The Marital Adjustment Deduction on the Means Test
If you are filing for bankruptcy without your spouse, the marital adjustment deduction may help you qualify for Chapter 7 bankruptcy.
In order to qualify for Chapter 7 bankruptcy, you must pass the "means test." If you are married and your spouse is not filing for bankruptcy with you, you will have to deal with one of the most controversial aspects of the means test--the marital adjustment deduction. This deduction becomes important if your non-filing spouse has significant income which would otherwise disqualify you from filing under Chapter 7 bankruptcy.
What Is the Means Test?
Congress designed the means test in order to limit Chapter 7 bankruptcy to those who truly can't pay their debts. If your income is higher than your state's median income, you deduct specific monthly expenses from your "current monthly income" (your average income over the six calendar months before you file for bankruptcy) to arrive at your monthly "disposable income." The higher your disposable income, the more likely you won't be allowed to use Chapter 7 bankruptcy.
If You Share a Household, the Income of Your Non-filing Spouse Counts
If you are separated and claiming separate households, the income of your non-filing spouse is not included in your means test. But if you are sharing a household, your spouse's income is included in the means test.
If your non-filing spouse has significant income, it could mean you don't qualify for Chapter 7 bankruptcy. However, you may be able to counteract your spouse's high income by using the marital adjustment deduction.
How the Marital Adjustment Deduction Works
There are two parts of the means test that allow you to deduct expenses from your income. If your allowable expenses are high enough, it is more likely that you will qualify for Chapter 7 bankruptcy. These two sections are:
- Part 1, Form 122A-2 (Determine Your Adjusted Income) -- this allows you to deduct parts of your spouse's income that are used for his or her personal expenses
- Part 2, Form 122A-2 (Calculate Your Deductions From Your Income) -- this is where you deduct your expenses and debt payments
In Part 2 of the means test, you deduct normal household expenses, such as the mortgage payment for the house you live in, utilities, and groceries. You do not claim these as part of the marital deduction in Part 1, even if your non-filing spouse pays them.
However, in Part 1 of the means test, you can deduct any amounts that your non-filing spouse uses to pay for personal expenses that are separate from household expenses. These expenses are called marital deduction expenses.
As a result of claiming the deduction, the amount of your spouse’s income that is used in the means test is reduced to just that portion that is actually used to contribute to paying the household expenses.
(To learn about the different sections of the means test and the information you must provide, see Completing the Means Test (Form 122A) in Chapter 7 Bankruptcy.)
Examples of Expenses that Might Qualify for the Marital Adjustment Deduction
While the courts are not all in agreement, below are some examples of items that might qualify as valid marital adjustment deductions. Many of these could not be deducted in the regular part of the means test if the couple filed a joint bankruptcy petition.
- payroll deduction such as taxes, insurance, retirement contributions, and union dues
- 401(k) loan repayments
- payments on credit cards that are only in the name of your non-filing spouse
- cell phone expenses for your non-filing spouse's phone
- car payments, insurance, and car expenses for your non-filing spouse’s car
- student loan payments for your non-filing spouse
- child support for your non-filing spouse’s children who do not live with you
- alimony payments
- business travel, food expenses, and uniforms
- attorneys fees
- entertainment expenses and gym memberships, and
- mortgage payments and other expenses for real estate owned solely by your non-filing spouse.
You Can't Deduct Twice
Make sure you are not claiming the same expenses twice -- an expense should appear either in Part 1 or in Part 2, but not in both sections.
For example, if you file income tax returns jointly with your spouse, payroll deductions for income tax would not be included in the marital adjustment deduction because they are already included in the household expense deductions.
You Need Supporting Documents
If your non-filing spouse's income is significant and you are claiming a large marital adjustment deduction, it's likely that the bankruptcy trustee or U.S. Trustee will examine the deductions carefully.
This means that you should have documents demonstrating that the expenses exist and that your spouse has been paying them in the amounts you have claimed for the deduction. If you can’t support their existence, the court may disallow some or all of the deductions.
If the court disallows enough of the deductions to make you ineligible for a Chapter 7 bankruptcy, your case could be dismissed. And if the court finds that you intentionally provided false information on your paperwork, you could be subject to criminal penalties and fines.
Check out Nolo's section on The Means Test & Other Chapter 7 Eligibility Issues to learn more.