§ 95.15     Other [Necessary] Expenses—Unsecured Debts
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 95.15, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

The eleventh of 161 categories of Other [Necessary]2 Expenses specified by the IRS3 is “Unsecured Debts.”4 A Chapter 13 debtor with current monthly income (CMI)5 greater than applicable median family income6 is allowed a deduction for actual monthly expenses in the category Unsecured Debts specified by the IRS as part of the calculation of disposable income under § 1325(b)(2) and (3).7

[2]

Viewed in isolation, “Unsecured Debts” is an immensely broad category of potential expenses for Chapter 13 debtors. Any debt for which there is no security or collateral would qualify if the debt is an actual expense for the debtor, the dependents of the debtor or the spouse of the debtor in a joint case, if the spouse is not otherwise a dependent.8 Every manner of prepetition liability, whether business or personal—if an “actual” expense—is a candidate for this Other [Necessary] Expense deduction.

[3]

Courts inclined to look deeper into the Internal Revenue Manual for insight about the Unsecured Debts category of Other [Necessary] Expenses9 will find this restrictive instruction to revenue agents with respect to the allowance of unsecured debts in negotiation with a delinquent taxpayer:

If the taxpayer substantiates and justifies the expense, the minimum payment may be allowed. The necessary expense test of health and welfare and/or production of income must be met. Except for payments required for the production of income, payments on unsecured debts will not be allowed if the tax liability, including projected accruals, can be paid in full within 90 days.10
[4]

The Internal Revenue Manual, of course, focuses the allowance of expenses in the category Unsecured Debts on interference between a taxpayer’s expenses and the payment of taxes. None of the conditions and limitations quoted above appear anywhere in the Bankruptcy Code. It would be nonsense to condition the allowance of expenses to a Chapter 13 debtor by comparison to how quickly the debtor would be able to pay a tax liability. The “minimum payment” reference sounds like the provision in some credit card contracts that allows the debtor to make a minimum payment each month toward a card balance. This Internal Revenue Manual discussion is completely irrelevant to any identifiable bankruptcy policy and is an excellent illustration why resort to the Internal Revenue Manual to interpret expense allowances for a Chapter 13 debtor with CMI greater than applicable median family income is a bad idea.

[5]

The Internal Revenue Manual also offers an example of Unsecured Debts which may be allowed a delinquent taxpayer:

Examples of unsecured debts which may be necessary expenses include: Payments required for the production of income such as payments to suppliers and payments on lines of credit needed for business and payment of debts incurred in order to pay a federal tax liability.11

The reference to “production of income” and “payments to suppliers . . . needed for business” is interesting because this seems to be the place at which the IRS considers business debt and business expenses in its determination of the ability of a delinquent taxpayer to pay taxes. The Bankruptcy Code does not separately allow a Chapter 13 debtor with CMI greater than applicable median family income a deduction for business expenses.12 Detailed elsewhere,13 the forms drafters have ambiguously if not inaccurately allowed Chapter 13 debtors to deduct business expenses from gross business revenues on the way to calculating CMI in Part I of Official Form B22C. This netting of business expenses from business income is premature on Official Form B22C, and that mistake is illuminated by the category of Other [Necessary] Expenses for Unsecured Debts, which—at least according to the IRS—is the place at which business expenses are deducted from income. In the logic of the calculation of disposable income in § 1325(b), unsecured debts—including business expenses—are deducted after the calculation of CMI.

[6]

But there are two much larger problems with the category of Other [Necessary] Expenses for Unsecured Debts: the entire category may be drained of all content by the “notwithstanding” sentence in § 707(b)(2)(A)(ii)(I);14 and the Unsecured Debts category is hugely duplicative of and overlapping with other expenses allowed Chapter 13 debtors with CMI greater than applicable median family income.

[7]

Section 707(b)(2)(A)(ii)(I) states, “Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts.”15 By definition, an obligation in the category “Unsecured Debts” is a “debt” excluded from allowable expenses by the “notwithstanding” sentence. This leads to the uncomfortable conclusion that Congress granted Chapter 13 debtors with CMI greater than applicable median family income an expense allowance in a category of Other [Necessary] Expenses specified by the IRS but then emptied that category of all meaning two sentences later in § 707(b)(2)(A)(ii)(I). It is not obvious what magic of statutory interpretation will avoid this strange aspect of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).16

[8]

That the Unsecured Debts category of Other [Necessary] Expenses may be unavailable altogether to Chapter 13 debtors with CMI greater than applicable median family income leads to an even more startling conclusion: without this category of expenses, there is no statutory deduction for business expenses for a Chapter 13 debtor with CMI greater than applicable median family income. As just mentioned, Chapter 13 debtors with CMI less than applicable median family income have a specific statutory deduction for “expenditures necessary for the continuation, preservation and operation” of a business in § 1325(b)(2)(B).17 However, this business expense deduction falls outside the “amounts reasonably necessary to be expended” for a debtor with CMI greater than applicable median family income because of the structure of § 1325(b)(2) and (3). To be allowed as deductions, business expenses for a Chapter 13 debtor with CMI greater than applicable median family income must be found somewhere in “subparagraphs (A) and (B) of section 707(b)(2).”18

[9]

Congress apparently contemplated that business expenses for a Chapter 13 debtor with CMI greater than applicable median family income would enter the disposable income calculation as Other [Necessary] Expenses specified by the IRS. But because of the “notwithstanding” sentence in § 707(b)(2)(A)(ii)(I), unsecured business expenses are excluded from “amounts reasonably necessary to be expended” and do not come back into the disposable income calculation at any other point in the statutory scheme.

