vehicles were not “debts” under the Consumer Credit Protection Act).

Domestic Support Orders “DSO”.

Is there a ‘profit motive’ in alimony or child support?  Probably not = consumer debt. In re Stewart, 175 F.3d 796, at 807 (10th Cir. 1999) [‘alimony is consumer debt as it was awarded for the former spouse for her support and benefit and not for a profit motive’.]

Car loans.

If you purchased a truck to use only in your construction business, this is a business debt. If you simply use your family car to make business sales calls, it is a consumer debt.

Medical bills.

Similar to taxes medical expenses are often viewed as non-consumer debts.  The argument for this definition is that medical debt is usually not voluntarily. But, could be if the medical expense is for elective cosmetic surgery and then would be defined as a consumer debt.

Clip from ABI 7/21 – Courts have traditionally evaluated whether a claim is a consumer debt by examining the purpose of the debt.  One common approach in this regard is the profit-motive test, which asks whether the debt was incurred with an “eye toward profit” or in connection with a business transaction (5)  For example, in Palmer v. Laying, the U.S. District Court n Colorado found that the debtor’s student loans were incurred with ha profit motive because the debtor pursued his doctorate in order to own and run his business.  (6)  Of course, the profit-motive test just confirms whether a debt is a business debts; for the purposes of Section 707(b), the real question is whether the debt is a consumer debts “or note”. (7)  For example, debts arising from tort liability related to a car accident, personal injury, income taxes and wrongful death claims have all been found to be non-consumer despite no showing of a “profit motive.” (8)  While such debts do not fit in either a classic “consumer” or “business” category, the key for purposes of section 707(b) is that they do not fall under the definition of a “consumer debt” under section 101(8).  Thus, a profit motive should be just one factor to consider in evaluating the purpose of the debt. (9)

Examining the purposes behind certain chapter 7 petitioners’ debts has leg some courts to conclude that medical bills are consumer debts.  In I re Martinez, the court looked to the purpose of the debt and determined that the bills for medical services were consumer debts because “(t)he nature of the indebtedness indicates that these debts were legitimately incurred by [the] Debtors’ family for a personal or family purpose.” (10)  Likewise, in In re Zgonina, the court found that the medical treatments and services are consumer debts because they are personal and provide “a direct traceable benefit to a debtor or the debtor’s dependents.” (11)

  1. Aspen Skiing Co., V. Cherrett (In re Cherrett), 873 F.3r 1060 (9th Cir. 2017)
  2. Palmer v. Laying, 559 B.R. 746 (D. Colo. Nov. 15, 2016)
  3. It is possible for a debt to be neither a consumer debt nor a business debt. Courts call these “interstitial debts.”
  4. See In re Stovall, 209 B.R. 849 (Bankr. E.D. Va. 1997), In re Marshalek, 158 B.R. 704 (Bankr. N.D. Ohio 1993), In re White, 49 B.R. 869 (Bankr. W.D.N.D. 1985), In re Kintzele, No. 12-04916-8, 2013 Bankr. LEXIS 222, 2013 WL 218856 at *1 (Bankr. E.D.N.C. Jan. 18, 2013) (Income tax debt is not consumer debt).
  5. In re Grillot, 578 B.R. 651 (Bankr. D. Kan. 2017)
  6. 171 B.R. 264, 267 N.D. Ohio 1994).
  7. In re Zgonina, 2019 Bankr. LEXIS 3571, 8 (Bankr. C.D. Ill. 2019.

In re Sijan, 19-53347 (Bankr. S.D. Ohio Feb. 12, 2020) Medical non-consumer debt ($300,000 in emergency, life-saving hospitalization)

In re Dickerson (Bankr. M.D. Fla. 1996) 193 B.R. 67.  Medical non-consumer debt

In re Morse (Bankr. E.D. Wash 1994) 164 B.R. 651.  Medical debt is consumer debt

In re Zgonina, (C.D. Ill 11/19/19) Court finds that the Debtor’s medical bills are consumer debts and that the Debtor’s debts are therefore primarily consumer debts. The debtor was a single woman saddled with more than $82,000 in medical debt. She had medical insurance, so the bills evidently represented copays, deductibles and uncovered expenses. The expenses were for medically necessary services, not for optional or elective procedures like cosmetic surgery.

