Part 1 - Case Law
Author: Spiros Avramidis
In determining a potential debtor’s ability to qualify as a debtor under Chapter 7, a debtor must pass the “means” test, which is primarily a calculation of the debtor’s “current monthly income” minus allowable expenses. Therefore, correctly calculating a debtor’s “currently monthly income” is vital in passing the means test. Importantly, a debtor’s “current monthly income” will also affect the calculation of “disposable income” under a Chapter 13 because the definition of “disposable income” specifically references “current monthly income.”
An interesting question that arises when determining a debtor’s “current monthly income” is whether a voluntary withdrawal from an individual retirement account (“IRA”) within the applicable six-month period is included in “current monthly income.” The unfortunate answer is: it depends on the jurisdiction.
An interesting question that arises when determining a debtor’s “current monthly income” is whether a voluntary withdrawal from an individual retirement account (“IRA”) within the applicable six-month period is included in “current monthly income.” The unfortunate answer is: it depends on the jurisdiction.
In In re Zahn, the Bankruptcy Appellate Panel (“BAP”) for the Eighth Circuit found that “IRA distributions should not be treated as income for purposes of the means test.” 391 B.R. 840, 845 (B.A.P. 8th Cir. 2008). The BAP analogized money in an IRA to money in an ordinary savings account; a transfer from one savings account to another savings account is not income. Id. Further, if an IRA withdrawal is included in “current monthly income,” the same income would be assessed against the Debtor on two separate occasions. Id. at 846 (“Under the trustee's definition of income, contributions to the debtor's IRA could be included in current monthly income twice: once when the money is earned and deposited, and again when the money is withdrawn.”). Hypothetically, the same income could be counted twice within the same means test period if a debtor were to deposit and withdraw from an IRA within a six-month window.
Similar decisions were also rendered in In re Wayman, 351 B.R. 808 (Bankr. E.D.Tex. 2006) (“Therefore, because her receipt of income as evidenced by the transfer of the IRA to her control was outside the six-month period outlined under § 101(10A) (A) (i), it did not have to be reported on Official Form B22C, nor could it properly have any effect on the Debtor's effort to confirm her proposed plan”) and Simon v. Zittel, No. 07-31616, No. 07-31805, No. 07-31719 (Bankr. S.D. Ill. Mar. 19, 2008) (available at https://www.govinfo.gov/content/pkg/USCOURTS-ilsb-3_07-bk-31719/pdf/USCOURTS-ilsb-3_07-bk-31719-0.pdf) (last accessed January 23, 2020) (“[T]he Court finds that the withdrawals taken in the six months prior to filing the Chapter 13 petition do not constitute "income from all sources" within the meaning of 11 U.S.C. § 101(10A) and may not be included when calculating current monthly income.”)
In contrast, in In re Mendelson, Judge Grossman of the EDNY adopted the holdings of In re DeThample, 390 B.R. 716 (Bankr.D.Kan.2008) in finding that IRA withdrawals are included in “current monthly income.” 412 B.R. 75, 84 (Bankr. E.D.N.Y. 2009). The DeThample court applied the plain meaning of the relevant statute and found that “[current monthly income] include[s] every dime a debtor gets during the relevant period except for those amounts specifically excluded by § 101(10A)(B), like Social Security benefits.” DeThample, 390 B.R. at 721. According to DeThample, “Congress could certainly have added other exclusions, but it did not.” Id. Therefore, a debtor must, according to these courts, include IRA withdrawals in calculating “current monthly income.”
An identical holding was rendered in In re Sanchez, Case Nos. 06-40886, 06-40865 (Bankr. W.D. Mo. July 13, 2006) (available at https://casetext.com/case/in-re-sanchez-49) (last accessed January 23, 2020). (“For the reasons stated above, the Court finds that in each of the above-captioned cases, the funds disbursed from the Debtors' 401(k) plan within the six months preceding the filing of their bankruptcy petitions should be included in the calculation of the Debtors' Current Monthly Income.”) Further, it is likely that Chief Judge Craig would hold similarly if faced with the appropriate case. In In re Cotto, Chief Judge Craig quoted both Mendelson and DeThample in finding that “a one time only payment, § 101(10A) does not distinguish between income that is non-recurring and income that will be received on an ongoing basis. CMI is intended to be a snapshot of the debtor's pre-petition income and not necessarily reflective of current or future income.” 425 B.R. 72, 75 (Bankr. E.D.N.Y. 2010) (internal quotations omitted).
Interestingly, although the reasoning of such holding being outside the scope of this article, the courts in Mendelson or DeThample found that even though the withdrawals are included in a debtor’s “current monthly income” such withdrawals should not be utilized in determining “projected disposable income” under 11 U.S.C. § 1325(b)(1)(B). DeThample, 716 B.R. at 725 (“This affords sufficient factual predicate to find that a change of circumstances justifies excluding the pre-petition $4,000 401(k) distribution from debtors' CMI, at least for § 1325(b)(1)(B) purposes.”); Mendelson, 412 B.R. at 84. (“The Court will not compel the Debtor to include voluntary withdrawals from her retirement account in her "projected disposable income.").
The holdings of these courts seem to lead to an unintended result: a debtor may be ineligible to file a Chapter 7 due to an artificially increased “current monthly income” that causes a debtor to fail the means test; however, at the same time, the debtor is not required to contribute the artificially increased amount in a chapter 13 plan. Further, a debtor may be unable to rely on the “special circumstances” safety valve of 11 U.S.C. § 707(b)(2)(B) to rebut the presumption of abuse to file a Chapter 7 under these circumstances. See Cotto, 425 B.R. at 77 (“Nevertheless, the Debtors' argument that the Court should subtract a one time payment from their CMI because the fact that the payment is non-recurring constitutes a "special circumstance," flies in the face of Congress' clear intent to include income from all sources in CMI, with certain specific statutory exceptions.”). Further, “[t]he Court cannot conclude that Congress intended the ‘special circumstances’ exception to strict application of the means test to undermine the unambiguous definition of CMI. Section 101(10A) sets forth specific enumerated exceptions to categories of income that must be included in CMI. A non-recurring, one-time only payment is not one of those exceptions.” Id.
