Friday, April 20, 2007

Spousal Debts

We’re often asked by couples if one spouse is responsible for the debts of the other spouse when only one spouse is filing for bankruptcy. Section 707(7)(B) requires that:

“In a case that is not a joint case, current monthly income of the debtor’s spouse shall not be considered for the purposes of subparagraph (A) [which prohibits the filing of a motion to dismiss for presumption of abuse if the current monthly income of the debtor and debtor’s spouse combined is less than or equal to the median family income in the applicable state and of the same household size] if-(i)(I) the debtor and the debtor’s spouse are separated under applicable nonbankruptcy law; or (II) the debtor and the debtor’s spouse are living separate and apart, other than for the purpose of evading subparagraph (A); and (ii) the debtor files a statement under penalty of perjury-(I) specifying that the debtor meets the requirement of subclause (I) or (II) of clause (i); and (II) disclosing the aggregate, or best estimate of the aggregate, amount of any cash or money payments received from the debtor’s spouse attributed to the debtor’s monthly income.”

So when we ask a client to fill out Schedule I (Current Income) and Schedule J (Current Expenditures), they need to keep these conditions in mind. This provision is one of the many changes enacted by BAPCPA to the bankruptcy process. Therefore, case law is still rather sparse, but one interesting case is In re Travis, 353 B.R. 520 (Bankr. E.D. Mich. 2006). The facts of the case are as follows: the debtor was married and filed for Chapter 7 bankruptcy separately from his wife. The debtor’s Statement of Current Monthly Income and Means Test Calculation (the “B-22 Form”) stated that a presumption of abuse did not arise. The United States Trustee filed a motion to dismiss the bankruptcy pursuant to §707(b)(2) and §707(b)(3). The UST argued that had the debtor completed the form correctly, a presumption of abuse arose. The primary disagreement was regarding line 17 of the B-22 Form. The debtor and his non-filing spouse both entered figures on this line, and the UST argued that the debtor’s spouse could not include in this figure any amounts for food, utilities, clothing and personal items because those expenses are already accounted for when the debtor calculated his deductions, and this would be “double dipping.” The UST also objected to several other expenses and deductions taken by the debtor.

The Court noted that the calculation of current monthly income is complicated, not clearly defined, fact specific and open to interpretation. The Court mentions that the issue of a non-filing spouse’s income is not limited to post-BAPCPA cases. In Chapter 13 cases, the issue arises under §1325(b)(1), which requires a determination of the debtor’s available disposable income and in Chapter 7 cases, the non-filing spouse’s income has been considered in conjunction with a §707 substantial abuse motion by the UST.

Thus, while §101(10A)(A) excludes a non-filing spouse’s income, a non-filing spouse’s income must be accounted for under §101(10A)(B) to the extent that the non-filing spouse contributes on a regular basis to the household expenses of the debtor and the debtor’s dependents.

In the instant case, the Court agreed with the UST that some of the expenses claimed by the debtor’s non-filing spouse as her own expenses were either counted twice or were a contribution to the household expenses of the debtor and debtor’s dependents, and therefore could not be included in the Line 17 marital adjustment. Specifically, the Court cited the contribution of the non-filing spouse for food and utilities and a deduction for taxes.

However, the court also found that it was appropriate, on the facts of this case, for the non-filing spouse to take marital adjustment for clothing and personal items. The Court contrasts the debtor’s expenses (which are fixed by the IRS national standards for allowable living expenses and the IRS local standards for housing and utility payments) with that of the non-filing spouse’s expenses, which are not fixed.

The Court recalculated the B-22 Form based on its rulings and still found a negative disposable income under §707(b)(2). Therefore there was no presumption of abuse under §707(b)(2). The Court also reviewed the totality of the circumstances to determine if the debtor’s petition was abuse under §707(b)(3) and concluded that it was not. Therefore, the Court denied the UST’s motion to dismiss.

Any persons having questions about the impact of spousal income on bankruptcy should contact Jim Shenwick.