Personal Guarantees.

Personal guarantees of business debts are non-consumer because they are usually business obligations.

Legal fees.

It depends on why the fees were incurred.  If for business purposes then they are non-consumer debts.  But if they were incurred for personal reasons, such as divorce, child custody and support obligations, they are usually a consumer debt.

Accident liabilities and other such Debts.

Courts typically look at the purpose of the debt – was it voluntarily incurred for family, household or personal purposes?  If so = consumer.  Vehicle accidents, etc are not incurred for family, household or personal purposes, therefore = non-consumer.

Compensation (employment) package:

In re Cherrett. cc14-1056-DKiTa (9th Cir BAP 2014) Court held: “the debtor’s housing loan, made by an employer to an employee as a key part of a compensation package, qualified as non-consumer debt.”


In your Trustee’s Evaluation and Recommendations # 5, you state that you believe In re Wiegand, 386 B.R. 238 (9th Cir. BAP 2008) applies to the calculation of CMI in this case. I respectfully disagree on two theories:

  1. The debtors own an LLC, which is a separate legal entity. Wiegand limited it’s holding to the impact on sole proprietors. 386 B.R. 238 (B.A.P. 9th Cir., 2008)(“We also observe that our plain meaning interpretation is not absurd because the Code is replete with rules and requirements that impact sole proprietors differently than wage earners.”)(emphasis added).

An Ohio case put it well in discussing a hypothetical debtor owning an LLC. It stated, “If, however, …[Debtors] received their income from … a limited liability company … and had take-home pay or a distribution from the business in the identical amount of $2,000 a month, they would have an applicable commitment period of only three years, because their income would place them in the category of below-median-income debtors.” In re Harkins, 491 B.R. 518 (Bankr.S.D.Ohio, 2013)

Additionally, every post-Wiegand opinion I could find that has considered the conflict between Forms B22C/122C and § 1325(b)(4) has specifically contemplated that Wiegand only applies to sole proprietorship debtors.

  • “The conclusion that business expenses may not be deducted from business income in Part I to reach net business income highlights the prejudicial treatment shown to sole proprietors under the BAPCPA.” In re Compann, 459 B.R. 478 (Bankr. N.D. Ga., 2010)(emphasis added).
  • “Congress conceivably could have intended that sole proprietors in Chapter 13 be subject to five-year applicable commitment periods because they often will have more debt than other consumer debtors.” In re Harkins, 491 B.R. 518 (Bankr.S.D.Ohio, 2013)(emphasis added).
  • “[M]any courts have concluded that Congress intended ‘income’ for a sole proprietor to mean ‘gross receipts’ before business expenses, as it did before BAPCPA.” In re Kuwik (Bankr. N.D. Ga., 2014)(emphasis added).
  • “This Court concludes that Congress intended ‘income’ to mean ‘gross receipts’ for purposes of calculating the current monthly income of a sole proprietor under § 101(10A) and determining the applicable commitment period under § 1325(b)(4).” In re Kuwik (Bankr. N.D. Ga., 2014)(emphasis added).
  1. If you were to make the argument that an LLC, where taxed on a pass-through basis, is equivalent to a sole proprietorship, that argument would also fail. Wiegand makes it clear that the Tax Code concepts are not applicable. 386 B.R. 238 (B.A.P. 9th Cir., 2008)(“[There is] a clear congressional intent that Tax Code concepts for determining taxable income are inapplicable to a determination of current monthly income.”)
  2. Finally, a multitude of cases have held that a debtor is not engaged in business if the debtor does not meet the definition in Section § 1304(a), which requires that the debtor “incurs trade credit in the production of income.” In re Green (Bankr. E.D. Wash., 2016)(“11 U.S.C. § 1304(a) states that a ‘debtor that is self-employed and incurs trade credit in the production of income from such employment is engaged in business.’ Both conditions must be met in order to qualify as a business under the statute.”)

