A while back I spent several posts discussing the means test in a chapter 7 New York bankruptcy. If debtors’ incomes are above the median family’s for their state, they must take the means test. Sometimes they fail it, but the Bankruptcy Code allows debtors an out: “special circumstances” that reduce their current monthly incomes below the limits that would otherwise create a presumption of abuse and force them to dismiss their cases or convert them to another chapter. The section governing special circumstances is 707(b)(2)(B). What are these special circumstances?
The statute lists two specific situations: a serious medical condition or a call to active duty in the U.S. Armed Forces. Either of these could create expenses that soak up sufficient income to pull debtors below the presumption limit. Fortunately, though, the section leaves open the possibility of other situations that qualify as special circumstances. It just doesn’t list them.
Thus, the Bankruptcy Code leaves debtors with some unanswered questions, particularly, how special the circumstances need to be, whether the expenses must be foreseeable by debtors, or whether they must be beyond the debtor’s control. Bankruptcy courts have split among these questions, leaving many debtors disappointed.
At least two New York bankruptcies notably addressed the issue. In In Re Cotto (425 B.R. 72 (Bankr. E.D.N.Y. 2010)), the debtors’ current monthly income was a mere $57.50 over the presumption limit. The special circumstance? They had recently received a one-time union wage settlement worth about $10,000 that jolted their incomes temporarily. The bankruptcy court strictly interpreted the statute and held that the settlement was not a special circumstance, even though the totality of the debtors’ situation clearly showed that the debtors would not be able to repay their creditors going forward.
The debtors in In Re DeJoy (No. 11-10268 (Bankr. N.D.N.Y. 2011)) offered a handful of reasons their case merited special circumstances. They were older, owed retirement loans, were supporting elderly relatives, owned old vehicles needing repairs, and would only minimally repay their creditors if they converted their case to chapter 13. The U.S. Trustee disagreed, arguing that the debtors did not provide detailed explanations for keeping their case in chapter 7. The bankruptcy court held that a special circumstance must be unforeseeable and beyond the debtors’ control.
One academic has found a number of examples of cases in which bankruptcy courts rejected debtors’ claims to special circumstances: post-petition job changes, post-petition loss of child support payments, high costs for the debtor’s commute, housing expenses for large homes, and food expenses while traveling exclusively for work. By contrast, courts have allowed non-filing spouses’ bonuses as special circumstances, as well as a debtor’s post-petition loss of overtime pay. Finally, one court did allow commuting costs for a debtor and spouse. I’ve written about student loans as a special circumstance too.
As for the procedure of claiming a special circumstance, debtors must, under oath, itemize each additional expense that can be traced to the special circumstance while providing a detailed explanation to the court. There must be no reasonable alternative to the added means test deductions.
The article analyzing special circumstances is here (pdf).
Although there do not appear to be agreed rules on what counts as a special circumstance, bankruptcy courts have narrowed candidates to involuntary, unforeseeable shocks to debtors’ incomes. Sometimes, though, courts come to different conclusions when given the same set of facts. If you are encountering financial difficulties but you feel that your situation may qualify for special circumstances, then you’ll definitely want an experienced New York bankruptcy lawyer arguing your case.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.