12 Dec New Massachusetts Means Test Decision
In the case of In re Bernard, 2008 WL 5050132 (Bkrtcy.D.Mass.2008), Judge Rosenthal of the Massachusetts Bankruptcy Court addressed two important means test issues. The debtors’ means test form showed that they had “passed” the test, but the UST argued that the form was completely incorrectly in two ways: (1) that the debtors did not include one paycheck earned but not received during the mean test period, and (2) that the debtors included their actual paycheck tax deductions as their tax expenses when they were over withholding taxes.
The United States Trustee had moved to dismiss the debtors’ Chapter 7 case arguing, among other things, that a presumption of abuse had arisen under the debtors’ means test. The Court agreed with the UST on both issues.
The Court held that money earned during the means testing period must be included in the abuse calculation, whether or not it was received during that period. The Court also held that it was improper to deduct actual tax withholdings instead of the debtors’ true tax expense.
The Court acknowledged that basing a means test partly on a tax liability that had not yet been assessed was difficult: the debtors could not be required to tell the future. However, the Court held that the prior year’s actual tax paid (divided by 12) was the best number to use, subject to modification based on changes in circumstances since that time.
This decision potentially has significant impact on above-median income Chapter 7 debtors. Many debtors over withhold and receive tax refunds. These debtors, if challenged by the UST, may have to reconstruct their means test forms to include the value of that over withholding instead of just relying on their paycheck deductions.
For those of you who are interested, here are some links to recent posts on the means test by my colleague, Jed Berliner:
Income “Derived” and “Received” for Means Test
Tax Refunds, Actual Tax Expenses, and the Means Test
Bonuses and Means Test Income
Nicholas Ortiz, Boston Bankruptcy Attorney
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