Consumer Bankruptcy Committee

ABI Committee News

Homeowners Walking Away on a Clearer Path: Form 22A Deductions Allowable for Secured Debt Despite Surrender

Completing Form 22A necessarily requires the consideration of pre-petition debts, but if a debtor intends to surrender real estate, should that expense still be included on Form 22A (the Means Test)?  On May 23, 2008, the First Circuit Bankruptcy Appellate Panel (BAP) ruled that a debtor who intends to surrender property in chapter 7 may deduct contractually due monthly payments on that property on the means test, even though the debtor intends to surrender the property. In re Rudler,1st Cir. B.A.P., No. 07-015 (2008 WL 2222388). 

Rudler involved two separate cases that were consolidated on appeal.  Both debtors' Statement of Intentions reflected an intent to surrender their homes, and one of the debtors also expressed an intent to surrender a motor vehicle.  On their means test form, the debtors deducted their contractual monthly payments for the debts securing the property from their current monthly income.

Pursuant to §707(b)(1)(A), the U.S. Trustee filed a Statement of Presumed Abuse and motions to dismiss for abuse under §707(b)(1). The U.S. Trustee argued that the debtors could not take means test deductions for payments on secured debt when they intended to surrender the property.  After all, the debtors were not going to have the property or the debt.  By substituting the "IRS Housing and Utilities Standards" for the debtors' contractual payments, the U.S. Trustee argued that the means test calculations showed that a presumption of abuse existed.  The New Hampshire Bankruptcy Court (Vaughn, U.S.B.J.) denied the U.S. Trustee's motions to dismiss, and the decision was appealed to the First Circuit BAP.

Under §707, the U.S. Trustee may move to dismiss a chapter 7 consumer case "if [the court] finds that the granting of relief would be an abuse."  BAPCPA removed the term "substantial" from the phrase, such that it is no longer necessary to prove a "substantial abuse." 

Abuse itself is defined by either §707(b)(2) or §707(b)(3) (or in a worst case scenario, both).  While dismissal under §707(b)(3) requires an analysis of the "totality of the [debtor's] circumstances," §707(b)(2) created a more objective mechanism by which to determine whether a debtor was abusing the provisions of the Code - the means test as defined by the Rules Committee on Form 22A.

The means test was enacted to create "a more objective standard for establishing a presumption of abuse and to reduce judicial discretion in the process."  In re Rudler, 2008 WL 2222388, at *4 (citing In re Randle, 358 B.R. 360, at 363 (citing Report of the Committee on the Judiciary, House of Representatives, to Accompany S. 256, H.R.Rep. No. 109-31, p.1 at 553, 109th Cong. 1st. Sess. (2005))). 

Once a debtor's current monthly income is determined (as defined by §101 (10A)), a "complex mathematical equation is provided" that sets forth allowable deductions.  See §707(b)(2)(A)(ii); In re Rudler, supra at *2.  In addition to the allowable deductions, §707(b)(2)(A)(iii) permits a debtor to deduct the "debtor's average monthly payments on account of secured debts [which are] calculated as the sum of...the total of all amounts scheduled as contractually due to secured creditors in each month of the 60 months following the date of the petition...divided by 60." [emphasis added]. Rudler, supra at *4.

The phrase "scheduled as contractually due" has been interpreted by the Bankruptcy Court for the Northern District of Georgia as meaning "those payments that the debtor will be required to make on certain dates in the future under the contract."  Id. at *5 (citing In re Walker, 2006 WL 1314125 *3 (Bankr. N.D. Ga. 2006)).  "And as a result, 'nothing the debtor does or does not do changes the fact that scheduled payments remain contractually due.'"  Id. at *4; see also In re Haar, 360 B.R. 759, 764-765 (Bankr. N.D. Ohio 2007); In re Randile, 358 B.R.360 at 365, (Bankr. N.D. Ill 2006), aff'd, Randle v. Neary (In re Randile, 2007 WL 2668727 (N.D. Ill. 2007); In re Walker, supra.  "[T]hose amounts remain contractually due, regardless of whether said payments will actually be made, whether the debtor will reaffirm the debt, or whether the debtor will surrender the property to the secured party." Rudler, supra at*5 (citing Randile, supra at 362-363 (emphasis in original)).

The U.S. Trustee argued that the use of the term "following" in §707(b)(2)(A)(iii) implied a "forward-looking" view of the debtor's financial situation, and thus the means test deductions.  In other words, the focus should be on whether the contractual payments will actually be made. This argument emanates from the underlying purpose of the means test: that it was designed to ensure "that those who can afford to repay some portion of their unsecured debts be required to do so." Id. at *4. The U.S. Trustee contended that "allowing a debtor to deduct the expense of secured debt for property the debtor intends to surrender would frustrate that purpose." Id. at *5.

The BAP disagreed, however, and found that "[i]f Congress had intended a forward-looking approach [to the Means Test], it could easily have said that the only deductible payments are those that the debtor intends to reaffirm...[and i]t is neither our function nor within our authority to infer such intent." Rudler, supra *5 (citing In re Hartwick, 359 B.R. 16, 19 (Bankr. D. N.H. 2007); In re Walker, supra at *4).  The BAP pointed out that the statute was unambiguous, and examining congressional intent is only permitted in cases where the plain language of the statute produces a result that is "demonstrably at odds with the intention of its drafters."  Id. at *6.  Since this statute is unambiguous, "examining congressional intent is unnecessary, and in fact impermissible."  Id.

It is important to note that debtors who intend to surrender property may not merely rest on Form 22A.  Section 707(b)(3) still permits the dismissal of the case if the court finds that the case was filed in bad faith (see §707(b)(3)(A)) or if "the totality of circumstances…of the debtor's financial situation demonstrates abuse."  Debtors should be prepared to address any question where the totality of the circumstances warrants a dismissal of the case.  However, the Rudler ruling assures debtors who intend to - and indeed need to - surrender their real estate or other secured property in chapter 7 that they need not be concerned that by doing so, they raise the possibility that a presumption of abuse under §707(b)(2) may impede their ability to obtain relief under the Code.