§ 95.14 — Other [Necessary] Expenses—Secured or Legally Perfected Debts

Revised: March 5, 2009

[1]

The tenth of 161 categories of Other [Necessary]2 Expenses specified by the IRS3 is “Secured or legally perfected 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 Secured or Legally Perfected Debts specified by the IRS as part of the calculation of disposable income under § 1325(b)(2) and (3).7

[2]

“Secured and legally perfected debts” is a potentially broad category of expenses that, enigmatically, may be both nullified and duplicated by other provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).8 “Secured” is straightforward enough and would include all debts that have security interests or liens. The term “security interest” is defined by the Bankruptcy Code.9 “Secured” is a broader term that would include security interests created by agreement as well as secured debts that arise involuntarily, such as statutory liens or judgments that become liens.

[3]

The phrase “legally perfected debts” is a bit confounding. The ordinary sense of “perfected” is that some action has been taken consistent with nonbankruptcy law to register, file or note a security interest or lien to make it effective against third parties. In this sense, most debts that are “legally perfected” would also be “secured.” This phrase appears nowhere in the Bankruptcy Code or in other federal law and seems to have been invented, without definition, by the IRS. Perhaps legally perfected simply signals the intent that both voluntary and involuntary secured debts are included in this category.

[4]

Courts tempted to look into the Internal Revenue Manual for insight about the content of the category Secured or Legally Perfected Debts10 will be disappointed. The Internal Revenue Manual says nothing about the content of the Secured or Legally Perfected Debts category of Other [Necessary] Expenses but only warns that to be allowable, such expenses must “meet[ ] the necessary expense test.”11 As explained above,12 elsewhere in the Internal Revenue Manual, the IRS instructs its revenue agents in negotiation with a delinquent taxpayer to exclude expenses unless an expense “provide[s] for the health and welfare of the taxpayer and/or his or her family or they must be for the production of income.”13 This “necessary expense test” is not found in the Bankruptcy Code. The Bankruptcy Code imposes on the category Secured or Legally Perfected Debts only the limitation that such debts must be “actual” and “for the debtor, the dependents of the debtor, and the spouse of the debtor in a joint case, if the spouse is not otherwise a dependent.”14

[5]

The category of Other [Necessary] Expenses for Secured or Legally Perfected Debts overlaps one other statutory expense allowed Chapter 13 debtors with CMI greater than applicable median family income and overlaps in part two other expense categories specified by the IRS. Detailed elsewhere,15 Chapter 13 debtors with CMI greater than applicable median family income are allowed an expense deduction in the calculation of disposable income for the average of all secured debts “scheduled as contractually due.”16 This separate expense allowance is not completely coextensive with the category Secured or Legally Perfected Debts specified by the IRS. The separate statutory deduction is limited to secured debts that are scheduled as contractually due. The IRS category would include secured debts that are neither scheduled nor contractually due—including secured debts that arise other than by contract, such as judgment liens and statutory liens. In other words, the separate statutory provision for secured debts in § 707(b)(2)(A)(iii) leaves content for the category Secured or Legally Perfected Debts that could make a difference in the expense calculation in some Chapter 13 cases.

[6]

There is also potential for overlap between the category Secured or Legally Perfected Debts and the separate categories of Other [Necessary] Expenses specified by the IRS for Court-Ordered Payments17 and for Taxes.18 There will occasionally be Court-Ordered Payments in the domestic relations context that will be secured by liens. A secured domestic relations obligation would fall in both the Secured or Legally Perfected Debts and the Court-Ordered Payments categories of Other [Necessary] Expenses. Similarly, taxes that are subject to a tax lien would be Secured or Legally Perfected Debts and would fall in the Taxes category of Other [Necessary] Expenses. The Bankruptcy Code provides no guidance how Chapter 13 practitioners should account for these overlaps.

[7]

Perhaps more importantly, it is inevitable that Secured or Legally Perfected Debts will be “debts” excluded from monthly expenses by the “notwithstanding” sentence in § 707(b)(2)(A)(ii)(I).19 Strangely, to fall in this category of Other [Necessary] Expenses as specified by the IRS a secured or legally perfected obligation must be a “debt.” But subclause (I) of § 707(b)(2)(A)(ii) explicitly excludes from monthly expenses “any payments for debts.”20 It seems to follow that the category Secured or Legally Perfected Debts is drained of all content by the exclusion of all debts from monthly expenses. This is every bit as odd as it sounds. It ascribes to Congress an intent that an expense deduction allowed by one sentence of § 707(b)(2)(A)(ii)(I) be taken away by a sentence in the same paragraph. Bankruptcy practitioners familiar with the BAPCPA21 are not surprised.

[8]

The category of Other [Necessary] Expenses for Secured or Legally Perfected Debts is one of several categories specified by the IRS that has gone missing altogether in Official Form B22C.22 The separate statutory expense category for secured debts scheduled as contractually due is addressed at Lines 47 and 48.23 But the phrase “legally perfected” appears nowhere in the Official Form, and the instructions at Lines 47 and 48 would exclude secured debts that are not scheduled as contractually due during the plan. As mentioned above, the category Secured or Legally Perfected Debts specified by the IRS is broader than the separate statutory deduction for secured debts scheduled as contractually due. Official Form B22C simply doesn’t acknowledge this category of Other [Necessary] Expenses. Perhaps this reflects a conclusion by the forms drafters that the “notwithstanding” sentence in subclause (I) drains this category of all content. If this speculation is correct, then the question remains whether this failure to address the category is based on sound statutory construction.


 

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

 

9  See 11 U.S.C. § 101(51) (“the term ‘security interest’ means lien created by an agreement.”).

 

10  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.

 

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

 

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

 

13  I.R.M. 5.15.1.10(1) (May 9, 2008), and I.R.M. 5.15.1.10(1) (May 1, 2004), available at 2007 WL 2646965, discussed in § 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

14  11 U.S.C. § 707(b)(2)(A)(ii)(I).

 

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

 

16  11 U.S.C. § 707(b)(2)(A)(iii).

 

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

 

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

 

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

 

20  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.

 

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

 

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

 

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