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Cash Advances Are Not Pre-Petition Income

Posted on Thursday (January 8, 2009) at 10:50 am to Bankruptcy Means Test
Suffolk Lawyer

 Recent Case Further Defines Means Test Criteria

Cash Advances -  Bankruptcy Means Test Criteriaby Craig D. Robins, Esq.

 Judicial interpretation of the means test, which is the controversial centerpiece of the 2005 Bankruptcy Amendment Act, has resulted in hundreds of decisions around the country during the past three years. A recent decision from Judge Robert E. Grossman, sitting in our own Central Islip bankruptcy Court, has further defined the parameters for how the means test should be prepared and utilized.

 Basic Purpose of the Means Test. For the uninitiated, the basic purpose of the means test is to determine whether a debtor is eligible to file a Chapter 7 petition based on a rather comprehensive calculation of the debtor’s income and expenses during the preceding six-month period. If the means test indicates that the debtor should be in Chapter 13, the test also provides the minimum amount that the debtor should pay on a monthly basis in a Chapter 13 plan.

In a nutshell, the means test determines the debtor’s current monthly income by taking the debtor’s household’s gross income and subtracting certain specified exclusions and deductions. Generally speaking, no matter what chapter the debtor files, the lower the final figure on the means test, the better.

 Income to be Included in the Means Test. Technically, almost all income that the debtor receives in the six-month window before filing must be included in the means test. Social Security income is the general exception. However, strictly complying with the statute in some instances can produce a skewed means test result. In a recent case, the issue was whether the debtor is required to treat cash advances as income for the purposes of calculating the means test.

 Chapter 13 Trustee Claims Cash Advances Are Income. In July 2008, Melville bankruptcy attorney Richard Kantor filed a routine Chapter 13 case for Rafael Almonte (Bankr.E.D.N.Y. 808-74084). During the six-month means test period, the debtor had taken $24,000 in cash advances from his credit cards. Believing these cash advances would not have any relevance to how much income the debtor would have in the future, Mr. Kantor did not include the cash advances as income in the means test.

Chapter 13 trustee Michael J. Macco objected to confirmation of the debtor’s plan, arguing that the debtor’s “current monthly income” used in the means test for purposes of determining the Debtor’s “projected disposable income” under Section 1325(b)(1)(B), must include, as income, the amount of the cash advances that the debtor took within the six months prior to filing.

 Judge Rules that Cash Advances Are Income and Not Income. Judge Grossman, in a well-worded, 16-page decision, analyzed the concept of “current monthly income” and determined that cash advances do constitute “current monthly income,” under the forward-looking approach to the calculation of a Chapter 13 debtor’s projected disposable income. However, he also held that the cash advances did not constitute part of the debtor’s “projected disposable income,” as they would not be repeated in the future.

In going through an elaborate analysis that highlighted the ambiguous and poorly-worded statute, Judge Grossman commented that “this Court is not the first to recognize the discrete differences among “current monthly income,” “disposable income,” and “projected disposable income,” and grapple with the imprecise language of this statute. He then concluded that the line of cases adopting the forward-looking, or “crystal ball,” approach to calculating a Chapter 13 debtor’s “projected disposable income” is the correct interpretation of the statute.

However, the court said that if the Chapter 13 trustee or an unsecured creditor objects to confirmation, the calculation of “disposable income” under Code § 1325(b) and the means test (Form B22C) is but a starting point in reaching the debtor’s “projected disposable income.” If a debtor’s “disposable income” on Form B22C differs from the debtor’s actual monthly disposable income reported on Schedules I and J, the court may analyze the debtor’s actual projected income over the life of the plan.

 The Trustee May Not Use a Strictly Mechanical Approach. In choosing the approach to take, the judge adopted the line of cases that holds that the Chapter 13 trustee may not use a strictly mechanical approach to evaluating the debtor’s projected disposable income. The Judge further implied that the trustee’s position would lead to the “absurd result” that a debtor would be required to repay more than the debtor can afford.

The court commented that the debtor could not possibly include the cash advances in “projected disposable income” because the debtor would not reasonably be expected to take additional cash advances during the life of the plan. “It would be absurd to assume that the debtor would continue to take cash advances in order to fund his chapter 13 plan, and the Court is not prepared to require that result.”

 The Court Takes the Logical Position.   In reaching the determination that calculating the debtor’s ability to fund a plan should not take into consideration income that simply will not be available in the future, Judge Grossman also pointed out that this approach could also work against the debtor, if the debtor were to have additional income in the future which is not reflected in the means test.

“Absent binding authority in this Circuit, this Court is not prepared to adopt an application of the statute which would result in a debtor either: (a) being precluded from Chapter 13 relief because a mechanical application of Form B22C would create fictional monthly disposable income that the debtor does not have, or (b) allow the debtor to withhold actual monthly disposable income from repayment to unsecured creditors because his or her historic income figures are lower than actual projected figures.”

 Practical Tips. The first point is that Mr. Kantor, in representing the debtor, did not give in to the trustee’s unsound position, and in doing so, obtained a victory for his client. Secondly, it appears that the judges in our jurisdiction are adopting a logical and reasonable approach towards how much income a debtor can devote towards his creditors. Thus, a debtor’s actual ability to pay appears to be the overriding criteria in determining how much the debtor will actually be required to pay.

 About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the January 2009 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.

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