The Debtors here have not incurred any trade credit in the production of their income.

Since the Debtors are not a sole proprietorship and are not engaged in business per Section § 1304(a), then the Wiegand holding requiring gross income on line 5 of Form 122C is not applicable.

Pollitzer v. Gebhardt, 16-11506 (11th Cir. June 27, 2017) An individual cannot evade the means test in Section 707(b) by filing first in chapter 13 and then converting to chapter 7.

The debtor made payments for two years under his chapter 13 plan and then exercised his right under Section 1307 to convert to chapter 7. The U.S. Trustee moved to dismiss, saying the debtor’s disposable income vastly exceeded the means test in Section 707(b), thus making his case presumptively abusive. Court found for the Trustee, Affirmed.

Schultz v. U.S., No. 07-5618 (U.S. 6th Circuit Court of Appeals, June 02, 2008)
In an action against the government challenging the constitutionality of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), and alleging that it is not a “uniform law” since median-income calculations under the act are based in part on the state and county where the debtor is located resulting in different relief, summary judgment and dismissal of plaintiff’s complaint is affirmed where: 1) plaintiffs have standing to challenge the mean income calculations under Chapter 13 and Chapter 7 since the same calculation is used under both schemes; 2) BAPCPA is a uniform law since Congress is allowed to distinguish among classes of debtors and to treat them differently through incorporation of varying state laws; 3) employing federal income standards does not enable preferential treatment of debtors in some states over those of another; and 4) the heightened scrutiny standard applied in United States v. Ptasynski, 462 U.S. 74 (1983), is not dispositive in the area of bankruptcy.  The district court grant the Government’s motion for summary judgment and dismissed the Schultzes’ complaint.  For the following reasons, we affirm the judgment of the district court.

Disposable Income should reflect changes that have occurred or that will occur and that are known as of the date of plan confirmation

In re Quigley, No. 09-2102 Helen Morris vs Susan Quigley 09-2102 (Fourth Circuit, 03/07/2012) In chapter 13 bankruptcy proceedings in which the proposed plan deducted the amount of payments on two all-terrain vehicles (ATVs) as expenses, when the debtor would not actually be making any of those payments once the plan was implemented, the district court’s order affirming the bankruptcy court’s decision overruling the trustee’s objection is reversed, as projected disposable income under 11 USC section 1325(b)(1)(B) should reflect changes that have occurred or that will occur and that are known as of the date of plan confirmation.

Hamilton v. Lanning, No. 08–998 (US Sup Ct 6/7/10, 10th Circuit) In an objection by a Chapter 13 bankruptcy trustee to confirmation of debtor’s plan because the proposed payment amount was less than the full amount of the claims against debtor, and because she had not committed all of her “projected disposable income” to repaying creditors, the Tenth Circuit’s affirmance of the bankruptcy court’s rejection of the objection is affirmed where, when a bankruptcy court calculates a debtor’s projected disposable income, the court may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation.

PRACTICE NOTE: Social Security and VA Disability (The HAVEN Act) are not included in the Means Test analysis.  But should they be listed on Schedule I?

Not paying Social Security income to creditors cannot be considered as part of a bad faith analysis in the 9th Circuit. In Re Welsh, 465 B.R. 843 (B.A.P. 9th Cir. 2012). Since both are “income” probably should put it on I.  If the excess is less than the SS/VA disability income, there should not be an objection. See Welsh.

