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A Self-Employed Chapter 13 Debtor Cannot Deduct Ordinary and Necessary Business Expenses When Calculating His Current Monthly Income

By: Arthur Rushforth

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re Hoffman,[1] a bankruptcy court denied confirmation of the joint debtors’ plan after the chapter 13 trustee objected to the plan, which had a three-year applicable commitment period, holding that the debtors improperly deducted ordinary and necessary business expenses when calculating their current monthly income.[2]  Instead, the court held that the debtors should have used the gross receipts from the business.[3]  In Hoffman, a married couple filed a joint petition under chapter 13 of the Bankruptcy Code.[4]  The husband was self-employed, and pursuant to Official Bankruptcy Form 22C,[5] the debtors deducted the husband’s ordinary and necessary business expenses from his gross receipts when they calculated their current monthly income.[6]  Based on these calculations the debtors’ annualized current monthly income was lower than the applicable median family income of in Minnesota, where they resided.[7]  Accordingly, the debtors proposed a plan that provided for them to pay $175.00 for thirty-six months.[8]  The chapter 13 trustee objected,[9] arguing that the debtors improperly deducted business expenses when calculating the husband’s current monthly income and that the debtor’s current monthly income was above-median after eliminating that deduction, thereby triggering a five-year applicable commitment plan rather than the three-year period proposed by the debtors.[10]  In particular, the trustee argued the plain language of section 1325 did not provide for the deduction of ordinary and necessary business expenses when calculating current monthly income.[11]  The debtors responded by claiming their applicable commitment calculation conformed to the calculation scheme provided for by Official Form 22C.[12]  The court ultimately agreed with the trustee and denied the confirmation of the debtor’s plan.[13]

Section 1325(b)(4) describes the formula for determining a debtors applicable commitment period under a chapter 13 plan, which will determine the length of the debtor’s plan.[14] Generally, unless a chapter 13 plan provides for payment in full, the plan must be (i) three years long if the debtor’s current monthly income is below the medium household income for the state where the debtor resides or (ii) five years if the debtor’s current monthly income is above the state median income.[15]  Section 101(10A) defines the term “”Current Monthly Income” as “the average monthly income from all sources that the debtor receives (or in a joint case the debtor and the debtor's spouse receive) without regard to whether such income is taxable income, derived during the 6-month period . . . ” prior to filing of the bankruptcy petition.[16]  Section 101(10A) further defines current monthly income to include “all sources that the debtor receives,” excluding only specific benefits enumerated in the statute.[17]  The Statute does not explicitly provide that a debtor may deduct ordinary and necessary business expenses when calculating his current monthly income.[18]  Notwithstanding the lack of statutory support, the formula for calculating current monthly income on Form 22C provides that a debtor may deduct such expenses when calculating his current monthly income.[19]  Given this conflict between the statute and the official form, courts have split as to whether a debtor can deduct ordinary and necessary business expenses when calculating his current monthly income.[20]

The overwhelming majority of courts have held that self-employed debtors may not deduct ordinary and necessary business expenses when calculating their current monthly income.[21]  For example, in Drummond v. Wiegand (In re Wiegand),[22] the Bankruptcy Appellate Panel for the Ninth Circuit held that a self-employed co-debtor could not deduct ordinary and necessary business expenses from gross business receipts when calculating the debtors’ current monthly income.[23]  The Wiegand court reasoned that the statute’s plain language did not provide for deductions of ordinary and necessary business expenses.[24]  In contrast, the Wiegand court noted that section 1325(b)(2) provides that a debtor can deduct business expenses from his current monthly income when calculating his disposable income.[25]  Therefore, “[t]o the extent that Part I of Form 22C requires a business debtor to calculate current monthly income by subtracting ordinary and necessary business expenses from gross receipts, [the Wiegand court] h[e]ld that Part I of Form 22C is inconsistent with [section] 1325(b)(2).”[26]  The minority of courts, however, have held that a debtor may use the formula on Form 22C and deduct his business expenses when calculating his current monthly income.  For example, in In re Romero,[27] the court reasoned that “[accepting] [t]he trustee’s calculation [of current monthly income] would artificially inflate the debtor’s income by including, as part of the debtor’s income, the business revenue that would be consumed by business expenses,” which in turn force the debtor into five year commitment plans.[28]  The self-employed debtor in Romero originally submitted a plan with a three-year applicable commitment period based on his calculation of his current monthly income, which deducted ordinary and necessary business expenses.[29]  Although the chapter 13 trustee objected to the proposed plan, citing to the reasoning applied by the majority of courts, the Romero overruled his objection, citing to public policy.[30]  In particular, the Romero court noted that an inequitable result occurs if the self-employed debtors were forced to include gross business receipts when calculating their current monthly income since doing so inflated their current monthly income by including money that they did not have to spend on themselves but rather reinvested into their business in order to maintain their income.[31]

The Hoffman court ultimately joined the majority of courts and held that a debtor may not subtract ordinary and necessary business expenses when calculating his current monthly income.[32]  In so holding, the Hoffman court used the plain meaning cannon of statutory interpretation to resolve the conflict between section 1325(b) of the Bankruptcy Code and Form 22C,[33] concluding that when an official form and the Bankruptcy Code conflict, “the [Bankruptcy] Code always wins.”[34]  The Hoffman court also relied on the legislative history of section 1325, which was amended by BAPCPA, noting that “although section 1325(b)(2) was amended . . . subsection (B) remained unchanged.”[35]  In addition, the Hoffman court specifically declined to follow the Romero decision citing the plain language approach.[36]  Therefore, since the debtors were forced to include the husband’s gross business receipts when calculating their current monthly income, which resulted in their income being above the state median, the Hoffman court refused to confirm their proposed chapter 13 plan that had a three-year commitment  period.[37]

