§ 30.5 — Income and Expenses
Revised: March 30, 2009
To complete the schedules and to present a financial picture of the debtor, counsel needs detailed current and historical information on the debtor’s employment, income, and earning ability.
Most important is the debtor’s current employment—the address of the current employer, the amount of the debtor’s wages, the regularity of payment of those wages (weekly, biweekly, semimonthly, monthly or other), the length of time the debtor has worked for that employer, the debtor’s job description and an employee number. A good source of most of this information is the debtor’s paycheck stub. The check stub will prove wages and overtime and reveal deductions from wages, including tax withholding, health and life insurance, wage assignments or garnishments, credit union and savings deductions.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)1 added to the list of required documents that must be filed by every Chapter 13 debtor “copies of all payment advices or other evidence of payment received within 60 days before the date of the filing of the petition, by the debtor from any employer of the debtor.”2 The bankruptcy court can “order[ ] otherwise[,]” but absent an order, every Chapter 13 debtor must file 60 days of payment advices or risk catastrophic consequences, including the enigmatic “automatic dismissal” in § 521(i).3 Although “payment advices” is not a defined term, it forces on debtors’ counsel the challenge to collect from the debtor all the pieces of paper that could be interpreted to be payment advices received by the debtor within 60 days before the petition. If the debtor received “payment advices” but no longer has all that were received within 60 days, then counsel has to work with the debtor to get copies or replacements from any employer of the debtor.
BAPCPA also invented a fundamental new term of art, “current monthly income” (CMI), which is the platform for calculating the entitlement of unsecured creditors through the projected disposable income test in § 1325(b).4 For most debtors, CMI is defined as “the average monthly income from all sources that the debtor receives . . . derived during the 6-month period ending on—” the month in which the petition is filed.5 CMI horrifically complicates the projected disposable income calculation in Chapter 13 cases and has been a tremendous source of litigation since the enactment of BAPCPA.6
To manage the calculation of CMI, counsel in every Chapter 13 case has to collect detailed income information for the debtor and the debtor’s spouse for at least the six months before the month in which it is contemplated that the petition will be filed. For many Chapter 13 debtors, the calculation of CMI will determine many features of the plan, and precise calculation for each payment period during the six-month calculation for CMI is essential. A lot of information has to be collected from the debtor to make the CMI calculation accurate.
Perhaps more difficult, BAPCPA included in CMI “any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor’s spouse), on a regular basis for the household expenses of the debtor or the debtor’s dependents.”7 Collecting this information from the debtor requires a sort of mind-reading exercise in which counsel has to conceive of questions that will inspire the debtor to remember household expenses that were paid for on a regular basis but from a source other than the debtor (or the debtor’s spouse in a joint case) and which did not involve money already received and accounted for as income to the debtor. The time period during which this addition to income must be determined is perhaps the same six-month period before the petition just described, but this temporal limitation is not certain.8
Tax returns are an obvious good source of information with respect to income and expenses of Chapter 13 debtors. It has always been a good idea for counsel to encourage the debtor to bring copies of tax returns to the initial client interview.
BAPCPA put an exclamation point to this use of tax returns in Chapter 13 practice. After BAPCPA, Chapter 13 debtors are mandated to provide tax returns to the trustee or as otherwise directed by local practice on a schedule that begins seven days before the first scheduled meeting of creditors9 and that includes filing with state and federal taxing authorities all tax returns for four years before the petition on or before the day before the first scheduled meeting of creditors.10 There are mandatory consequences—including dismissal of the case—if the debtor fails to comply with a tax-return-filing requirement.11 After BAPCPA, every Chapter 13 debtor’s attorney has to have a robust protocol for determining whether the debtor has filed all required tax returns and then to provide required copies (or transcripts) to the trustee consistent with local practice.12
Counsel will need to collect current and historical wage information for both the debtor and the debtor’s spouse, even if the debtor’s spouse is not joining the petition. After BAPCPA, this is especially true because of the upside-down construction of Official Form B22C, which begins with a combined income statement that includes all of a nonfiling spouse’s income.13 In other words, even though it may not be necessary to file “payment advices” for a nonfiling spouse, it will be necessary to gather comprehensive income information from even a nonfiling spouse for the entire six-month period before the month in which the petition is filed.
