§ 95.8     Other [Necessary] Expenses—Court-Ordered Payments
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 95.8, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

The fourth of 161 categories of Other [Necessary]2 Expenses specified by the IRS3 is one of the most problematic: “Court-Ordered Payments (Alimony, child support, including orders made by the state, and other court ordered payments).”4 A Chapter 13 debtor with current monthly income (CMI)5 greater than applicable median family income6 includes in monthly expenses within the disposable income calculation actual expenses in the category Court-Ordered Payments.7

[2]

There are many problems with this category of monthly expenses. The obvious first issue is that “Court-Ordered Payments” is broad enough to include any amount that a debtor owes that is contained in a prepetition court order. The reference to alimony and child support in the parenthetical probably does not serve to limit the breadth of the category in light of the further parenthetical statement that Court-Ordered Payments includes all orders made by the state and “other” court-ordered payments.

[3]

Debtors come into Chapter 13 cases with all manner of Court-Ordered Payments. Of course, there will be domestic support obligations (DSOs), including alimony, maintenance and support to former spouses and children.8 There will be court orders for payments due to landlords, lessors and lenders both secured and unsecured. A debtor’s “actual” expenses with respect to all Court-Ordered Payments would include all amounts a debtor is actually obligated to pay on account of all prepetition judgments and court orders. “Actual” in this context seems broad enough to include all court-ordered amounts due or that will become due—at least during the Chapter 13 case.

[4]

“Court-Ordered” self-evidently requires an order or judgment from a court. But the parenthetical inclusion of “orders made by the state” could expand this category to include at least administrative “orders” and perhaps even the directives of other agencies of the state—a traffic ticket, for example. The bankruptcy court in In re Law9 rejected the argument that a wage levy by the IRS pursuant to 26 U.S.C. § 6331 was a court-ordered payment for purposes of this category of Other [Necessary] Expenses. The court reasoned that an agency levy did not involve action by a court and thus the levy did not produce a court-ordered payment. Of course, the IRS is neither a “court” nor a “state,” but it seems odd that a levy “ordered” by a state tax-collecting agency might qualify as a Court-Ordered Payment when a federal tax levy would not.

[5]

The huge problem created by the category Court-Ordered Payments is that it overlaps so many other categories of Other [Necessary] Expenses specified by the IRS and overlaps if not collides with several specific expenses allowed Chapter 13 debtors with CMI greater than applicable median family income by other parts of the disposable income test. Most obviously, to the extent Court-Ordered Payments are for alimony, maintenance or support, those payments will almost certainly be DSOs that are priority claims in the Chapter 13 case.10 DSOs entitled to priority are separately deductible (divided by 60) in the disposable income calculation under § 707(b)(2)(A)(iv).11 The Bankruptcy Code does not resolve this double allowance of court-ordered DSO debts.12

[6]

A secured debt reduced to a prepetition judgment—for example, a mortgage foreclosure judgment—would fall into the Court-Ordered Payments category of Other [Necessary] Expenses allowable under § 707(b)(2)(A)(ii)(I) and (absent merger) would also be a scheduled, contractually due, secured debt that is deductible in the disposable income calculation under § 707(b)(2)(A)(iii).13 The separate categories of Other [Necessary] Expenses for “Secured or Legally Perfected Debts”14 and for “Unsecured Debts”15 will overlap the Court-Ordered Payments category whenever a secured or unsecured debt has been reduced to a prepetition judgment or court order. These overlaps are inevitable and simply aren’t resolved by any statutory instructions within the disposable income test as reconstituted by BAPCPA.16

[7]

Although controversial,17 some courts will be tempted to look to the Internal Revenue Manual for illumination of the category of Other [Necessary] Expenses for Court-Ordered Payments. As if to prove the futility of the effort, the version of the Internal Revenue Manual produced by the Treasury Department on May 9, 2008, contains very different instructions with respect to Court-Ordered Payments than the May 1, 2004, version of that same manual. Tax collection agents are now informed that an expense in the category Court-Ordered Payments is necessary as follows:

If alimony and child support payments are court ordered, reasonable in amount, and being paid, they are allowable. If payments are not being made, do not allow the expense unless the nonpayment was due to temporary job loss or illness.18

The May 1, 2004, version of the Manual gave the following more cryptic instruction:

If court ordered and being paid, they are allowable. If payments are not being made, do not allow the expense. Child support payments for natural children or legally adopted dependents may be allowed.19

The “Notes/Tips” section of the Internal Revenue Manual in its May 1, 2004, version stated only, “Review the court order.”20 In its May 9, 2008, iteration, the “Notes/Tips” provision with respect to court-ordered payments was expanded:

Review the court order. Payments that are included in a state court order are not necessarily allowable (such as a child’s college tuition that would not otherwise be allowable as a necessary expense).21
[8]

Obviously, during the years between May 2004 and May 2008, the Treasury Department had second thoughts about the allowance of court-ordered expenses in negotiations between the IRS and a delinquent taxpayer. It is no longer enough for the IRS that alimony and child support payments are court ordered and being paid—they must be “reasonable in amount” and, even then, some kinds of court-ordered support—such as college tuition—are excluded altogether. Of course, there is no limitation in the Bankruptcy Code on the allowance of actual expenses in the category Court-Ordered Payments specified by the IRS even faintly resembling the significant (new) limitations in the Internal Revenue Manual. Whatever policy considerations went into the limitations in the Internal Revenue Manual, nothing similar is expressed anywhere in the Bankruptcy Code or legislative history. If anything, bankruptcy policy has shifted in favor of insulating payments for spousal and child support from the effects of a bankruptcy case.22 Consulting the Internal Revenue Manual for insight with respect to the content of the Court-Ordered Payments category of Other [Necessary] Expenses is fundamentally misguided.