In re: Nancy Adinolfi, EC-15-1091-JuFD (9th Cir. BAP 2016)  Debtor Nancy Adinolfi appeals from the bankruptcy court’s order denying the confirmation of her chapter 131 plan.  A chapter 13 debtor whose income exceeds the applicable median must devote all of her “projected disposable income” to the payment of her unsecured creditors.  The statute excludes “benefits received under the Social Security Act” from “disposable income.”      The Debtor argues that Adoption Assistance payments she receives are “benefits received under the Social Security Act,” but the bankruptcy court ruled to the contrary.  We hold that the bankruptcy court erred, and therefore we REVERSE.

In re Welsh, 711 F3d 1120, 9th Cir. 3/25/13  Social Security is not included in DMI.  Background: Chapter 13 trustee objected to confirmation of plan on grounds that it was not proposed in good faith and that debtors were not committing 100% of their disposable income to plan payments. The Bankruptcy Court, Ralph B. Kirscher, J., 440 B.R. 836, overruled trustee’s objection and entered order confirming plan. Trustee appealed. The Bankruptcy Appellate Panel, 465 B.R. 843, affirmed. Trustee appealed. Holdings: The Court of Appeals, Ripple, Senior Circuit Judge for the U.S. Court of Appeals for the Seventh Circuit, sitting by designation, held that:

(1) Congress’s adoption of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) foreclosed a court’s consideration of a debtor’s Social Security income as part of the inquiry into good faith and

(2) bankruptcy court could not consider debtor’s payments to secured creditors with respect to “luxury” items.

Vandenbosch, 9:10-bk-06427-ALP District Court, Florida 10/11/11 – “Refusal to confirm the amended plan because of the failure to include social security benefits as projected disposable income was therefore an error of law. Reversed and remanded back to Bankruptcy Court”

In re Burnett (NDNY Ch. 13 Bk. #10-31788; joint decision with In re Uzailko; Hon. Margaret Cangilos-Ruiz; decision January 21, 2011). In Chapter 13, a debtor’s plan payment must, at a minimum, reflect the difference between the debtor’s income and expenses, so a debtor with monthly income of $3,000 and expenses of $2,500 must, at a minimum, pay $500 to the plan. A plan which fails to pay this disposable income minimum can be denied confirmation on the grounds the debtor’s plan was not filed in good faith, under Bankruptcy Code Section 1325(a)(3). But must social security income be included in this income/expense calculation? No, says a bankruptcy judge in Syracuse.

Drummond v. Welsh (In re Welsh), 465 B.R. 843 (BAP 9th Cir. 2012) : do not have to include all social security in their DMI: See also Thompson, 43,9 B.R. 140, 2010 WL 3583400, *3 (8th Cir. BAP) which, citing Lanning, held that because of § 101(10A)(B)’s exclusion of SSI from CMI, considering the same issue under the good faith test would be duplicative and render § 1325(b)’s ability to pay test meaningless. This Court agrees. In re Chavez, Case No. 07-60567-13, 2007 WL 3023145 No. 08-60641-13, 2008 WL 4516374 (September 30, 2008 15), this Court overruled good faith objections because the adequacy of plan payments is determined by Form 22C. Based on those cases, Form B22C filed in the instant case, 42 U.S.C. § 407(a), and there being no express reference thereto in § 1325(a)(3) modifying or limiting § 407(a), and there being no evidence of the first three Leavitt factors for bad faith, the Court finds that the Debtors have satisfied their burden of proof to show that they proposed their Plan in good faith. The Trustee’s good faith objection based on § 1325(a)(3) is overruled.


8/23/19: The HAVEN Act provides much needed relief for veterans and their dependent survivors by excluding VA and DoD disability payments from the definition of “current monthly income” for purposes of bankruptcy means testing.   The HAVEN Act provides much needed relief to our servicemen and servicewomen through the equitable treatment of veterans disability benefits in consumer bankruptcy cases.

The HAVEN Act will become effective upon enactment.

