Dominick Capotosto, educational Expense Deductions from the Chapter 13 Plan: Creating a ?reasonably Necessary? Standard

• Citation: Vol. 29 No. 1
• Publication year: 2011

EDUCATIONAL EXPENSE DEDUCTIONS FROM THE CHAPTER 13 PLAN: CREATING A “REASONABLY NECESSARY” STANDARD

ABSTRACT

The current state of bankruptcy law concerning chapter 13 educational expense deductions from a debtor’s disposable income is cloudy at best. The vague guidelines provided by the drafters of the Bankruptcy Code have created a system where this issue is analyzed on a case-by-case basis. Bankruptcy judges possess great discretion in deciding whether a particular tuition deduction is “reasonably necessary,” as required by 11 U.S.C. § 1325(b)(2), creating inconsistent decisions across jurisdictions. BAPCPA created even more chaos in this context, as it split debtors into two groups depending on their income and forced judges to use the new “means test” to evaluate certain debtors’ tuition claims. This makes it very difficult for debtors and objecting creditors to predict whether a tuition deduction will be upheld or shifted to the debtor’s disposable income to be paid to creditors.

Congress expressed a desire for debtors to make lifestyle sacrifices in return for the benefits of chapter 13 bankruptcy. In addition, the legislature contemplated a definite standard for courts to use in calculating a debtor’s disposable income. After more than twenty-five years of bankruptcy litigation concerning tuition expense deductions, no such standard has emerged.

This Comment proposes a new test concerning educational expense deductions that heeds more closely to the legislative intent. This new standard would cap tuition deductions and require debtors to repay a minimum percentage of their debt to unsecured creditors. In addition, debtors would have to show one of an exclusive group of compelling circumstances. This new test would create a more functional, universal standard for bankruptcy judges to apply and would alleviate the inconsistencies that have plagued this area of bankruptcy law.

INTRODUCTION

There are over five million students in grades pre-K–12 who attend private school in the United States, accounting for around 10% of all students.1 The average cost of tuition at these institutions is over $8,500 per year.2 While the general public may consider the families of such students to be without financial burden, many individuals and families who file for chapter 13 bankruptcy have dependents who attend private schools. Understandably, these families want their children to continue attending their respective schools. But, should these families be allowed to direct a substantial amount of their future

income towards private school tuition while debts owed to legitimate creditors go unpaid?

Whereas chapter 7 bankruptcy essentially liquidates the debtor’s estate and leaves the debtor with no collateral,3 chapter 13 bankruptcy allows consumer debtors to retain certain property and earnings. Instead, chapter 13 requires that debtors pay off their debts over some future period of time according to a court-approved plan.4 This plan must detail exactly how much of the debtor’s future disposable income must be paid to creditors.5 However, creditors and bankruptcy trustees may object to the confirmation of the plan.6 Creditors and trustees often object because the debtor is withholding private school tuition or some other educational cost as a monthly expense, rather than including that amount in the disposable income to be paid to creditors.7

Chapter 13 debtors may deduct certain expenses from their disposable income to be paid to creditors.8 The Bankruptcy Code (the “Code”) evaluates these expenses differently, depending on whether the debtor’s monthly income

1. SUSAN AUD ET AL., NAT’L CTR. FOR EDUC. STAT., U.S. DEP’T OF EDUC., NCES 2012-045, THE

   CONDITION OF EDUCATION 2012, at 138 (2012), available at http://nces.ed.gov/pubs2012/2012045.pdf.

2. Schools and Staffing Survey (SASS)—Percentage of Private Schools that Charged Tuition, Percentage of Schools Charging Tuition that Allowed Tuition Reductions, and Average Full Tuition at Each School Level, by Selected School Characteristics: 2007–08, NAT’L CTR. FOR EDUC. STAT., http://nces.ed.gov/surveys/sass/ tables/sass0708_008_s2n.asp (last visited Oct. 4, 2012).

3. See Chapter 7—Liquidation Under the Bankruptcy Code, U.S. COURTS, http://www.uscourts.gov/ FederalCourts/Bankruptcy/BankruptcyBasics/Chapter7.aspx (last visited Feb. 25, 2012).

4. 7 WILLIAM L. NORTON, JR., NORTON BANKRUPTCY LAW AND PRACTICE 3D § 139:13 (2008).

5 11 U.S.C. § 1322(a) (2006).

6 Id. § 1325(b)(1).

7 See, e.g., In re Crim, 445 B.R. 868, 869 (Bankr. M.D. Tenn. 2011); In re Cleary, 357 B.R. 369, 370

(Bankr. D.S.C. 2006); In re Ehret, 238 B.R. 85, 86 (Bankr. D.N.J. 1999); In re Jones, 55 B.R. 462, 465 (Bankr.