[10]

This has to be a fundamental mistake in the deconstruction of the disposable income test by BAPCPA. It is akin to the charitable contributions problem. Detailed elsewhere,19 BAPCPA isolated the special expense allowance for charitable contributions in § 1325(b)(2)(A)(ii), rendering that deduction available to Chapter 13 debtors with CMI less than applicable median family income but not applicable in the calculation of “amounts reasonably necessary to be expended” by a Chapter 13 debtor with CMI greater than applicable median family income. The statutory allowance for business expenses in § 1325(b)(2)(B) is similarly located within the expense deductions available to Chapter 13 debtors with CMI less than applicable median family income but outside the “amounts reasonably necessary to be expended” for a debtor with CMI greater than applicable median family income.

[11]

In 2006, Congress fixed this problem with respect to charitable contributions by amending § 1325(b)(3) to include charitable contributions described in § 1325(b)(2)(A)(ii) in the “amounts reasonably necessary to be expended” for a debtor with CMI greater than applicable median family income.20 As of this writing, there is no similar fix for the positioning of the business expense deduction in § 1325(b)(2)(B). The exclusion of “payments for debts” in § 707(b)(2)(A)(ii)(I) conspires with the placement of § 1325(b)(2)(B) to leave Chapter 13 debtors with CMI greater than applicable median family income naked of any deduction for business expenses.

[12]

There are at least seven other categories or items of expense allowed Chapter 13 debtors with CMI greater than applicable median family income within the disposable income calculation that overlap or duplicate the category of Other [Necessary] Expenses for Unsecured Debts. There is a separate category of Other [Necessary] Expenses for Accounting and legal fees that would contain unsecured debts.21 There is a separate category for Court-Ordered Payments that would overlap Unsecured Debts to the extent prepetition Court-Ordered Payments are not secured.22 There is a separate category for Taxes that will overlap the category for Unsecured Debts to the extent taxes are not secured by a lien.23 There is a category of Other [Necessary] Expenses for the Repayment of loans made for payment of Federal Taxes that will overlap the category Unsecured Debts.24 Section 707(b)(2)(A)(iv) allows an expense deduction for the payment of all priority claims (divided by 60).25 Priority claims in a Chapter 13 case would include debts for taxes and for domestic support obligations that would also be unsecured debts within the category specified by the IRS. Similarly, § 1322(f) excludes from disposable income amounts required to repay a pension loan of the sort described in § 362(b)(19).26 Some pension loan repayment obligations could be characterized as “debts” within the Unsecured Debts category specified by the IRS.

[13]

Needless to say, the Bankruptcy Code does not instruct Chapter 13 practitioners how to manage the numerous duplications and overlaps with respect to the allowance of expenses for Unsecured Debts in the disposable income calculation. Official Form B22C ignores altogether the category Unsecured Debts specified by the IRS. There are various lines on Form B22C at which debtors are invited to enter expense amounts that could be characterized as Unsecured Debts, but there is no separate line for the Unsecured Debts category itself. As mentioned above, this is especially a problem with respect to unsecured debts for business expenses, which Official Form B22C improperly nets from gross business receipts at Line 3 notwithstanding that this positioning of the deduction for business expenses distorts the calculation of CMI.27


 

1  Prior to May 9, 2008, the IRS specified 16 categories of Other [Necessary] Expenses in the Internal Revenue Manual. See I.R.M. 5.15.1.10 (May 1, 2004), available at 2007 WL 2646965. The May 9, 2008, version of the Internal Revenue Manual eliminated the “Health Care” category of Other [Necessary] Expenses, leaving only 15 categories. See I.R.M. 5.15.1.10 (May 9, 2008), discussed in §§ 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories and 477.8 [ Other [Necessary] Expenses—Health Care ] § 95.11  Other [Necessary] Expenses—Health Care.

 

2  The word “Necessary” is in brackets because there is no such thing as a category of Other Necessary Expenses specified by the IRS as contemplated by 11 U.S.C. § 707(b)(2)(A)(ii)(I). There are categories of Other Expenses specified by the IRS, but the “Necessary” part of that phrase appears only in the Bankruptcy Code and is not specified by the IRS. See § 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

3  See § 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

4  I.R.M. 5.15.1.10 (May 9, 2008). The specification of this category of Other [Necessary] Expenses by the IRS was the same prior to May 9, 2008. See I.R.M. 5.15.1.10 (May 1, 2004), available at 2007 WL 2646965.

