A fellow bankruptcy attorney recently posed an interesting pair of related questions:
How (if at all) does a valid prenuptial agreement affect the requirements to list a non-filing spouse’s income in CMI per 707(b)(7)(B)? Does it make ALL of the spouse’s income includable in the “marital adjustment”?
Here is my response.
I. The Bankruptcy Code’s Definition Of CMI
It seems to me that the starting point for the analysis must be § 101(10A), which provides (with emphasis added):
(10A)The term “current monthly income”—
(A) means the average monthly income from all sources that the debtor receives (or in a joint case the debtor and the debtor’s spouse receive) without regard to whether such income is taxable income, derived during the 6-month period ending on—
(i) the last day of the calendar month immediately preceding the date of the commencement of the case if the debtor files the schedule of current income required by section 521(a)(1)(B)(ii); or
(ii) the date on which current income is determined by the court for purposes of this title if the debtor does not file the schedule of current income required by section 521(a)(1)(B)(ii); and
(B) includes any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor’s spouse), on a regular basis for the household expenses of the debtor or the debtor’s dependents (and in a joint case the debtor’s spouse if not otherwise a dependent), but excludes benefits received under the Social Security Act, payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes, and payments to victims of international terrorism (as defined in section 2331 of title 18) or domestic terrorism (as defined in section 2331 of title 18) on account of their status as victims of such terrorism.
II. CMI Includes Only That Portion Of The Nonfiling Spouse’s Income Contributed On a Regular Basis To Household Expenses
Here’s an observation on that statutory subsection from a bankruptcy court in South Carolina (with emphasis added):
The use of parenthetical phases in 11 U.S.C. 101(10A) implies that the income of a non-filing [sic] spouse is not included for purposes of determining a debtor’s projected disposable income under 11 U.S.C. 1325(b) if a debtor does not “receive” this income pursuant to 11 U.S.C. 101(10A)(A). However, 11 U.S.C. 101(10A)(B) indicates that a non-filing [sic] spouse’s income is included, regardless of a debtor’s receipt of such income, if the income is paid on a “regular basis” for debtor’s “household expenses.” In re Quarterman, 342 B.R. 647, 651 (Bankr. M.D. Fla. 2006); In re Hall, 2007 WL 445517, *3 (Bankr. C.D. Ill. Feb.12, 2007). Through this definition “Congress chose to exclude that portion of the non-filing spouse’s income devoted to personal pursuits or expenses from current monthly income.” In re Baldino, 369 B.R. 858, 862 (Bankr. M.D. Pa. 2007).
To the extent that a nonfiling spouse regularly contributes to the family’s actual household expenses, such contributions are included in the definition of “current monthly income.” § 101(10A)(B).
Thus, CMI is the sum of the six-month averages of the debtor’s gross income and the portion of the debtor’s nonfiling spouse’s gross income that is contributed on a regular basis for the debtor’s household expenses.
III. Some Of The Nonfiling Spouse’s Income Can Be Excludable Under The Marital Adjustment
Form 22 (Form 22A in Chapter 7 and Form 22C in Chapter 13) starts with the assumption that all of the nonfiling spouse’s income is contributed on a regular basis to the debtor’s household expenses, so both spouses’ incomes must initially be listed. However, the form permits a marital adjustment by allowing the debtor to subtract that portion of the nonfiling spouse’s income that is not being contributed on a regular basis to the debtor’s household expenses (line 17 of Form 22 A and line 19 of Form 22C):
The marital deduction has been described as “that part of the non-debtor spouse’s income that is not contributed to the debtor’s household support” which should be excluded from the calculation of current monthly income. In re Vollen, 426 B.R. 359, 366 (Bankr. D. Kan. 2010). Line 17 of Form B22A provides for an adjustment to allow married debtors, who file individually, to deduct a portion of the non-filing [sic] spouse’s income that is not within the definition of CMI, as set forth in the Bankruptcy Code. In re Dugan, 2008 WL 3558217 *5, 2008 Bankr. LEXIS 2813 *16 (Bankr. D. Kan. 2008).
