Means Test: Don’t Give Up, Even If You Think You Flunked It, Part 6

The “means test,” or Form B22, is a financial report analyzing your income and expenses which must be filed as part of a consumer bankruptcy case.  You usually have to pass the means test to file a chapter 7.  The means test can also have a major impact on how much your chapter 13 payment must be.  A particularly frustrating aspect of the means test is the line which allows an expense for “mandatory payroll deductions.”  The instructions for this line of Form B22 read as follows:

Enter the total average monthly payroll deductions that are required for your employment, such as mandatory retirement account contributions, union dues, and uniform costs.  Do not include discretionary amounts, such as non-mandatory 401(k) contributions.

For chapter 7 cases, there is no further guidance.  For chapter 13 cases, another line asks for any retirement account contributions, and also payments for retirement account loans.  This is because the text of the bankruptcy law allows, in chapter 13, a deduction from income beyond what the IRS standards allow.  In chapter 13 cases, there is not much debate over what is an allowable deduction on this part of the means test due to this additional language allowing retirement loans and normal retirement account contributions to be deducted.

Not so in chapter 7.  It may be unclear whether your retirement contributions are mandatory or not, or whether your retirement loan repayments are mandatory.  After all, you suffer a big tax penalty if you don’t repay a retirement loan.  To make matters more confusing, Form B22 uses the word “mandatory,” while the IRS standards use the word “involuntary.”  Needless to say, it is unfortunate that the committee which drafted Form B22 deviated from the statutorily mandated language; these two words have slightly different meanings, and that could be important.  Additionally, the failure to list retirement account loans as an example of “discretionary” deductions seems to suggest, by negative implication, that retirement account loan repayments are not discretionary, and therefore should be listed.

In fact, at least one court has agreed that retirement account contributions, and loan repayments, can be deducted on this line of Form B22 in chapter 7 cases.  Furthermore, the U.S. Trustee in your court district may be reluctant to make this an issue in some cases.  If you could benefit from using this as an expense on your means test, talk with your lawyer about whether this is likely to work, based on the law in your federal court district.