Specific benefits protected under the Haven Act are:

  • Permanent Disability Retired Pay
  • Temporary Disability Retired Pay
  • Retired or Disability Severance Pay for Pre-Existing Conditions
  • Disability Severance Pay
  • Combat Related Special Compensation
  • Survivor Benefit Plan for Chapter 61 Retirees
  • Special Survivor Indemnity Allowance
  • Special Compensation for Assistance with Activities of Daily Living
  • VA Veterans Disability Compensation
  • VA Dependency and Indemnity Compensation, and
  • VA Veterans Pension.

Chart from ABI



HAVEN Act’s Amended to CMI, article in ABI Journal 11/2019

Frequently Asked Questions about HAVEN Act (ABI article) 11/2019

The HAVEN Act – understanding this complicated new law (10/19 – webinar from the Academy)

Need information proving source of income: https://www.ebenefits.va.gov/ebenefits/homepage

In re Adinolfi (9th Cir. BAP 1/19/16) should adoption income be included in the means test as “income”.  Case has a lengthy analysis of what is included in the Social security Act (huge list) and therefore exempt from being included in the disposable income analysis for the means’ test.

In re Smith aka American Express Bank vs Smith, WW-08-0311, No. 07-43853 (9th Circuit BAP, Washington 10/5/09) In preparing a means test may the debtor not deduct secured debts on collateral they intend on surrendering. This would reduce the return to the unsecured creditors of the debtor’s projected disposable income as set forth in 1325(b). The Smith court distinguished the result from Kagenveama, 541 F.3d 868 (9th Cir. 2008) (the court refused to look at post-petition change in expenses due to scrape off of secured debts in chapter 13).

In re Rudler, No. 08-9007 U.S. 1st Circuit Court of Appeals, August 05, 2009
Bankruptcy Appellate Panel judgment is affirmed where, in calculating monthly income under the means test for identifying an abusive Chapter 7 petition, the plain language of 11 U.S.C. sec. 707(b)(2) allows debtors to deduct payments due on a secured debt notwithstanding the debtor’s intention to surrender the collateral.

In re Pennington, 348 B.R. 647 (Bkrtcy.D.Del. 2006) Mary F. Walrath, Bankruptcy Judge “court could dismiss chapter 13 for “abuse” notwithstanding the debtor’s income was below the state median” Threshold for “abuse” where the means test per se does not apply is 25% of unsecured debt. § 707(b)(1)

Debtor’s income was below the state median but actual disposable income at the time of the hearing to dismiss or convert was sufficient to pay 42% of the unsecured debt over a 3-year plan. The court noted that the surplus income was more than enough to pay more than 25% of the unsecured debt, which was the “threshold were abuse is presumed under the means test”, even though the means test is not applicable.

In re: Scott Lee Egebjerg, 08-55301 (9TH Cir. Ct App, CA – CV 07-06850-PA)
We consider whether a debtor’s repayment of a 401(k) loan constitutes a “monthly payment on account of secured debts” or an “[o]ther [n]ecessary [e]xpense” that can be deducted from a debtor’s monthly income for purposes of calculating the debtor’s disposable monthly income under § 707(b)(2). Because we conclude it is not, the debtor’s filing in this case was presumptively abusive under the “means test” of § 707(b)(2). We therefore affirm the bankruptcy court’s dismissal of his Chapter 7 petition.

Under certain situations, such as dramatic downturn in their income, a debtor may be able to sign a Declaration of Special Circumstances, explaining the situation (such as no longer employed and now living on Social Security).

The Means Test creates the rebuttable presumption of abuse.   A feasible approach to potential disqualification of Debtors to file a Chapter 7 under 707 is not buy into the mechanical application of the Means Test.  Instead – look at the feasibility test under Chapter 13 – will these debtors fail in a chapter 13?   What is going on in their lives? —  student loans, uncertain employment, high irregular car repairs, medical expenses, housing costs.

Use Schedules I and J to describe these irregularities in income and expenses.   File exigent circumstance declarations.