The Trustee’s argument is based, apparently, not on the inaccuracy of the Debtor’s calculations, but on a belief by the Trustee that if a Debtor is married, all income of a non-filing spouse must be considered as income contributed for the support of the Debtor and the Debtor’s dependents regardless of how that income is actually spent. This Court has previously rejected a similar argument by the Trustee. See In re Hall, 2007 WL 445517 at *3 (Bankr. C.D. Ill.). This Court again rejects the position of the Trustee that, as a matter of law, all income of a non-filing spouse must be included when calculating a debtor’s “current monthly income”.
It is worth noting that the debtor has the burden of proving that funds received by the nonfiling spouse are not regularly contributed to the household expenses. In re Dugan, 2008 WL 3558217 *6, 2008 Bankr. LEXIS 2813 *16 (Bankr. D. Kan. 2008).
IV. Excludable Income
What sorts of things are legitimate marital adjustments? I have used payments the nonfiling spouse makes on premarital debts without any complaint from the U.S. Trustee’s office. More generally, here’s what the U.S. Trustee’s line-by-line Guide says about the Form 22A marital adjustment:
Line 17, Marital adjustment.
- All income of the non-debtor [sic] spouse should be included, except the following expenses of the non-debtor [sic] spouse may be excluded:
- withholding taxes;
- student loan payments;
- prior support obligations;
- debt payments on which only the non-filing spouse is legally liable and where the consideration for the loan exclusively benefits the non-filing spouse. (Credit cards used to pay for household expenses may not be deducted on Line 17).
Notice that no mention is made of prenuptial agreements. However, that may be because the guide is for the entire nation. In fact, on its first page the guide makes the disclaimer: “Unless a circuit court has decided an issue to the contrary, United States Trustees should, absent unusual circumstances, maintain these positions when interpreting section 707(b).”
V. Community Property And Prenuptial Agreements
It is entirely uncontroversial that under normal circumstances community property consists of all assets except those assets with which a spouse enters the marriage, those assets a spouse inherits, and the offspring of such assets. See Cal. Fam. Code § 770. However, a prenuptial agreement — defined in Cal. Fam. Code §§ 1610 – 1617 — can dramatically change things since it can exclude post wedding day wages from community property.
By the way, to be valid a prenuptial agreement must be in writing. See, e.g., In re Marriage of Shaban, 105 Cal. Rptr. 2d 863 (Cal. Ct. App. 4th App. Dist., 3rd Div. 2001) (“. . . the requirement that prenuptial agreements be in writing under California law is a statute of frauds provision, and to satisfy the statute of frauds, a writing must state with reasonable certainty what the terms and conditions of the contract are.”).
Since a prenuptial agreement can remove wages from community property, it is arguably true that it can put wages under the marital exclusion rubric.
Unfortunately, the Ninth Circuit case law does not appear to answer the question posed. This means that if the U.S. Trustee follows the Guide, you may face a battle over excluding the nonfiling spouse’s wages using the marital adjustment based on the prenuptial agreement.
However, based on the principles developed above, it seems to me that if the prenuptial agreement clearly specifies that the nonfiling spouse’s income is that spouse’s separate property, the couple has consistently enforced the terms of the prenuptial agreement throughout the marriage, and the agreement satisfies the requirements of Cal. Fam. Code §§ 1610 – 1617 and the Statute of Frauds, then that spouse’s income is excludable as a marital adjustment. In sum, if the prenuptial agreement clearly excludes the nonfiling spouse’s income from community property, then it is the nonfiling spouse’s separate property, and unavailable for payment of the filing spouse’s debts.
If you’re planning on filing a bankruptcy case in Los Angeles County or Orange County in which you will use the marital adjustment based on a prenuptial agreement, contact a good bankruptcy attorney to help you.