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Debtor Cannot Deduct Payments to Secured Creditors Whose Collateral the Debtor Intends To Surrender

On Behalf of | Aug 4, 2014 | Bankruptcy |

In a recent case, In Re White, __ B.R. __ , 2014 WL 2960428 (Bankr. N.D. Miss. 7/2/2014), the Bankruptcy Court held that a debtor in a Chapter 7 case cannot deduct on his means test payments to creditors whose debt is secured by collateral he intends to surrender.

When a debtor earns more than the median income for the state where he resides, he must complete the means test to determine if he qualifies to file a Chapter 7. If he fails the test, he will not qualify for Chapter 7 relief. The means test has a line where a debtor is allowed to deduct payments he is obligated to make to secured creditors from his net monthly income. When applying this deduction many debtors can demonstrate their ability to file a Chapter 7 case. On the other hand, if they are not allowed to deduct these payments from their net income, they may not qualify for Chapter 7.

There are two approaches to this issue. One is the “snapshot” approach. Under this approach, since the debtor is obligated to make these secured payments on the date of filing, it does not matter if he actually makes or intends to make these payments, they are allowed to be deducted from his net income. The other approach is the “forward looking” approach. Courts employing this approach hold that debtors may not deduct expenses for payments to secured creditors that will not be made. These courts reason that the result of the Chapter 7 debtor’s surrender of collateral is that the debtor is no longer required to make the installment payments and the secured debts no longer exist. Because no secured debt remains at that point, the payments due on the secured debt may not be deducted from the debtor’s net income. The bankruptcy court in the White case was persuaded by the forward looking approach and held that the debtor could not deduct the payments due to secured creditors whose collateral he was surrendering. There are cases in the 4th Circuit, In re Hamilton, __ B.R. __, 2014 WL 2986705 (M.D.N.C. 2014); and In re Byers, 501 B.R. 82 (Bankr. E.D.N.C. 2013) which also adopted the forward looking approach. However, in the case of In re Sonntag, 2011 WL 3902999 (Bankr. N.D. W. Va. 2011), the court in Virgina allowed the debtor to deduct payments to secured creditors whose collateral he was surrendering, however, the court held that it may take the fact that he is surrendering the collateral into consideration when deciding whether to dismiss the case based on the totality of the debtor’s circumstances to determine whether the debtor is abusing the provisions of Chapter 7.

As you can see, this is a very complex issue. If you earn more than the median income in your state and are surrendering collateral, you need to speak to a qualified bankruptcy lawyer to determine if you will qualify for Chapter 7. The attorneys at the law firm of Laura Margulies & Associates, LLC have assisted thousands of clients through the Chapter 7 bankruptcy process. Please call us for a consultation today. To learn more about our firm visit our web site at