§ 95.18     Other [Necessary] Expenses—Student Loans
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 95.18, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

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

[2]

“Student Loans” is a category of potential expenses simple enough on its face, but, as explained below, the category may have been drained of content by peculiar language in § 707(b)(2)(A)(ii)(I).8 Student loans are well known to Chapter 13 practitioners because many debtors come into Chapter 13 owing debts incurred for educational purposes. Many student loans are not dischargeable in a Chapter 13 case unless the debtor is able to prove “undue hardship” for purposes of §§ 1328(a)(2) and 523(a)(8).9 It is at least interesting that the IRS specifies this category as “Student Loans” rather than “Educational Loans” or “Educational Benefits.” The category Student Loans may be different from the Educational Loans and Educational Benefits that are rendered nondischargeable by § 523(a)(8). The content of that difference is not clear. Arguably, “Student Loans” would include any loan to a student, perhaps educationally related but certainly including loans for living expenses and other costs incidental to being a student. That reading has been controversial with respect to the dischargeability of educational loans.10

[3]

Courts inclined to consult the Internal Revenue Manual to flesh out the Student Loans category of Other [Necessary] Expenses11 will find conditions and limitations that appear nowhere in the Bankruptcy Code. The Internal Revenue Manual states that a revenue agent can allow student loan expenses to a delinquent taxpayer “[i]f [they are] secured by the federal government and only for the taxpayer’s education.”12 The Internal Revenue Manual further provides that the taxpayer “must substantiate that the payments are being made.”13 Perhaps the Bankruptcy Code requirement that student loan expenses be “actual” is less rigorous than the Internal Revenue Manual condition that student loan payments are actually being made. The Bankruptcy Code does not condition the allowance of student loan expenses that the loans be “secured” by the federal government or any other entity. The Bankruptcy Code allows expenses in the Student Loans category with respect to the debtor, the dependents of the debtor and the spouse of the debtor in a joint case.14 There is no limitation in the Bankruptcy Code that Student Loans are an allowable expense “only” for the debtor’s education. There is no substantiation condition in the Bankruptcy Code analogous to that in the Internal Revenue Manual. This is another example of the misconceived incorporation of IRS collection standards into Chapter 13 practice through the disposable income test.

[4]

The Student Loans category of Other [Necessary] Expenses specified by the IRS overlaps several other categories of expenses allowed Chapter 13 debtors with CMI greater than median family income. There is a separate category of Other [Necessary] Expenses specified by the IRS for “Education.”15 The category for Education is strangely limited and conditioned by the Internal Revenue Manual.16 But the limitations imposed on revenue agents by the Internal Revenue Manual are not reflected in the Bankruptcy Code, and the incorporation of both categories of expenses into Chapter 13 practice produces a substantial potential overlap. Although not in the context of a student loan, one bankruptcy court concluded that $1,000 per month for college expenses claimed by a Chapter 13 debtor was not allowable in any category of Other [Necessary] Expenses because college expenses did not fit the “Education” category of Other [Necessary] Expenses specified by the IRS and no other category applied.17

[5]

The Student Loans category of Other [Necessary] Expenses specified by the IRS inevitably overlaps the separate “Unsecured Debts” category of Other [Necessary] Expenses specified by the IRS.18 Almost all student loans are unsecured debts that will fall in both categories. The Bankruptcy Code provides no instructions with respect to management of this duplication of expenses allowed a Chapter 13 debtor with CMI greater than applicable median family income.

[6]

Loans for a student under the age of 18 to attend public or private elementary or secondary school would overlap a separate expense allowance in § 707(b)(2)(A)(ii)(IV).19 Unlike the other overlaps and duplications just discussed, the separate allowance for a dependent child under the age of 18 to attend public or private elementary or secondary school specifically requires a detailed explanation of why such expenses are not already accounted for.20

[7]

Official Form B22C is not much help dealing with student loan expenses. There is no line item on Official Form B22C for the Student Loans category of Other [Necessary] Expenses specified by the IRS. At Line 43, there is an education expense allowance for dependent children under the age of 18, but the instructions at Line 43 seem targeted at the separate statutory allowance in § 707(b)(2)(A)(ii)(IV) and do not address the Student Loans category of Other [Necessary] Expenses specified by the IRS. A Chapter 13 debtor with student loan expenses might consider claiming “special circumstances” for purposes of the deduction allowed at Line 57.21 “Student Loans” is one of the categories of Other [Necessary] Expenses that the drafters of Official Form B22C simply omitted.22

[8]

Perhaps the forms drafters had in mind the “notwithstanding” sentence in § 707(b)(2)(A)(ii)(I) when the decision was made to omit the Student Loans category of Other [Necessary] Expenses from Form B22C. Detailed elsewhere,23 notwithstanding any other provision of § 707(b)(2)(A)(ii)(I), the monthly expenses of a Chapter 13 debtor “shall not include any payments for debts.”24 Student loans are almost assuredly “debts” for purposes of the “notwithstanding” sentence. This reading of the statute raises the discomforting possibility that the Student Loans category of Other [Necessary] Expenses specified by the IRS is an entirely empty category of expenses. One of the first courts to address this issue reached exactly that conclusion. In In re Knight,25 the bankruptcy court speculated that maintenance of payments on a long-term, nondischargeable student loan might be a special circumstance for purposes of § 707(b)(2)(B)26 but concluded that the “notwithstanding” sentence excluded student loans from allowable monthly expenses:

The IRS includes student loans as one of several “Other Necessary Expenses” in § 5.15.1.10 of the IRS Manual. Student loan payments thus qualify as “Other Necessary Expenses” that are allowable expenses under the IRS standards incorporated into the “means test” calculations in the first sentence of § 707(b)(2)(A)(ii)(I). . . . But they are also “payments for debts.” And § 707(b)(2)(A)(ii)(I) expressly excludes “payments for debts” as qualified expenses . . . . The clear language of the statute, therefore, precludes deduction of the student loan payments as a “reasonably necessary” expenditure under § 707(b)(2)(A).27
[9]

It is unfortunate that the management of student loan expenses has been complicated by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).28 It does bankruptcy practice no good that the category of Other [Necessary] Expenses for Student Loans specified by the IRS may have been drained of all content by the “notwithstanding” sentence in § 707(b)(2)(A)(ii)(I). This leaves Chapter 13 debtors with no welcoming place for an expense deduction for student loan debt that is most likely nondischargeable in the Chapter 13 case. The “special circumstances” provision in § 707(b)(2)(B) is a difficult fit for student loan debt.29 This leaves Chapter 13 debtors to make the problematic argument that student loan debt can be separately classified for more favorable payment through the plan—payment that will come from projected disposable income.30


 

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 below in this section, and see § 472.1 [ Netting Issues, Including Exclusion of Payments for Debts ] § 94.2  Netting Issues, Including Exclusion of Payments for Debts.

 

9  See §§ 346.1 [ Student Loans ] § 158.2  Student Loans and 553.1 [ Student Loans: § 523(a)(8) ] § 159.6  Student Loans: § 523(a)(8).

 

10  See § 346.1 [ Student Loans ] § 158.2  Student Loans.

 

11  There are many good reasons why consulting the Internal Revenue Manual to interpret expense deductions in Chapter 13 cases 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.

 

12  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.

 

13  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.

 

14  11 U.S.C. § 707(b)(2)(A)(ii)(I).

 

15  See § 477.7 [ Other [Necessary] Expenses—Education ] § 95.10  Other [Necessary] Expenses—Education.

 

16  See § 477.7 [ Other [Necessary] Expenses—Education ] § 95.10  Other [Necessary] Expenses—Education.

 

17  In re Saffrin, 380 B.R. 191, 193 (Bankr. N.D. Ill. 2007) (Goldgar) (“Section 707(b)(2)(A)(ii)(I) . . . permits a deduction for ‘Other Necessary Expenses’ only if those expenses are listed in the ‘categories specified’ in the Internal Revenue Manual. . . . The categories of ‘other expenses’ in the Internal Revenue Manual do not include expenses associated with a child’s college education. Certainly, one of the ‘categories specified’ is ‘education.’ See Internal Revenue Manual § 5.15.1.10 at ¶ 3. But educational expenses are deemed ‘necessary’ only if the education producing the expenses ‘is required for a physically or mentally challenged child and no public education providing similar services is available,’ or if it is ‘for the taxpayer and . . . [is] required as [a] condition of employment.’ . . . [T]he expenses the [debtors] are incurring to send their daughter to the University of Illinois are not expenses related to the education of a physically or mentally challenged child, nor are they expenses for education required as a condition of employment.”).

 

18  See § 477.12 [ Other [Necessary] Expenses—Unsecured Debts ] § 95.15  Other [Necessary] Expenses—Unsecured Debts.

 

19  See § 483.1 [ Education Expenses ] § 95.26  Education Expenses.

 

20  See 11 U.S.C. § 707(b)(2)(A)(ii)(IV), discussed in §§ 472.1 [ Netting Issues, Including Exclusion of Payments for Debts ] § 94.2  Netting Issues, Including Exclusion of Payments for Debts and 483.1 [ Education Expenses ] § 95.26  Education Expenses.

 

21  See § 487.1 [ Additional Expenses or Adjustments to CMI ] § 98.1  Additional Expenses or Adjustments to CMI.

 

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

 

23  See §§ 472.1 [ Netting Issues, Including Exclusion of Payments for Debts ] § 94.2  Netting Issues, Including Exclusion of Payments for Debts and 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

24  11 U.S.C. § 707(b)(2)(A)(ii)(I), discussed in § 472.1 [ Netting Issues, Including Exclusion of Payments for Debts ] § 94.2  Netting Issues, Including Exclusion of Payments for Debts.

 

25  370 B.R. 429 (Bankr. N.D. Ga. 2007).

 

26  See § 487.1 [ Additional Expenses or Adjustments to CMI ] § 98.1  Additional Expenses or Adjustments to CMI.

 

27  370 B.R. at 436. See also In re Redmond, No. 07-80634-G3-13, 2008 WL 1752133 (Bankr. S.D. Tex. Apr. 14, 2008) (Letitia Clark) (Without discussion of the category of Other Necessary Expenses for student loans and without discussion whether student loan would be “payment for debt” excluded from monthly expenses by § 707(b)(2)(A)(ii)(I), debtor failed to prove that direct payment of student loan “outside the plan” is reasonably necessary to support of debtor or debtor’s dependents for purposes of projected disposable income test.).

 

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

 

29  See § 487.1 [ Additional Expenses or Adjustments to CMI ] § 98.1  Additional Expenses or Adjustments to CMI.

 

30  See §§ 153.1 [ Student Loans ] § 88.6  Student Loans and 463.1 [ Nondischargeable Claims ] § 88.2  Nondischargeable Claims after BAPCPA.