Good news for a Chapter 13 filer

[bingo]

Love the 1% payback.

Private School Tuition Was Reasonable and Necessary Expense

Private school tuition was a "reasonable" and "necessary" expense for a below-median-income Chapter 13 debtor whose non-debtor spouse worked outside the home at a parochial school specifically for the purpose of allowing their children to obtain an education there, a South Carolina bankruptcy court has ruled. Moreover, the debtor was not limited to a monthly expenditure of $125.00 per child.

The Chapter 13 trustee objected to confirmation of the debtor's proposed plan, asserting that expenditures totaling $1,513.00 per month for private school tuition for five of the debtor's six children were not reasonable and necessary expenses and, thus, that the plan did not provide "that all of the debtor's projected disposable income to be received in the applicable commitment period . . . will be applied to make payments to unsecured creditors under the plan," as required by 11 U.S.C.A. § 1325((1)(.

Both the debtor and his non-debtor wife were employed outside the home, she as a teacher's aide at the Catholic school which three of the couple's children attended. Their household income fell below the median income for a South Carolina family of eight. The debtor testified, credibly, that the family held membership in a Catholic church and that their children were in private school in order to obtain a Catholic church-based education, which was very important to them. The debtor's wife, who had received a private Catholic education as a child and teenager, worked outside the home only to fund the private school tuition for the children. The debtor credibly testified that the family had chosen to reduce expenditures in other categories in order to provide the funds for private school tuition, and the bankruptcy court noted that, given the size of the family, many of their expenses were well below reported averages and below that which the Chapter 13 trustees in the district would deem objectionable.

"The Court [was] presented with the narrow issue of whether private school tuition is 'an amount reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor . . . .'" Only such expense amounts as are reasonably necessary may be deducted from current monthly income to determine disposable income that must be paid to unsecured creditors. Under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), the determination of "disposable income" is a bifurcated process, different for "above-median-income" and "below-median-income" debtors. For below-median-income debtors, the bankruptcy court explained, most courts have used Schedules I and J to determine "projected disposable income." Because this debtor's Schedule I, line 3 gross income and Form B22C "current monthly income" were the same, the court was not required to "navigate the path nor choose between § 1325((2) disposable income and § 1325((1)( income as a starting point."

The expense calculation is also bifurcated, the court observed, with above-median-income debtors using the "means test" to arrive at expenses. "For a below median income debtor . . . the amounts reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor are determined in the context of the estimated average monthly expenses reported on Schedule J," the court continued. "These expenses must undergo judicial analysis, in the face of an objection, as to reasonableness and necessity; or as some might say, 'the old fashion way.'"

The debtor bears the burden of showing that an expense is reasonable for confirmation purposes. Prior to BAPCPA, the courts were split with respect to the reasonableness of private school tuition as a deduction from income to arrive at disposable income, with the majority rejecting private school tuition as a reasonable and necessary expense, at least in the absence of educational necessity or special needs. "The public policy notion that private school tuition is a luxury expense for the purposes of calculating available income under either the chapter 7 means test or for the disposable income analysis in confirming a chapter 13 plan is swept aside by BAPCPA," the court stated. Now, § 707((2)(A)(ii)(IV) provides that an allowable expense is that for "each dependent child less than 18 years of age, not to exceed $1,500 per year per child, to attend a private or public elementary or secondary school if the debtor provides documentation of such expenses and a detailed explanation of why such expenses are reasonably necessary, and why such expenses are not already accounted for in the National Standards, Local Standards, or Other Necessary Expenses referred to in subclause (I)." Thus, "[f]or some purposes at least, Congress has set forth the public policy that private school tuition can be a reasonable and necessary expense."

The court, then, was faced with two issues in the case at bar: whether some expense for private school tuition was reasonably necessary, and if so, the amount that was reasonably necessary. "The pre-BAPCPA cases setting forth special circumstances are helpful in this analysis," the court noted, "although care must be shown to the public policy shift."

Although the debtor was retaining real estate and paying just a 1% dividend to general unsecured creditors, and the children had no special education needs other than the fact that they were bright and needed to be challenged, the court found those factors to be outweighed by others, namely, the children's long-term enrollment at parochial schools, the family's strongly held religious convictions, and the wife's decision to work outside the home in order to pay for the children's private school education. Moreover, "[t]he family's sacrifice of other basic expenses to fund private school tuition [was] noteworthy and, in this case, the deciding factor for the Court in approving the necessity and reasonableness of the expense for private school tuition." The court added that the debtor was giving up furniture secured by purchase money loans, and that he could file a Chapter 7 petition and likely lose no assets to administration for creditors.

Finally, the court addressed what amount was a reasonably necessary expense for private school tuition. The calculation of the means test in Chapter 7 and of disposable income for above-median-income debtors in Chapter 13 limits the expenditure for private school tuition, and this limit is presumptively reasonable. Under the narrow facts of this case, however, the court determined that the debtor was not limited to a monthly expenditure of $125.00 per child in private school. The debtor's wife was not a co-debtor, the court reasoned, and her income would likely not be available if the children withdrew from private school because she would not work outside the home. "Debtor and his family sacrifice significantly in the purchase of food and clothing and in the areas of recreation and transportation expense," the court reiterated, concluding that "[t]he expense of $1,513.00 for private school tuition is a reasonable and necessary expense." In re Cleary, 2006 WL 3479611 (Bkrtcy.D.S.C., Judge Duncan).