UST Motion to Dismiss

[stevem3827]

Among other issues, the UST is stating that all expenses associated with our adult children are not allowance in the DMI calculations. Our children are 18 & 20 respectively, both full-time in college, both with minimal part-time job earnings ($1200 or less annual).

Our son commutes to the local Community college while our daughter is a resident student approximately 50 miles away. She comes up each weekend to work and also for drs. appointments. They both work during the school year at jobs close to home. The UST is not allowing expenses associated with their transportation.

From what I've read, the Bankruptcy Code is supposed to use IRS rules in determining expenses, etc. The IRS considers both of our children as eligible dependents since we provide more than 1/2 of their living expenses.

My question is whether the UST is overstepping their bounds in disqualifying expenses associated with them? As such, if they are not allowed, then shouldn't the portion of our wages that is used to support them be excluded from the DMI calculations along with the 1040 standard exemptions (that lower our net tax liability) also be excluded? I know this sounds far reaching, but if in the eyes of the UST they can't exist as an expense, then all things associated with their support (wages, tax deductions, credits, etc.) also be excluded?

The UST is comparing our pay stubs from January 2013 in determining our average income but then is using average tax refunds from 2010 & 2011 to determine a lower actual tax liability. If her methodology is correct, then the Education Credit and Child Credits received during 2010 & 2011 should be excluded as well, right?

Between the UST and the multiple errors and delays caused by the attorney's paralegal, this is such a nightmare!

[justbroke]

Let's just talk about the tax issue. If you are receiving refunds (and did in 2010 and 2011), then that is relevant to how much your tax liability is likely in 2012. Forget about the tax credits and other things. For example, let's say you earned $100K in each of 2010, 2011, and 2012. Your tax liability was $15K (effective tax rate of 15%). However, you had $30K in withholding. You do not get to put $30K as your taxes on the Means Test or Schedule J (unless you add the $15K refund back into your income on Schedule I). This is where many debtors get confused or have issues when they are over-the-median and have a lot of expenses that are questionable. So, using 2010 and 2011, since you have not filed 2012, is a good method to form an idea about what comprises your tax liability.

The United States Trustee (UST) is not overstepping any boundaries. This is EXACTLY the UST's job. That is to question any petition that has the appearance of not being needy. In fact, the UST will generally scrutinize and question any over-the-median income filer because, generally, the Congressional intent of the changes in 2005 was to push more people into Chapter 13s. So, most (consumer) over-the-median income filers would not qualify for a Chapter 7 discharge. This is a matter of public policy. The UST is just enforcing that public policy.

As for transportation expenses, this is something you would need to fight. If you have more than 2 cars in your family, fighting for a 3rd and/or 4th vehicle is probably the thorn. You may want to mention the Lanning and Ransom cases. In the Florida case below, the Judge allowed a third vehicle claim. Of course the UST will say that there is only a spot for 2 on the Means Test, but the IRS guidelines do in fact allow "necessary" expenses.

Sounds like you just have a fight ahead. This is probably normal in 50% of over-the-median income cases in Chapter 7s.

Florida case on third vehicle:

http://pacer.flmb.uscourts.gov/pdf-new/47871781.pdf

[stevem3827]

Thanks for the info. I'll forward the case info to my attorney.

Going back to the refund issue, I understand that the refund must be subtracted to get the actual tax liablity but if the refund includes credits that are directly attributable to the adult children (i.e. $5000 Education Credits for 2 college attending children) that the UST is not allowing expenses for, why is this allowable for the trustee to include it as a reduction to net taxes but not as allowance expenses?

[justbroke]

Going back to the refund issue, I understand that the refund must be subtracted to get the actual tax liablity but if the refund includes credits that are directly attributable to the adult children (i.e. $5000 Education Credits for 2 college attending children) that the UST is not allowing expenses for, why is this allowable for the trustee to include it as a reduction to net taxes but not as allowance expenses?

No one indicated that it is allowable. The UST's attorney has made the UST's position known. The Judge will determine whether it is allowable.