If the debtor has recently changed jobs, counsel will need detailed information on the current and prior job. If the debtor works more than one job, counsel will need wage, hour and deduction information—and 60 days of payment advices—for each job. If the debtor is being paid in cash, from tips, or by check without a check stub, counsel will have to construct the actual income on a per-pay-period basis from the debtor or the debtor’s employer.
Debtors with income from commissions or other forms of percentage of business present special problems of information collection. Debtor’s counsel must create a history of the success of realizing income from commissions, at least for the six-month CMI period and perhaps for projection of those numbers realistically into the future.
Many debtors have income sources other than wages or salary. For some debtors the only sources of income are not from employment.
Debtors don’t always think of unearned income as income. When collecting information from the debtor, counsel must search for these other sources of income by asking pertinent questions. Income, however irregular, should be accounted for—from family members, profit sharing at work that may come once or twice a year, disability or veterans benefits, AFDC, entitlements programs, pensions, interest, dividends, odd-job income, moonlighting, inheritances, alimony or child support, rental income, loan repayment, tax refunds, proceeds from insurance policies and in-kind income such as free rent, food, clothing, reduced utility bills or subsidies. BAPCPA explicitly defined CMI to include income from all sources “without regard to whether such income is taxable income.”14
For many wage earners, the yearly tax refund is the largest single other item of income. Schedule B to Official Form 6 requires the debtor to reveal tax refunds, and this may include not only the current year’s refund but also any prior refunds owed, with the Form asking for “particulars.”15
Public assistance in the form of cash payments or rent and utility subsidies can be significant other income sources. These other sources of income may be outcome determinative of the debtor’s ability to fund a Chapter 13 plan. After BAPCPA, all such payments or subsidies may be included in CMI if “paid” on a “regular basis” for the “household expenses” of the debtor or a dependent of the debtor.16
To complete Schedule J to Official Form 617 and Official Form B22C,18 debtor’s counsel must collect detailed information about the debtor’s regular, recurring, or average monthly, expenditures. Counsel is rarely lucky enough to have a debtor who pays bills from a single checking account. Debtors are sometimes facile at juggling income to maximize the availability of essential services, but few can produce anything that resembles a monthly budget. The information must be collected piecemeal.
Schedule J to Official Form 6 is a good starting point for a checklist to use in collecting expense information from the debtor.19 BAPCPA added so many new financial considerations to the projected disposable income calculation that counsel also has to parse Official Form B22C to identify the areas in which expense information will be needed. In advance of the initial client interview, the debtor should be encouraged to assemble coupon books, utility stubs, and receipts for recurring expense items. Preinterview forms are useful in this effort.20 Expenditures of the debtor and the debtor’s family within each of the following categories must be calculated and averaged to produce average monthly expenses:
Rent or home loan payment
Real estate taxes
Utilities (electricity, gas, water, telephone, sewer)
Maintenance, repairs and upkeep for residence
Alimony, maintenance or support payments
Insurance (life, health, auto, homeowner’s or renter’s)
Other installment payments (furniture, appliances, personal loan)
Transportation costs, including car maintenance
Education (tuition, books, room and board)
Medical, dental and medicines
Laundry and cleaning
Newspapers, periodicals and books
Recreation, clubs and entertainment
Payments for support of dependents not living in the debtor’s home.
If a business debtor,21 regular expenses for operating the business.
Success of the Chapter 13 plan often depends on accurately estimating and budgeting irregular expenses. Often debtors know the family car is on its last legs, significant dental work is needed, a child requires medical attention or the house needs a new roof.