The Hoffman decision is significant for a self-employed chapter 13 debtor because it followed the majority rule and required a debtor to use his gross business receipts when calculating his current monthly income.  Importantly, the majority rule increases the likelihood that a debtor will have to propose a plan with a five-year commitment period since the debtor’s current monthly income will not account for the debtor’s ordinary and necessary business expenses.  Therefore, consumer bankruptcy attorneys should be aware of this split when advising their clients as to whether to file under chapter 13 and if so, as to how long their plans will be after calculating their current monthly income. In particular, unless he practices in a minority jurisdiction, a consumer bankruptcy attorney should use a self-employed debtor’s gross receipts to calculate the debtor’s current monthly income and advise the debtor accordingly because it is likely that the court will not permit the debtor to deduct his business expenses when calculating his current monthly income.  Accordingly, the attorney should advise the debtor that if his current monthly income (even if such income is “inflated”)[38] is above the state median, such debtor will likely (or definitely if the debtor resides in a majority jurisdiction) have to propose a plan with a five-year commitment period.  By doing so, the attorney will have managed the client’s expectations even the attorney and client ultimately decide to propose a plan with a three-year commitment period.  While the result created by the majority of decisions arguably creates an unfair result for many self-employed debtors,[39] the real take away from the majority of cases addressing the issue, including Hoffman, may be that a debtor cannot rely on the official forms.  This is particularly concerning since there may be other conflicts between the Bankruptcy Code and the official forms that are unknown to debtors and their attorneys, creating potential pitfalls for debtors.  Ultimately, an attorney would be wise to cross-reference an official form to the corresponding Bankruptcy Code section at least once to see if any other conflicts exist.  If the attorney identifies such a conflict, he should be aware that the Bankruptcy Code section will likely trump the official form.[40]



[1]In re Hoffman, 511 B.R. 128 (Bankr. D. Minn. 2014).

[2] See 11 U.S.C. §101(10A) (2012) (defining current monthly income  as “all sources that the debtor receives” and making no mention of any exceptions except for benefits received under the Social Security Act and payments to victims of terrorism against humanity).

[3] In re Hoffman, 511 B.R. at 137.

[4] Id at 128.

[5] Official Form of Commitment Period and Disposable Income (Chapter 13) (04/13) Line 3a-3c. (Bankruptcy Code Form 22C is filled out by every debtor when filing for bankruptcy. These forms are uniform and used throughout the country).

[6] In re Hoffman, 511 B.R. at 130.

[7] Id.

[8] Id.

[9] See 11 U.S.C. §1325(b)(1) (2012) (“if the trustee . . . objects to the confirmation of a plan then the court may not approve the plan unless. . . .”)

[10] Id. at §1325(b)(1)(B) (allowing trustee’s to object to confirmation of debtor’s plan when distribution does not reflect 100% payout to unsecured creditors or when debtor’s do not commit all their disposable income to paying into plan.)

[11] In re Hoffman, 511 B.R. at 131.

[12] Supra note 5 (providing for deduction of ordinary and necessary business expenses when calculating debtor’s current monthly income).

[13] In re Hoffman, 511 B.R. at 137.

[14] See 11 U.S.C. §1325(b)(4) (“For purposes of this subsection, the ‘applicable commitment period’ . . . shall be— (i) 3 years; or (ii) not less than 5 years, if the current monthly income of the debtor and the debtor's spouse combined, when multiplied by 12, is not less than . . . (II) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals . . .”).

[15] Id.

[16] See id. at §101(10A).

[17] See id. (providing for enumerated exemptions such as victims of terrorist attacks who receive compensation for injuries received).

[18] Id.

[19] Id.

[20] See Drummond v. Wiegand,(In re Wiegand) 386 B.R. 238, 238 (B.A.P. 9th Cir. 2008); see also In re Arnold, 376 B.R. 652, 654 (Bankr. M.D. Tenn, 2007); In re Bembenek, No.08-22607-svk, 2008 WL 2705289, at *1 (Bankr. E.D. Wisc. July 2, 2008); In re Harkins, 491 B.R. 518, 518 (Bankr. S.D. Ohio 2013); In re Compann, 459 B.R. 478, 483 (Bankr. N.D. Ga. 2010); but see In re Romero, No. 12–20793–BKC–AJC, 2013 WL 241742, at *1 (Bankr. S.D. Fla. 2013).

[21] See supra, note 20.   

[22] In re Wiegand, 386 B.R. at 238.

[23] Id. at 239.

[24] Id.

[25] See 11 U.S.C. §1325(b)(2)(B).

[26] Supra note 23.

[27] In re Romero, 2013 WL 241742, at *3.

[28] Id.

[29] Id. at *1.

[30] The court held that deducting ordinary and necessary business expenses when calculating current monthly income resulted in “prejudicial treatment to business proprietors” under the Bankruptcy Code. Id. at *2.

[31] Id.

[32] In re Hoffman, 511 B.R. at 137.

[33] In re Wiegand, 386 B.R. at 241.

[34] Id.

[35] Id. at 242

[36] In re Hoffman, 511 B.R. at 137. (“[T]he Court respectfully disagrees with the debtors and their reliance on . . . Romero”).

[37] Id.

[38] See In re Romero, 2013 WL 241742, at *3.

[39] See id.; but see In re Wiegand, 386 B.R. at 241.

[40] When an official form and the Bankruptcy Code conflict, “the [Bankruptcy] Code always wins.” In re Romero, 2013 WL 241742, at *3.