In re Davis, 19-3117 (6th Cir Ct Appeals 6/1/20)”We now conclude that the hanging paragraph is best read to exclude from disposable income a debtor’s post-petition monthly 401(k) contributions so long as those contributions were regularly withheld from the debtor’s wages prior to her bankruptcy”  Excellent step by step analysis of Code and case law.

A chapter 13 debtor’s voluntary post-petition contributions to his 401k plan must be included in the calculation of disposable income under section 1325. Penfound v. Ruskin, No. 18-13333 (E.D. Mich. Sept. 20, 2019).

Above-median Debtor, John Penfound, worked continuously for twenty-four years during which time he made regular voluntary contributions to his 401k plans. When he and his wife, Jill Penfound, filed a petition for chapter 13 bankruptcy, he sought to continue contributing $1,375/month to his 401k and exclude those amounts from his calculation of disposable income. Upon objection by the trustee, the bankruptcy court ordered the debtors to amend their proposed plan based on a re-calculation of disposable income including the monthly contributions to the 401k plan. The debtors appealed confirmation of the amended plan.

Relying on reasoning and dictum in In re Seafort, 669 F.2d 662 (6th Cir. 2012), the district court affirmed.


Unusual transportation expenses:

In re: Rodriguez, No. 20-1085 (9th Cir. BAP 10/16/2020)  Above-median Bay Area debtors calculated their actual commute expenses to be approximately  $1,000 per month.  The applicable Local Standard for vehicle operation expense only allowed them a deduction of $424.  On their Form 122C-2, they claimed the $424 for the operation expense, and on line 43 they claimed an additional $500 as a “special circumstance,” because of debtor-husband’s “extraordinary commute expense.”  The chapter 13 trustee objected that debtors could not circumvent the Local Standards by categorizing ordinary work travel as a special circumstance.  Debtors responded to the objection by deleting the special circumstance, and instead increasing their vehicle operation expense from 424 to $924.  Facing the court’s tentative ruling sustaining the trustee’s objection, debtors filed an amended plan that deleted the $500 additional expense and increased plan payments in like amount.   Whereupon the court made two rulings:  it sustained the trustee’s objection to debtor’s original plan, and it confirmed the amended plan.  Both rulings were appealed, and in a published decision the BAP affirmed.

The debtors didn’t argue for a “special circumstance,” but rather they contended that the court could deviate from a mechanical application of the Means Test “as justice requires,” and as authority they cited to the IRS Manual, from which the Local Standard tables are derived.  According to the Manual, the Local Standards are treated as guidelines.  Specifically, Section of the Manual provides for additional vehicle operating costs if the taxpayer “commutes long distances.”   

The BAP, citing In re Ransom, 562 U.S. 61(2011), acknowledged that the Manual may be consulted to interpret  the Standards, but it may not supplant the plain language of the Code.  Here, the Means Test of 707(b)(2)(A)(ii) states that the debtors’ monthly expenses “shall be the debtors’ applicable monthly expense amounts specified under the …Local Standards.”  Accordingly, the debtors are required to use the exact numbers specified in the Local Standards-“no more and no less.” 

As for how “special circumstances”might fit into the analysis, the BAP stated only:  “if a debtor is, for example a long-haul trucker or Uber driver, 707(b)(2)(B) may allow additional expenses based on “special circumstances.”  Those costs of vehicle operation are business expenses not commuting costs.”

Debtors argued that Lanning authorized the court to deviate from a mechanical application of the Means Test.  Lanning permits the court to take into account  “known or virtually certain” changes to debtors’ financial situation that the Means Test fails to capture.  Here, however, debtors failed to offer evidence of any changes to their financial situation.

In re Ian Murphy, 19-19811, 7, (Bk Court, D. N.J. 1/24/20) New Jersey bankruptcy court opened the door to allow the debtor to use his monthly student loan payments as a special circumstances to pass the means test. It is a great template on what needs to be proven re. special circumstances.

