Chapter 7 Means Test and Surrendered Property

For chapter 7 debtors, statutory means testing applies to individuals above the state median income. The availability of means testing deductions determines the result of the statutory formula, and whether a given debtor can proceed in chapter 7. One means test deduction is for payments on secured debts due in the next 60 months. By this deduction, if a debtor has an expensive mortgage payment, that payment is accounted for in determining if any monthly income is available for unsecured creditors.

A more difficult question is how this means test deduction works when a debtor intends to surrender collateral. In such a situation, the debtor is still obligated to make the payment (as of the petition date), but does not intent to make it, but rather have the obligation discharged. This question has been subject to considerable judicial interpretation since the 2005 bankruptcy law was enacted.

Recently, the Bankruptcy Court for the Eastern District of North Carolina held in In re Sterrenberg (summary) that a deduction could not be claimed when there was an intent to surrender. The Court relied on a line of cases that interpreted the statutory "scheduled as contractually due" language to exclude debts where there was a stated intention to surrender, and found support in recent chapter 13 decisions that favor "a more case-specific forward looking approach."

While the decision in Sterrenberg is not surprising given the overall direction of means testing jurisprudence, the decision does not address a few points. For one, the decision does not address the earlier Haenke decisions in the Eastern District, where the Bankruptcy Court held the opposite, that contractually due debts could be deducted even if surrendered, and was subsequently affirmed on appeal to the district court. Additionally, while the recent chapter 13 decisions favor a forward looking approach, including the 4th Circuit's Quigley decision concerning surrendered property in chapter 13, chapter 13 includes "projected disposable income" language that is absent from chapter 7.