The Fourth Circuit recently decided that, under Section 707(b)(2) of the Bankruptcy Code, a debtor can take the full IRS National and Local Standard amounts for expenses even though the debtor’s actual expenses are less. Lynch v. Jackson, No. 16-1358 (4th Cir., Jan 4, 2017). The debtors had filed for chapter 7 and on Form 22A, as the Form’s instructions provided, used the IRS National and Local Standard amounts for their expenses, rather than their actual expenses. The trustee moved to dismiss their petition as being abusive, and argued that the IRS standards acted as a “cap” but if a debtor’s actual real life expenses were less, then the debtor should use the lesser amounts. The bankruptcy court denied the trustee’s motion to dismiss and the Fourth Circuit accepted a direct appeal.
The Supreme Court had previously decided in another case, Ransom v. FIA Card Servs., 562 U.S. 61 (2011), that in order for a debtor to use the IRS Standards the debtor actually had to incur the type of expense designated. A debtor cannot claim the expenses for car maintenance, for example, if the debtor does not actually own a car; a debtor cannot claim childcare expenses without a child, and so on. The Supreme Court never addressed the question about once the debtor has the expense, whether actual amounts or IRS Standards should be used.
The Fourth Circuit found, after looking at Section 707(b)(2) of the Bankruptcy Code, that the IRS Standards shall be applied. To do otherwise would punish frugal debtors who had somehow managed to live on less before they filed Chapter 7. This is a very favorable decision for debtors facing Chapter 7.