 

5  See 11 U.S.C. § 101(10A), discussed in § 468.1 [ Current Monthly Income: The Baseline ] § 92.3  Current Monthly Income: The Baseline.

 

6  See § 469.1 [ Comparison of CMI to Applicable Median Family Income: § 1325(b)(3) ] § 92.4  Household Size and Comparison of CMI to Median Family Income: § 1325(b)(3).

 

7  See § 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

8  See 11 U.S.C. § 707(b)(2)(A)(ii)(I), discussed in § 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

9  There are many good reasons why this is a bad idea. See §§ 471.1 [ Big Picture: Too Many Issues ] § 94.1  Big Picture: Too Many Issues, 475.1 [ National Standards ] § 95.2  National Standards, 476.1 [ Local Standards: Housing and Transportation ] § 95.3  Local Standards: Housing and Transportation and 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

10  I.R.M. 5.15.1.10 (May 9, 2008); I.R.M. 5.15.1.10 (May 1, 2004), available at 2007 WL 2646965.

 

11  I.R.M. 5.15.1.10 (May 9, 2008); I.R.M. 5.15.1.10 (May 1, 2004), available at 2007 WL 2646965.

 

12  Compare 11 U.S.C. § 1325(b)(2)(B), which allows Chapter 13 debtors with CMI less than applicable median family income an expense deduction “if the debtor is engaged in business, for the payment of expenditures necessary for the continuation, preservation and operation of such business.” See §§ 167.1 [ Debtor Engaged in Business ] § 91.6  Debtor Engaged in Business, 468.1 [ Current Monthly Income: The Baseline ] § 92.3  Current Monthly Income: The Baseline and 470.1 [ Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Applicable Median Family Income ] § 93.1  Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income.

 

13  See §§ 379.1 [ Form B22C: Statement of Current Monthly Income ] § 36.19  Form 122C-1: Statement of Current Monthly Income and 468.1 [ Current Monthly Income: The Baseline ] § 92.3  Current Monthly Income: The Baseline.

 

14  See below in this section, and see § 471.1 [ Big Picture: Too Many Issues ] § 94.1  Big Picture: Too Many Issues.

 

15  11 U.S.C. § 707(b)(2)(A)(ii)(I), discussed in § 471.1 [ Big Picture: Too Many Issues ] § 94.1  Big Picture: Too Many Issues.

 

16  Pub. L. No. 109-8, 119 Stat. 23 (2005).

 

17  See §§ 468.1 [ Current Monthly Income: The Baseline ] § 92.3  Current Monthly Income: The Baseline and 470.1 [ Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Applicable Median Family Income ] § 93.1  Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income.

 

18  11 U.S.C. § 1325(b)(3), discussed in § 471.1 [ Big Picture: Too Many Issues ] § 94.1  Big Picture: Too Many Issues.

 

19  See §§ 477.3 [ Other [Necessary] Expenses—Charitable Contributions (Donations to Tax Exempt Organizations) ] § 95.6  Other [Necessary] Expenses—Charitable Contributions and 487.2 [ Charitable Contributions ] § 99.6  § 1325(b)(2)(A)(ii): Charitable Contributions (Again?).

 

20  See 11 U.S.C. § 1325(b)(3), as amended by the Religious Liberty and Charitable Donation Clarification Act of 2006, Pub. L. 109-439, 120 Stat. 3285 (Dec. 20, 2006), discussed in §§ 477.3 [ Other [Necessary] Expenses—Charitable Contributions (Donations to Tax Exempt Organizations) ] § 95.6  Other [Necessary] Expenses—Charitable Contributions and 487.2 [ Charitable Contributions ] § 99.6  § 1325(b)(2)(A)(ii): Charitable Contributions (Again?).

 

21  See § 477.2 [ Other [Necessary] Expenses—Accounting and Legal Fees ] § 95.5  Other [Necessary] Expenses—Accounting and Legal Fees.

 

22  See § 477.5 [ Other [Necessary] Expenses—Court-Ordered Payments ] § 95.8  Other [Necessary] Expenses—Court-Ordered Payments.

 

23  See § 477.13 [ Other [Necessary] Expenses—Taxes ] § 95.16  Other [Necessary] Expenses—Taxes.

 

24  See § 477.17 [ Other [Necessary] Expenses—Repayment of Loans to Pay Federal Taxes ] § 95.20  Other [Necessary] Expenses—Repayment of Loans to Pay Federal Taxes.

 

25  See § 486.1 [ Total Priority Debts and Divide by 60 ] § 97.1  Total Priority Debts and Divide by 60.

 

26  See 11 U.S.C. § 1322(f), discussed in § 491.1 [ Pension Loan Repayments ] § 99.4  Pension Loan Repayments.

 

27  See §§ 379.1 [ Form B22C: Statement of Current Monthly Income ] § 36.19  Form 122C-1: Statement of Current Monthly Income and 468.1 [ Current Monthly Income: The Baseline ] § 92.3  Current Monthly Income: The Baseline.