[9]

Courts inclined to consider the Internal Revenue Manual might be pressed to explain the changes between the 2004 and 2008 versions. For example, the 2004 version allowed an expense deduction for child support payments only for “natural children or legally adopted dependents.” These limitations, of course, appeared nowhere in § 707(b)(2)(A) or (B) and were eliminated entirely in the 2008 version of the Manual. Was this change intended to broaden the allowance of expenses for child support payments? Nonpayment due to “temporary job loss or illness” is now recognized as an exception to the “being paid” requirement imposed by the IRS, but this exception, apparently, was not available prior to May 9, 2008. The Bankruptcy Code differently requires that Court-Ordered Payments be “actual.” There are too many mixed messages here to allow for useful guidance with respect to the allowance of expenses for Court-Ordered Payments in the disposable income test.

[10]

The expense allowance for Court-Ordered Payments becomes truly obtuse because of the “notwithstanding” sentence in § 707(b)(2)(A)(ii)(I). Detailed elsewhere,23 the sentence that allows monthly expenses in the categories of Other [Necessary] Expenses specified by the IRS also states, “[T]he monthly expenses of the debtor shall not include any payments for debts.”24 It is hard to conceive of a “Court-Ordered Payment” that would not meet the definition of “debt” for bankruptcy purposes.25 In other words, any right to payment that is manifest in a prepetition court order or judgment is almost assuredly a “debt” that would be excluded from monthly expenses in the category for Court-Ordered Payments specified by the IRS.

[11]

This raises the obvious question whether this is a completely empty expense category for a Chapter 13 debtor with CMI greater than applicable median family income. If all Court-Ordered Payments are debts and all debts are excluded from monthly expenses, then why did Congress include this category in allowed monthly expenses?

[12]

Official Form B22C addresses the Court-Ordered Payments category of Other [Necessary] Expenses at Line 33. The instructions recite: “Enter the total monthly amount that you are required to pay pursuant to the order of a court or administrative agency, such as spousal or child support payments. Do not include payments on past due obligations included in Line 49.” This instruction is curious in several respects. The parenthetical “orders made by the state” in the category specified by the IRS has become “order of . . . administrative agency” for purposes of Official Form B22C. In contrast to the “actual” expenses allowed by the statute, Line 33 instructs debtors to enter the monthly amount “that you are required to pay.”

[13]

The exclusion of “payments on past due obligations” by Line 33 is an acknowledgment that the category Court-Ordered Payments overlaps and collides with several other expense deductions allowed within the disposable income calculation, but this exclusion appears nowhere in the statute, and the cross-reference to Line 49 is at least incomplete. Line 49 is where Chapter 13 debtors with CMI greater than applicable median family income calculate priority claims for deduction consistent with § 707(b)(2)(A)(iv).26 As mentioned above, a DSO would be a Court-Ordered Payment allowed as a monthly expense in the category specified by the IRS and would be entitled to priority and deduction as an expense (divided by 60) under § 707(b)(2)(A)(iv). The “past due” distinction in the instruction at Line 33 of Form B22C addresses only part of the DSO debt that might appear at Line 49. Why is there no exclusion at Line 33 for secured debts included at Line 47 or 48?27

[14]

More fundamentally, it is curious that there is a Line 33 deduction for Court-Ordered Payments in the first place. As explained above, it seems certain that any Court-Ordered Payments a Chapter 13 debtor brings into the Chapter 13 case will be “debts” that are statutorily excluded from deduction as Other [Necessary] Expenses by the “notwithstanding” sentence in § 707(b)(2)(A)(i)(I). Official Form B22C at Line 33 instructs Chapter 13 debtors to enter spousal or child support payments that would be excluded debts. Dividing those excluded debts between past due and not past due does not solve the problem. Whether past due or not, alimony, maintenance or support pursuant to a prepetition court order would be debt that is not allowable as monthly expense in the category of Other [Necessary] Expenses for Court-Ordered Payments. Court-Ordered Payments that are also DSOs that meet the requirements for priority would be separately deductible (divided by 60) under § 707(b)(2)(A)(iv).28 A prepetition Court-Ordered Payment for alimony or support that is not entitled to priority would be a debt that is not deductible as a Court-Ordered Payment at Line 33 and would not be deductible as a priority debt at Line 49.