1. Minn. 1985).

   8 11 U.S.C. § 1325(b)(2).

   
   

   is above or below the median income of the state in which the debtor resides.9 For below-median income debtors, these expenses must be “amounts reasonably necessary to be expended . . . for the maintenance or support of the debtor or a dependent of the debtor.”10 For above-median debtors,

   § 707(b)(2)(A)(ii)(IV) sets a ceiling of up to $1,775 per year per child for certain tuition costs that may be deducted from a debtor’s disposable income.11 Section 707(b)(2)(A)(ii)(IV) also qualifies such tuition costs by requiring the debtor to show that these costs are “reasonable and necessary.”12

   
   

   Courts have consistently struggled to determine the meaning of “reasonably necessary” and “reasonable and necessary” in the context of chapter 13 debtors seeking to deduct tuition expenses from their disposable income. Currently, no definitive standard exists that debtors can look to in their attempts to show that

   tuition expenses are reasonably necessary.13 This determination ends up in the

   sole discretion of the bankruptcy judge presiding over the confirmation hearing.14 While one jurisdiction may consider a claim for tuition expenses to be “reasonably necessary,” another jurisdiction could declare a substantially similar claim of tuition expenses to be abusive.15 Unclear standards of allowable tuition expenses create inconsistency across jurisdictions, thereby making it difficult for debtors to plan for their and their dependents’ educational futures.

   
   

   This Comment attempts to reconcile the current inconsistencies and difficulties in this area of bankruptcy law by proposing certain changes that would give way to a new universal test for courts to use in deciding the reasonableness and necessity of an educational expense. Bankruptcy judges have considered a number of different individualized factors when faced with this issue in the past, and this Comment seeks to narrow those issues to a few easily identifiable factors. In addition, this Comment suggests certain statutory barriers that would preclude a claim for educational expenses altogether. The

   
   

   9 See id. § 1325(b)(3).

   10 Id. § 1325(b)(2).

   11 Id. § 707(b)(2)(A)(ii)(IV). As this Comment explains, the statutory ceiling has served more as a guideline which courts have routinely ignored, and the question of reasonableness and necessity plays a much larger role in the confirmation of a chapter 13 plan than the statutorily prescribed amount. See infra Part I.F.

   12 11 U.S.C. § 707(b)(2)(A)(ii)(IV).

   1. See In re Crim, 445 B.R. 868, 871 (Bankr. M.D. Tenn. 2011) (“[T]he allowance of private school tuition as a reasonable and necessary expense is not settled law . . . .”).

   2. See NORTON, supra note 4, § 151:22.

   3. See Bankruptcy and Your Child’s Private School Fees, THE ONLINE BANKRUPTCY BLOG (Aug. 18, 2011), http://onlinebankruptcyblog.com/bankruptcy-law/bankruptcy-private-school-fees/.

   resulting test would hold true to the legislative history and policy concerns that go along with chapter 13, while also allowing debtors to deduct these expenses where a compelling circumstance exists.

   
   

   This Comment is organized into five parts. Part I provides a thorough examination of the applicable Code sections. It includes not only the text of such sections, but also a deeper look into the legislative history behind their creation. Part I also explains the major statutory changes created by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) and examines the distinction that BAPCPA made between chapter 13 debtors with different incomes. In addition, Part I explores the applicable IRS Standards and how they relate to educational expense deductions.

   
   

   Beginning with the earliest case to decide the issue of tuition deductions in chapter 13, Part II takes a chronological look at how bankruptcy courts have interpreted the applicable Code sections. Important pre-BAPCPA cases developed certain tests to resolve this issue, but these tests have changed over time. BAPCPA created new standards for courts to grapple with, and Part II explains the development of the rubric used by courts to decide if educational costs are reasonably necessary. Part II then summarizes the present judicial standard.

   
   

   Using several case illustrations, Part III discerns the most important factual circumstances in cases where a tuition expense is in dispute. Part III is broken down into several subparts, each focusing on a factor that courts have considered relevant and discussing how that factor has affected the courts’ decisions. Part III also analyzes how well these factors adhere to the Code and legislative history regarding educational expense deductions in chapter 13.

   
   

   Part IV proposes a new evaluative standard that would provide more guidance to the courts. This new standard best encompasses the congressional intent and purpose of chapter 13, while also balancing the rights of creditors and debtors. It is much more workable than the current standard and does away with the arbitrariness and inconsistency currently plaguing decisions on this issue. Part V summarizes the issue at hand and explains why the proposed standard from Part IV would better suit all parties involved in chapter 13 litigation.

   1. THE MEANING OF DISPOSABLE INCOME—AN EVOLUTIONARY LOOK AT

      §§ 1325(B) AND 707(B)(2) OF THE CODE

      
      

      The crux of the issue of...