Friday, January 1, 2010

Bankruptcy Means Test Allows Deduction for Surrendered Home Mortgage

In the case of In re Phillips, 417 B.R. 30 (Bankr. W.D.OH 2009), Debtor filed chapter 7 bankruptcy in an effort to discharge debts. Debtor was required to satisfy the “means test” to qualify for the chapter 7 discharge because debtor’s income was above the median income level for debtor’s state. Debtor deducted from her current monthly income expenses related to real property vacated and surrendered prior to filing bankruptcy.


Debtor’s discharge was challenged by the US Trustee (UST). The UST maintained that debtor’s case should have been dismissed pursuant to §707 because debtor failed the means test that resulted in a presumption of abuse for above median income debtors when the debtor’s current monthly income was reduced by allowed deductions. Specifically, the UST asserted that it was improper for debtor to take deductions for payment of mortgages and taxes on a house that had been surrendered by debtor prior to debtor’s bankruptcy filing.

The issue before the Phillips court was whether the Bankruptcy Code’s “means test” allowed debtor to deduct from her current monthly income expenses related to real property vacated and surrendered prior to filing bankruptcy. The court noted that the majority view was that a debtor may deduct expenses on the means test for payments on secured debt even when the collateral was surrendered as long as the debtor’s continuing contractual obligations remained unextinguished on the date of the bankruptcy filing. Generally, these courts interpreted the plain language “scheduled as contractually due to secured creditors” to mean that a debtor may deduct secured debts that are contractually owed by the debtor to secured parties as of the petition date. The Phillips court believed that the majority courts essentially take a snapshot of the debtor’s schedules on the petition date to calculate the secured debt deduction on the means test form.

Finally, the Phillips court held that the means test allowed debtor to deduct from her current monthly income expenses related to real property vacated and surrendered prior to the date the bankruptcy case was filed. Consequently, the court found that a presumption of abuse did not arise under §707(b)(2).

Warmest Regards,

Bob Schaller


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By: Attorney Robert Schaller (Bob's bio) of the Schaller Law Firm
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