[15]

One bankruptcy court has held that the Court-Ordered Payments allowed at Line 33 are properly averaged over the life of the plan. In In re Casey,29 a prepetition court order required payments to an ex-spouse of $600 per month. The payments would be completed in the 24th month of the plan. The debtor took a deduction at Line 33 of $600 per month. The bankruptcy court concluded that the amount actually allowed at Line 33 was $600 times 24 divided by 60 or $224.39 per month.

[16]

If the Court-Ordered Payment to the ex-spouse in Casey was a DSO entitled to priority under § 507(a),30 then, at Line 49, and consistent with § 707(b)(2)(A)(iv), the total obligation ($600 times 24) would be divided by 60 and the correct entry would be $224.39. However, for purposes of § 707(b)(2)(A)(ii)(I), it is the “actual” monthly expense in the category Court-Ordered Payments that is allowed. The actual monthly expense is $600, notwithstanding that the $600 payments may not be due every month of the plan. Spreading the actual $600 payment over the life of the plan will create a feasibility problem for Chapter 13 debtors if the result is to increase the amount of disposable income that must be paid to unsecured creditors to an amount that exceeds the debtor’s ability during the 24 months in which $600 is payable to an ex-spouse—perhaps to keep the debtor out of jail. The Casey court addressed not at all the question whether the prepetition court order for a $600-per-month payment created a debt that is excluded from the category Court-Ordered Payments by the “notwithstanding” sentence in § 707(b)(2)(A)(ii)(I).

[17]

The Court-Ordered Payments category of Other [Necessary] Expenses well illustrates that wholesale incorporation of IRS collection standards into the Bankruptcy Code creates a mess for Chapter 13 practitioners. It looks like this category is completely nullified by the “notwithstanding” sentence. But the forms drafters think otherwise and have allowed the deduction for Court-Ordered Payments at Line 33 with instructions that change the content. The Court-Ordered Payments category overlaps and is inconsistent with other deductions allowed by the Code and addressed elsewhere in Official Form B22C, and Chapter 13 debtors are left scratching their heads about what expenses are allowable, in what amounts and at what line(s). The mathematics of the answers to these problems makes quite a difference, as illustrated in Casey. The confusion created by this category and by the treatment of this category in Form B22C invites unproductive litigation.


 

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 § 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. § 101(14A), discussed in §§ 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA, 441.1 [ New and Changed Treatment of Priority Claims ] § 73.6  Treatment of Priority Claims Changed by BAPCPA and 519.1 [ Domestic Support Obligations ] § 136.21  Domestic Support Obligations after BAPCPA.

 

9  No. 07-40863, 2008 WL 1867971 (Bankr. D. Kan. Apr. 24, 2008) (Karlin).

 

10  See §§ 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA and 441.1 [ New and Changed Treatment of Priority Claims ] § 73.6  Treatment of Priority Claims Changed by BAPCPA.

 

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

 

12  See also § 472.1 [ Netting Issues, Including Exclusion of Payments for Debts ] § 94.2  Netting Issues, Including Exclusion of Payments for Debts.

 

13  See § 485.1 [ Average Monthly Payments on Account of Secured Debts ] § 96.1  Average Monthly Payments on Account of Secured Debts.

 

14  See § 477.11 [ Other [Necessary] Expenses—Secured or Legally Perfected Debts ] § 95.14  Other [Necessary] Expenses—Secured or Legally Perfected Debts.

 

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

 

16  But see discussion of “notwithstanding” sentence below in this section and in §§ 471.1 [ Big Picture: Too Many Issues ] § 94.1  Big Picture: Too Many Issues and 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

17  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.

 

18  I.R.M. 5.15.1.10 (May 9, 2008).

 

19  I.R.M. 5.15.1.10 (May 1, 2004), available at 2007 WL 2646965.

 

20  I.R.M. 5.15.1.10 (May 1, 2004), available at 2007 WL 2646965.

 

21  I.R.M. 5.15.1.10 (May 9, 2008).

 

22  See, e.g., 11 U.S.C. § 101(14A), discussed in §§ 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA, 441.1 [ New and Changed Treatment of Priority Claims ] § 73.6  Treatment of Priority Claims Changed by BAPCPA and 519.1 [ Domestic Support Obligations ] § 136.21  Domestic Support Obligations after BAPCPA.

 

23  See § 471.1 [ Big Picture: Too Many Issues ] § 94.1  Big Picture: Too Many Issues.

 

24  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, 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.

 

25  See 11 U.S.C. § 101(12) (“‘debt’ means liability on a claim”); 11 U.S.C. § 101(5) (“‘claim’ means— . . . right to payment”).

 

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

 

27  See § 485.1 [ Average Monthly Payments on Account of Secured Debts ] § 96.1  Average Monthly Payments on Account of Secured Debts.

 

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

 

29  356 B.R. 519 (Bankr. E.D. Wash. 2006).

 

30  See §§ 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA and 441.1 [ New and Changed Treatment of Priority Claims ] § 73.6  Treatment of Priority Claims Changed by BAPCPA.