In Chapter 13 bankruptcy, the marital adjustment deduction can help you reduce the amount you pay back to unsecured creditors.
If you are married but filing for Chapter 13 bankruptcy without your spouse, the marital adjustment deduction can help you reduce the amount you pay back to general unsecured creditors. Read on to learn more about the marital adjustment deduction and the role it plays in your Chapter 13 bankruptcy.
What Is the Marital Adjustment Deduction?
Just because you are married does not mean you must file a joint bankruptcy. You are allowed to file an individual bankruptcy without your spouse. However, if you are sharing a household, you must include both your income as well as your spouse's income in your bankruptcy even if you file alone. As a result, this can greatly increase what you have to pay back unsecured creditors through your Chapter 13 (discussed below).
Since you are required to include your non-filing spouse's income, the Bankruptcy Code allows you to deduct your spouse's personal and separate expenses from his or her income when completing your bankruptcy forms. This is referred to as the marital adjustment deduction. Essentially, you can use the marital adjustment deduction to exclude the portion of your spouse's income not regularly contributed and used to pay your household expenses.
What Expenses Qualify for the Marital Adjustment Deduction?
Currently, bankruptcy courts have differing views as to what can be used as a marital adjustment deduction. The following are some of the most common expenses that may qualify for the marital adjustment deduction:
- non-filing spouse's payroll deductions such as taxes, retirement contributions, insurance, and 401(k) loans
- payments to creditors on non-filing spouse's separate individual debts
- non-filing spouse's car payments and expenses
- alimony and child support paid by the non-filing spouse
- non-filing spouse's attorneys fees
- personal clothing and entertainment expenses of the non-filing spouse, and
- mortgage and other expenses related to real property owned solely by the non-filing spouse.
For more details on what you can count as deductions, see The Marital Adjustment Test: Types of Allowable Deductions.
How Does the Marital Adjustment Deduction Affect Your Chapter 13?
When you file for Chapter 13 bankruptcy, you are required to disclose your income on Form 22C, "Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income." This is the Chapter 13 means test form that calculates your current monthly income ("CMI") and uses it to determine how much you should be paying back your general unsecured creditors. It also determines whether your bankruptcy should last three or five years.
If your annualized CMI is below your state's median income for a household of the same size, you can be in a three-year bankruptcy and pay little or nothing to general unsecured creditors. If you have an above-median CMI, you must be in a five-year plan and the amount you have to pay unsecured creditors is determined by your disposable income as calculated by the means test. (To learn more about the plan, how long it must last, and what you must pay through it, see the Chapter 13 Bankruptcy Repayment Plan area.)
The marital adjustment deduction helps you by reducing your total CMI. As a result, if the marital adjustment deduction sufficiently decreases your CMI, you can significantly reduce how much you end up paying unsecured creditors through your Chapter 13 repayment plan. If it decreases your CMI below the state median, it may also reduce your commitment period to three years.
Example. Katherine and Jim are married and share a household. Katherine makes $3,000 and Jim makes $2,000 per month. This means their combined CMI is $5,000 and their annual income is $60,000. Jim files for Chapter 13 bankruptcy without Katherine. Their state's median income for a two-person household is $50,000. Without the marital adjustment deduction, their combined income is above median so Jim would have to be in a five-year bankruptcy and likely pay back a portion of his unsecured debts. However, if Katherine uses $1,000 of her income each month to pay for her own non-household expenses, Jim can deduct that amount from her income when completing the means test. This would reduce their CMI to $4,000 and their annual income to $48,000. Since the new CMI is below the state median, Jim may be in a three-year bankruptcy and pay little or nothing to his unsecured creditors.
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