Whether a voluntary retirement account withdrawal should be included in “current monthly income” is still unclear and very dependent on a debtor’s jurisdiction. The highest court, the 8th Circuit BAP, to weigh in on the issue unequivocally holds that a voluntary withdrawal should be excluded from “current monthly income.” However, debtors subject to the EDNY may face an uphill battle in excluding an IRA withdrawal from their “current monthly income.”
Similar decisions were also rendered in In re Wayman, 351 B.R. 808 (Bankr. E.D.Tex. 2006) (“Therefore, because her receipt of income as evidenced by the transfer of the IRA to her control was outside the six-month period outlined under § 101(10A) (A) (i), it did not have to be reported on Official Form B22C, nor could it properly have any effect on the Debtor's effort to confirm her proposed plan”) and Simon v. Zittel, No. 07-31616, No. 07-31805, No. 07-31719 (Bankr. S.D. Ill. Mar. 19, 2008) (available at https://www.govinfo.gov/content/pkg/USCOURTS-ilsb-3_07-bk-31719/pdf/USCOURTS-ilsb-3_07-bk-31719-0.pdf) (last accessed January 23, 2020) (“[T]he Court finds that the withdrawals taken in the six months prior to filing the Chapter 13 petition do not constitute "income from all sources" within the meaning of 11 U.S.C. § 101(10A) and may not be included when calculating current monthly income.”)
In contrast, in In re Mendelson, Judge Grossman of the EDNY adopted the holdings of In re DeThample, 390 B.R. 716 (Bankr.D.Kan.2008) in finding that IRA withdrawals are included in “current monthly income.” 412 B.R. 75, 84 (Bankr. E.D.N.Y. 2009). The DeThample court applied the plain meaning of the relevant statute and found that “[current monthly income] include[s] every dime a debtor gets during the relevant period except for those amounts specifically excluded by § 101(10A)(B), like Social Security benefits.” DeThample, 390 B.R. at 721. According to DeThample, “Congress could certainly have added other exclusions, but it did not.” Id. Therefore, a debtor must, according to these courts, include IRA withdrawals in calculating “current monthly income.”
An identical holding was rendered in In re Sanchez, Case Nos. 06-40886, 06-40865 (Bankr. W.D. Mo. July 13, 2006) (available at https://casetext.com/case/in-re-sanchez-49) (last accessed January 23, 2020). (“For the reasons stated above, the Court finds that in each of the above-captioned cases, the funds disbursed from the Debtors' 401(k) plan within the six months preceding the filing of their bankruptcy petitions should be included in the calculation of the Debtors' Current Monthly Income.”) Further, it is likely that Chief Judge Craig would hold similarly if faced with the appropriate case. In In re Cotto, Chief Judge Craig quoted both Mendelson and DeThample in finding that “a one time only payment, § 101(10A) does not distinguish between income that is non-recurring and income that will be received on an ongoing basis. CMI is intended to be a snapshot of the debtor's pre-petition income and not necessarily reflective of current or future income.” 425 B.R. 72, 75 (Bankr. E.D.N.Y. 2010) (internal quotations omitted).
Interestingly, although the reasoning of such holding being outside the scope of this article, the courts in Mendelson or DeThample found that even though the withdrawals are included in a debtor’s “current monthly income” such withdrawals should not be utilized in determining “projected disposable income” under 11 U.S.C. § 1325(b)(1)(B). DeThample, 716 B.R. at 725 (“This affords sufficient factual predicate to find that a change of circumstances justifies excluding the pre-petition $4,000 401(k) distribution from debtors' CMI, at least for § 1325(b)(1)(B) purposes.”); Mendelson, 412 B.R. at 84. (“The Court will not compel the Debtor to include voluntary withdrawals from her retirement account in her "projected disposable income.").
The holdings of these courts seem to lead to an unintended result: a debtor may be ineligible to file a Chapter 7 due to an artificially increased “current monthly income” that causes a debtor to fail the means test; however, at the same time, the debtor is not required to contribute the artificially increased amount in a chapter 13 plan. Further, a debtor may be unable to rely on the “special circumstances” safety valve of 11 U.S.C. § 707(b)(2)(B) to rebut the presumption of abuse to file a Chapter 7 under these circumstances. See Cotto, 425 B.R. at 77 (“Nevertheless, the Debtors' argument that the Court should subtract a one time payment from their CMI because the fact that the payment is non-recurring constitutes a "special circumstance," flies in the face of Congress' clear intent to include income from all sources in CMI, with certain specific statutory exceptions.”). Further, “[t]he Court cannot conclude that Congress intended the ‘special circumstances’ exception to strict application of the means test to undermine the unambiguous definition of CMI. Section 101(10A) sets forth specific enumerated exceptions to categories of income that must be included in CMI. A non-recurring, one-time only payment is not one of those exceptions.” Id.
Whether a voluntary retirement account withdrawal should be included in “current monthly income” is still unclear and very dependent on a debtor’s jurisdiction. The highest court, the 8th Circuit BAP, to weigh in on the issue unequivocally holds that a voluntary withdrawal should be excluded from “current monthly income.” However, debtors subject to the EDNY may face an uphill battle in excluding an IRA withdrawal from their “current monthly income.”
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