Means Test and college tuition

Here at Shenwick & Associates, we are getting many calls about the means test and college tuition; specifically, whether the high cost of college tuition is a deductible expense on the means test. As many of you know, in 2005, Congress radically changed the personal bankruptcy law and instituted median income and means testing to limit the number of individuals who would be able to file for Chapter 7 bankruptcy. Chapter 7 bankruptcy is a liquidation or "fresh start," in which debtors can liquidate or discharge most of their debts. To limit the number of filers, Congress provided that if a debtor exceeded the median income in their state, then there is a presumption that they are not entitled to file for Chapter 7 bankruptcy unless they pass the means test. The median income is adjusted periodically. For bankruptcy cases filed on or after March 15, 2010, the median income in New York State is $46,320 for a family of one, $57,902 for a family of two, $69,174 for a family of three and $82,164 for a family of four (add $7,500 for each individual in excess of four),.

The means test is an extremely complicated calculation (it is a six page calculation, similar to a 1040 tax return for an individual) that is based on a debtor's income and expenses. The expenses are, in general, pegged to the allowable expenses in an offer of compromise with the IRS.

The questions that arises is whether the cost of college tuition (at a private college or a public university) is deductible for the purposes of the means test calculation. Unfortunately, the majority of cases hold that college tuition is, in fact, not deductible, because Congress failed to allow college tuition as a deduction in the means test. A number of Bankruptcy Courts have reviewed this issue, and have held that college tuition is not deductible.

For example, in In re Saffrin, 380 B.R. 191 (Bankr. N.D. Ill 2007), the Bankruptcy Court held that the debtors could not deduct their daughter's college expenses on the means test because the Bankruptcy Code only allows elementary or secondary educational expenses for dependent children under 18.

Similarly, in In re Boyd, 378 B.R. 81 (Bankr. M.D. Pa. 2007), the Bankruptcy Court found that the debtors could not deduct their adult daughter's college education on the means test because the Bankruptcy Code does not expressly provide such deduction, and college tuition does not qualify to be included on line 59 of the means test under "Other Necessary Expenses."

However, notwithstanding the fact that college tuition is not deductible for the means test, debtors may have other expenses that will be sufficient for them to pass the means test and file for Chapter 7 bankruptcy.

Any individuals having questions about Chapter 7 bankruptcy or the means test are encouraged to contact Jim Shenwick.