Means Test Deductions Do Not Include Mortgage Payments For Surrender...

The Chapter 7  means test permits debtors to deduct from income the amounts of the debtor’s monthly mortgage payments. Many people who are walking away  from upside down mortgaged property file bankruptcy because they want to wipe out liability for a mortgage deficiency claim. The debtor would properly state on his bankruptcy petition his intent to surrender the upside down property. The debtor will have  greater disposable income after he ceases mortgage payments on the  surrendered property as the standard housing deduction from income is usually much less than typical mortgage payments.

A recent Florida bankruptcy case considered this question regarding a debtor’s mortgage expense in his means test calculation: if a debtor intends to surrender a mortgaged property may the debtor still deduct the mortgage payments amounts in the means test calculation. The debtor argued that his mortgage payment deduction is property as long as the debtor is contractually obligated to pay the mortgage. The court disagreed and dismissed the Chapter 7 filing.

The judge said that debtors may not claim as an expense secured loan payments they will not actually make when they surrender a property. In this case, the debtors had already stopped making mortgage payments several months before filing bankruptcy. The court said that creditors to whom payments are not being made are no longer “secured creditors” for means test purposes.

Whether a debtor is making payments to a secured creditor is a factual question. Debtors who plan to surrender an upside down home and file Chapter 7 bankruptcy should try to keep payments current, or almost current, until they actually file bankruptcy. After the bankruptcy is over the debtors can reconsider the issue and possibly change their mind about keeping the house. They will not have deficiency liability as long as they did not sign a reaffirmation agreement with the mortgage company. Case No. 6:11-01403