Irregular but anticipated future expenses can be built into the Chapter 13 budget and plan. Replacement of essential property can be provided for in the debtor’s schedule of current expenditures. Schedule J permits a description of “any increase or decrease in expenditures reasonably anticipated to occur within the year following the filing of this document.”22 Counsel’s task is to collect enough information to permit the regularization of such irregular expenses by identifying them and mathematically including them within the budget and plan. Debtors’ counsel often forget to itemize lump-sum expenditures like yearly insurance premiums. If counsel fails to collect this information, the plan may lack feasibility at its inception, or the plan will crater after confirmation because there is no money to deal with the first major irregular expense.
1 Pub. L. No. 109-8, 119 Stat. 23 (2005).
2 11 U.S.C. § 521(a)(1)(B)(iv), discussed in § 376.1 [ Payment Advices ] § 42.3 Payment Advices.
3 See 11 U.S.C. § 521(i), discussed in § 388.1 [ Consequences of Failure to File Required Information, Including “Automatic Dismissal” ] § 42.2 Consequences of Failure to File Required Information, Including “Automatic Dismissal”.
5 11 U.S.C. § 101(10A)(A), discussed in §§ 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.
6 See § 468.1 [ Current Monthly Income: The Baseline ] § 92.3 Current Monthly Income: The Baseline.
7 11 U.S.C. § 101(10A)(B), discussed in §§ 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.
8 See § 468.1 [ Current Monthly Income: The Baseline ] § 92.3 Current Monthly Income: The Baseline.
9 See § 390.1 [ Tax Return Duties Seven Days before First Scheduled Meeting of Creditors ] § 42.5 Tax Return Duties Seven Days before First Scheduled Meeting of Creditors.
10 See § 391.1 [ Tax Return Duties One Day before First Scheduled Meeting of Creditors ] § 42.6 Tax Return Duties One Day before First Scheduled Meeting of Creditors.
11 See § 393.1 [ Consequences of Failure to File or Provide Tax Returns ] § 42.8 Consequences of Failure to File or Provide Tax Returns.
12 See §§ 389.1 [ New Tax Return Duties—In General ] § 42.4 Tax Return Duties—In General–393.1 [ Consequences of Failure to File or Provide Tax Returns ] § 42.8 Consequences of Failure to File or Provide Tax Returns.
13 See §§ 379.1 [ Form B22C: Statement of Current Monthly Income ] § 36.19 Form 122C-1: Statement of Current Monthly Income, 468.1 [ Current Monthly Income: The Baseline ] § 92.3 Current Monthly Income: The Baseline and 473.1 [ Accounting for Spouses ] § 94.3 Accounting for Spouses.
14 11 U.S.C. § 101(10A)(A), discussed in § 468.1 [ Current Monthly Income: The Baseline ] § 92.3 Current Monthly Income: The Baseline.
15 Official Form 6, Schedule B, Line 18.
16 See 11 U.S.C. § 101(10A)(B), discussed in § 468.1 [ Current Monthly Income: The Baseline ] § 92.3 Current Monthly Income: The Baseline.
17 See § 35.10 [ Schedules I and J—Income and Expenditures ] § 36.16 Schedules I and J—Income and Expenditures.
18 See §§ 379.1 [ Form B22C: Statement of Current Monthly Income ] § 36.19 Form 122C-1: Statement of Current Monthly Income–380.1 [ Form B22C: Disposable Income Calculation ] § 36.21 Form 122C-2: Disposable Income Calculation.
20 See § 27.1 [ Use of Preinterview Forms ] § 29.1 Use of Preinterview Forms.
21 See § 31.1 [ Special Information Needs ] § 33.1 Special Information Needs In Business Cases.
22 Official Form 6, Schedule J, Line 19, discussed in §§ 35.10 [ Schedules I and J—Income and Expenditures ] § 36.16 Schedules I and J—Income and Expenditures and 378.1 [ Statement of Anticipated Increase in Income or Expenditures ] § 36.18 Statement of Anticipated Increase in Income or Expenditures.