If the debtor’s income is below the state median, the dreaded Means Test is “done.” However, if debtor’s gross income exceeds the median (gross income for the household size chosen is greater than the state median), the rest of the Means Test Form must be completed. Debtor can deduct things like mandatory deductions from gross income, income taxes and union dues.

Debtor can also deduct secured payments to be made in the next 60 months. In other words, if debtor financed a car and there are 45 payments left. The 45 payments are added and divided by 60. The figure is then deducted from the income. Same techniques is applied to mortgage payments(also a secured debt).

What about secured payments on collateral to be surrendered in a chapter 7 or soon after

Can you still get the benefit of the deduction? Because technically the Means Test is backward looking in that even if your income at the time of filing is lower than the median, it doesn’t matter if the income during the 6 months prior to the filing exceeds the median. Likewise, shouldn’t your obligation during those 6 months be allowed to set off that income? Well, Courts are all over the place on that specific issue.

In California, the 9^th Circuit is pretty settled on the answer. Thankfully for those of us practicing in the Circuit.

Intent to surrender collateral, irrelevant and deduction is still allowed in the following 9^th Circuit cases:

C.D. California: In re Wilkins, 370 B.R. 815 (Bankr. C.D. Cal., July 2, 2007) (Bankruptcy Judge Meredith A. Jury) (Chapter 7 case)

E.D. California: In re Vartan, 2007 WL 640006 (Bankr. E.D. Cal., Feb. 26, 2007) (Bankruptcy Judge Robert S. Bardwil) (Chapter 7 case)

N.D. California: In re Rodrigues, 2008 WL 372742 (Bankr. N.D. Cal., Feb. 11, 2008) (Bankruptcy Judge Alan Jaroslovsky) (Chapter 7 case); In re Chang, 2007 WL 3034679 (Bankr. N.D. Cal., Oct. 16, 2007) (Bankruptcy Judge Arthur S. Weissbrodt) (Chapter 7 case);

S.D. California: In re Sederberg, Case No. 07-02065-JM7 (Bankr. S.D. Cal., Dec. 20, 2007) (Bankruptcy Judge James W. Meyers) (Chapter 7 case); In re Maya, 374 B.R. 750 (Bankr. S.D. Cal., Aug. 14, 2007) (Chief Bankruptcy Judge Peter W. Bowie) (Chapter 7 case)

Idaho: In re Kelvie, 372 B.R. 56 (Bankr. D. Idaho, July 10, 2007) (Chief Bankruptcy Judge Terry L. Myers) (Chapter 7 case)

Oregon: In re Stewart, Case No. 08-33275-rld7 (Bankr. D. Or., March 11, 2009), amended (March 16, 2009) (Bankruptcy Judge Randall L. Dunn) (Chapter 7 case); In re Oliver, 2006 WL 2086691 (Bankr. D. Or., June 29, 2006) (Bankruptcy Judge Randall L. Dunn) (both Chapter 7 and 13 cases)

W.D. Washington: In re Smith, 401 B.R. 469 (Bankr. W.D. Wash., Nov. 14, 2008) (Bankruptcy Judge Paul B. Snyder) (both Chapter 7 and Chapter 13)

From the above, it is pretty clear that you can deduct secured payments for collateral you intend to surrender in the 9^th Cir. (California included).

What about collateral that was already surrendered, repossessed or foreclosed on prior to filing?

The answer is less clear. I would say that this is not something yet decided and I would advise clients, if circumstances permit and the deduction is necessary, to file before the property is surrendered, repossessed or foreclosed on. I think that the case law currently is leaning toward not permitting deductions.

Caution: sometimes it is better and necessary to wait until after and risks must be weighed to determine which option is better. I recommend consulting an experienced attorney to help you make the right decision.

Deduction was not permitted in this case:

In re Ballard, 2008 WL 783408 (Bankr. N.D. Ohio, March 25, 2008)

(Bankruptcy Judge Russ Kendig) (the creditor obtained a foreclosure judgment prepetition); Case number 07-61486.