Bankruptcy

Can Debtor's Deduct In Means Test Mortgage Payments Owed But Unpaid?

By Jonathan Alper

Prospective bankruptcy debtors who earn above applicable median income must pass the means test in order to file Chapter 7 bankruptcy. The means test formula deducts from income certain allowable expenses to determine if your net income is under the applicable disposable income limits. Secured debt payments are among the allowable expenses. For most debtors, their mortgage payments are their biggest expense deduction in their means test. Many chapter 7 cases involve homeowners who are in the process of surrendering their home, or homes, to foreclosure. These debtors are not paying their mortgage payments and will not pay the mortgages in the future. Several U.S. Trustees have complained about different Chapter 7 debtors taking large mortgage expense deduction on their means test when the debtors have not paid and will not pay the mortgages. Should debtors be allowed to pass a means test using "phantom" expenses that are due on paper (the mortgage) but which are no longer being paid?

On recent bankruptcy court judge in Tampa answered this question: "yes they can." Yes, the debtors can subtract monthly expenses due pursuant to their mortgage notes when the debtors have stopped paying the mortgage and have stated their intent to surrender the property. The court noted that the means test allows expenses "contractually due" even if the expenses are paid. Most judges have adopted a "snapshot" view of the means test- its is a mechanical test meant to determine quickly the state of the debtor?s finances. The court said that all long term debt payments due by contract are deductions regardless of what the debtor does with the obligation after the snapshot and after the bankruptcy petition is filed. See In re Labruno Case No. 8:08-6339.

It seems that once a property goes to foreclosure sale (or the debtor?s automobile is sold at auction) the debt to the lender is still contractually due but the same debt is no longer secured by the property so cannot be deducted as a secured debt in the means test analysis. If you are filing bankruptcy make sure your attorney deducts in the means test all mortgages and car payments even if you no longer making payments and intend to surrender the property.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida        

Full post as published by Florida Bankruptcy Law on July 21, 2009 (boomark / email).