It's hard to realize this but "allowable" expenses and taxes are different things. This is simply just how the tax code intersects with the bankruptcy code. For example, say I am married with no children and I don't own a business. I purchase a third vehicle. The IRS allows a deduction on my tax return for the sales tax paid on that vehicle. However, the UST does not allow a vehicle expense for the third vehicle because it is not necessary for the health and welfare of the debtor (or for the reorganization of the debtor).

In your particular case, the UST's position is that you should not be allowed to take the deductions for the transportation expense of the adult children. Your attorney will argue that it is necessary for the family and that the expenses are reasonable. It will go to the Judge and your attorney will try to persuade the Judge that the UST's position is nonsense.

[stevem3827]

ok, thanks. That makes sense.

[stevem3827]

Meeting with our attorney on Monday to go over what I feel are inaccuracies in the UST position on dismissal.

First and foremost, I do not agree that the UST is using our paystubs from the beginnng of 2013 to indicate current income then using tax refunds from 2010 and 2011 to get an average amount and actual tax liability. For example, in 2010 we qualified for both child credit and education credits for our son and daughter. In 2012, we no longer qualified for either one has our son is now over the age for the child credit and we are over the upper threshold for the Education credit. Additionally, I had reduced my withholding in September of 2012 from Married filing Single with no exemptions to Married with 4. This significantly reduced the amount being withheld and it's where it stands today.

The UST calculated that based on the 2010 and 2011 refunds, our actually tax liability is overstated by around $900 per month. However, if you project out 2013 based on our 2013 pay stubs, we would be closer to $100 per month average refund (even in 2012, we got about 1/2 of what we received for a refund in those years due to refinancing, lost credits, higher AGI and lower withholding). Also, since the UST is disallowing expenses related to, what they call our "adult children" I don't think it's right that when calculating the potential refund vs. actual tax liability, that the standard exemption for the kids be included, as that lowers our net taxable amount. You shouldn't be able to include in one sense then say their expenses aren't allowed in another.

I also intend to challenge their challenge regarding our charitable contributions and cell phone amounts. For the charity, we have documented evidence of about $1900 in various contributions but we also have about $500 in non-documented such as weekly cash collection at church, clothes donated to local charity via their drop off box, foods donated to church for bake sale, etc. For the cell phone, it states that it can be allowed if used to produce income. I have a part-time business and use the internet and cell heavily within that business. I claimed a profit in 2012 and projected one for 2013 as well.

I am hoping that the attorney agrees with my logic. We were scheduled for a hearing on the Motion on April 23rd, but neither the attorney nor myself are available that day, so it needs resecheduled.

[justbroke]

I wish you the best of luck. You and your attorney will attack the UST's points one by one, knocking them each out quickly!

[stevem3827]

Thanks, I hope that you are right!!

Does anyone know if the Middle District of PA, or any jurisidiction for that matter, considers a 401K loan to be a secured debt? I did find a reference that states the District of Idaho and Eastern District of Washington do, but not sure if this is still relevant and accurate. Grasping at all the straws I can reach.

[justbroke]

Does anyone know if the Middle District of PA, or any jurisidiction for that matter, considers a 401K loan to be a secured debt? I did find a reference that states the District of Idaho and Eastern District of Washington do, but not sure if this is still relevant and accurate. Grasping at all the straws I can reach.

I don't know of any District that allows a 401(k) loan payment to be used as an expense in a Chapter 7 bankruptcy. They can only be used to reduce your disposable monthly income (DMI) in a Chapter 13. As such, the Means Test for Chapter 7s do not have any place to put a 401(k) loan payment. (You mention Idaho and Washington allowing the loan repayments to be placed on the Means Test as a secured debt.)

What matters is how they are treated in your District. In the supermajority of Districts, a 401(k) loan is not a "debt" for purposes of the bankruptcy code. Most have reasoned that if you didn't pay your 401(k) loan, the plan administrator could not sue you to recover the money. It is therefore, not a debt in those Districts.