Applying the Applicable Standard or the Actual Amount Monthly Rent in a Debtors Chapter 13 Plan

By: Paola Chiarenza

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

Although the “means test” added by the 2005 BAPCPA amendments

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was designed to ensure that chapter 13 debtors repay creditors as much as they can afford, the Bankruptcy Court for the Southern District of New York followed a plain language approach to hold that in determining a debtor’s disposable income the proper deduction is the full amount of the rental allowance set forth in the objective IRS Standards, even though the actual rental expense is lower.

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  After surveying numerous approaches to addressing the section 1325 (b)(3) and section 707 (b)(2)(A)(ii)(I) directives regarding disposable income, the Court noted that there is “no clear consensus” as to whether the IRS Standard or a lower actual amount applies.

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A Chapter 13 Plan and a debtor’s disposable income are governed by section 1325, which refers to section 707 stating, in relevant part, “monthly expenses shall be the debtor’s applicable monthly expense specified under . . . Standards, and the debtor’s actual monthly expenses for . . . Other Necessary Expenses.”

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  Courts using the lower actual rental expense focus on the word “applicable” and interpret it to incorporate the IRS internal guidelines and interpretations of the standards, as reflected in the IRS Financial Analysis Handbook.

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  Rejecting that view, the Court notes that the statutory language refers to the published IRS Standards and does not even hint that Congress intended to incorporate internal IRS practices.

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  Further, the statute’s use of the term “applicable” with respect to certain national and local expense categories, contrasted with its use of the term “actual” for other expense categories, demonstrates that Congress did not intend that actual expenses be used for those expense deductions.

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The court found support for its view in decisions relating to transportation costs,

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and the policy that the “allowance” view provides the debtor with flexibility to move during the plan term or to build a cushion to meet unexpected expenses.

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  The court noted but did not address applicability of the IRS Standards where a debtor has no actual rent expense.

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  However, since there is no direct language in the statute creating such an exception, failure to apply the standards would be contrary to the statutory interpretation made in Osei.

 

Furthermore, it is a general principle of BAPCPA to “ensure that debtors repay creditors the maximum they can afford.”

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  Some courts rely on this policy and the introductory language of section 1325(b) requiring deduction of “amounts reasonably necessary to be expended” to use lower actual expenses, reasoning that the excess is not a necessary expense.

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The court rejects that view, holding that “reasonable necessity” is defined by the IRS Standards and does not constitute an independent threshold debtors must satisfy.

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