Fourth Circuit: Debtors Entitled To Full National And Local Standard...


MeansTest_Below 300w, 40w, 80w, 160w, 320w, 629w" sizes="(max-width: 150px) 100vw, 150px" />Our neighbors to the north recently had a key, debtor-friendly, decision in a Chapter 7 case regarding what expenses may be used in the means test calculations.  In In re Jackson, 2017 WL 59011, Ch. 7 No. 16-1358 (4th Cir., January 5, 2017) the debtors had used the entire amount allowed by the “National and Local Standards” for certain expenses even though their actual expenses for those categories were lower.  The Bankruptcy Administrator moved to dismiss.

We granted the appeal as to the following question: whether 11 U.S.C. § 707(b)(2) permits a debtor to take the full National and Local Standard amounts for expenses even though the debtor incurs actual expenses that are less than the standard amounts.

In their means test calculations, the debtors included the full local standard amount of $1548.00 for their home loan payments, even though their actual monthly payment was only $878.00.  They also claimed the entire local standard amount for vehicles of $488.00 each, even though the actual payments for their two vehicles was $111.00 and $90.50, respectively.  In her Motion, the Bankruptcy Administrator argued that this was “abuse” and that the official forms were incorrect because they should state that debtors are “limited to” the National and Local Standards.  The debtors argued that the statute was unambiguous and allowed them to use the entire amount of the National and Local Standards even if their actual expenses for those categories was lower.

The Court held in favor of the debtors.

In Ransom v. FIA Card Servs., 562 U.S. 61, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011), the Supreme Court was tasked with interpreting 11 U.S.C. § 707(b)(2)(A)(ii) (I). It held that an expense is “applicable,” as used in § 707(b)(2)(A)(ii)(I), “only if the debtor will incur that kind of expense during the life of the plan.” Ransom, 562 U.S. at 70, 131 S.Ct. 716. However, the Court expressly declined to reach the issue of “the proper deduction for a debtor who has expenses that are lower than the amounts listed in the Local Standards.” Id. at 75 n.8, 131 S.Ct. 716 (emphasis in original). This court must now address the issue that the Supreme Court declined to reach in Ransom. Based on the plain language of the statute, we hold that a debtor is entitled to deduct the full National and Local Standard amounts  even if they have actual expenses below the standard amounts.

Here, the language is quite clear. Once an expense is incurred, then “[t]he debtor’s monthly expenses shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards.” 11 U.S.C. § 707(b)(2)(A)(ii)(I) (emphases supplied). A debtor is entitled to take the full amount of the National and Local Standards if they incur an expense in that category…

This interpretation gives full effect to Congress’s decision to use different words in the statute. Section 707(b)(2)(A) (ii)(I) uses both “applicable” and “actual” in the same sentence, and “[d]ifferent words used in the same … statute are assigned different meanings…” Because Congress chose to use two different words in the same sentence, the words must mean something different. As used in § 707(b)(2)(A)(ii) (I), “applicable monthly expenses” entitles a debtor to the full National and Local Standard amounts, and “actual monthly expenses” only entitles a debtor to expenses incurred.

Moreover, interpreting “applicable” to mean “actual,” as the Bankruptcy Administrator urges, would create an absurd result: punishing frugal debtors. If § 707(b)(2) (A)(ii)(I) only allows for deductions up to the amount to spend up to the amount of the National and Local Standards. A frugal debtor, who spent less than the National and Local Standard amounts, would be punished and receive less protection than a prolific debtor who spent up to or beyond the cap. Readings of a statute that “produce absurd results are to be avoided.” Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 575, 102 S.Ct. 3245, 73 L.Ed.2d 973 (1982). Therefore, we hold a debtor is entitled to the full National and Local Standard amounts for any category of expense in which they incur a cost.

The Fourth Circuit got this one right, based on the plain language of the statute and basic rules of statutory interpretation.  As the Court stated, the Administrator’s argument would lead to an absurd result, and likely would lead to debtors incurring more secured debt prior to filing to either qualify for Chapter 7 or reduce their pool for unsecured claims in a Chapter 13.  It already happens for debtors who might not have any expenses for a certain category, such as a secured car loan (or two).  It is probably also safe to say that when an argument is based on incorrect instructions in the official forms, it is not a strong argument.


Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.