Question – Prospective debtor (husband) has 200K in unsecured personal debt. He later marries a high-earning spouse (wife). Under Washington community property law, the wife’s assets and income are never liable for the premarital debts of her new debt-ridden husband. Yet a means-test calculation puts the husband well above median (wife has no debts subject to the marital adjustment). Husband would be below median if wife’s income is excluded, but my understanding is that the wife’s income cannot be omitted from the means test form (or for that matter Schedule I).

Possible answer: In re Whitus, 240 B.R. 705 (Bankr. W.D. Tex 1999). It goes through this complicated analysis that has always confused me, but it seems relevant in your situation. In a nutshell, 726(c) creates four sub-estates to be used to pay claims. I THINK a spouse’s separate debts can only be paid from the the third tier (726(c)(2)(C)), but only with separate property, not community property. Yet, you only get to this third tier for distribution if all community claims are paid in full from community property in sub-estates tier 1 and 2. I am assuming that will not happen in your case.

Although Chapter 13 doesn’t have the equivalent of 726(c), I think this case says that the plan can place all community claims into a separate class for treatment consistent with the best interest of the creditors class under 1325(a)(4), and that in a hypothetical Chapter 7, such separate debt would not be paid from the community property pursuant to 726(c).

SIDE NOTE: The attached case  involves an IRS debt against the non-filing spouse due to pre-marital conduct, can be collected from community property pursuant to the IRC that trumps any state community property law. The spouse that was liable for the IRS’s debt was a non-filing spouse.

If I am wrong, someone please respond, as I always have been confused about 726(c).

In re Egebjerg, 80-55301, (9th Cir Ct Appeals, 5-29-09) In this direct appeal from the bankruptcy court, Scott Lee Egebjerg (“Egebjerg”) challenges the bankruptcy court’s dismissal of his Chapter 7 petition for abuse under 11 U.S.C.§ 707(b)(3). In an issue of first impression in this circuit under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), we consider whether a debtor’s repayment of a 401(k) loan constitutes a “monthly payment on account of secured debts” or an “[o]ther [n]ecessary[e]xpense” that can be deducted from a debtor’s monthly income for purposes of calculating the debtor’s disposable monthly income under § 707(b)(2). Because we conclude it is not, the debtor’s filing in this case was presumptively abusive under the “means test” of § 707(b)(2). We therefore affirm the bankruptcy court’s dismissal of his Chapter 7 petition.


In re Hamilton, 21-12060 (S.D. Ohio Bank. Jan 5, 2024) Social Security Income Analysis: Judge Buchanan looked to previous rulings from multiple federal courts of appeal, which have decided, for different reasons, that social security income is not taken into account when calculating the debtor’s disposable income. Significantly, the Sixth Circuit held in Baud v. Carroll, 634 F.3d 327 (6th Cir. 2011) that, in accordance with Section 1325(b), social security income should not be included in the computation of disposable income under Chapter 13. The anti-assignment clause in the Social Security Act totally keeps social security income out of the bankruptcy estate, the Eighth Circuit said in Carpenter v. Ries (In re Carpenter), 614 F.3d 930 (8th Cir. 2010). In Beaulieu v. Ragos (In re Ragos), 700 F.3d 220 (5th Cir. 2012), the Fifth Circuit further noted that Congress specifically excluded social security from the means test and a debtor’s anticipated disposable income in Chapter 13 proceedings.
Even so, a few lower courts have voiced disagreements, particularly on how to interpret Social Security Act Section 407 with regard to a debtor’s ability to repay. Not only does Section 707(b)(3)(B) not provide a comparable exception, but it also expressly excludes social security income. The question is whether Congress meant to include social security income in the whole picture analysis used to assess a debtor’s capacity to pay.
Siding ultimately with the debtor and several courts of appeals, Judge Buchanan found that the Social Security Act’s protections were incompatible with the United States Trustee’s expansive reading of 707(b)(3)(B), which supported the bankruptcy analysis’s exclusion of social security income.