AWG Hearing: Establishing Financial Hardship

The transcript of the video follows below for further review.

The Debt Collection Act of 1982 (DCA) and the Debt Collection Improvement Act of 1996 (DCIA), 31 U.S.C. § 3701, 3711-3702E authorizes the U.S. Small Business Administration (SBA), by and through the Department of Treasury (Financial Management Services n/k/a the Bureau of Fiscal Service (Treasury/BFS)) to initiate Administrative Wage Garnishment (AWG) Proceedings in an attempt to seize an a person's disposable income per pay period in connection with an alleged non-tax delinquent federal debt allegedly owed to the SBA.  31 C.F.R. § 285 et seq.

Typically, a written notice is sent to the last known address of the alleged federal debtor.  The notice provides information as to the amount claimed, the federal creditor agency demanding restitution and an opportunity for the debtor to submit a formal "Request for Hearing."  These are very important rights which the SBA debtor should not simply ignore or take lightly.  Because, if the SBA debtor fails to adequately respond to the notice by defending the allegations on the merits or misses the deadline to submit the Request for Hearing, more often than not, an AWG order will be issued against the SBA debtor's paychecks.  As such, it is much more difficult to petition for a release or reduction of an AWG order as opposed to defending against it before one is issued.

One of the defenses that should be explored in any AWG proceeding, is whether the AWG amount to be deducted from an SBA debtor's paychecks each month would cause severe "financial hardship," and therefore, should not issue on this basis alone.

Applicable federal government regulations, rules and policies define “financial hardship” as the inability to pay for: (i) food and clothing; (ii) out of pocket health care expenses; (iii) housing and utilities; and (iv) transportation.  For all federal debts (tax and non-tax), the Federal Government reviews petitions for relief from forcible collection action based on financial hardship by assessing a Petitioner’s expenses as against the IRS’s financial collection standards (a bureau of the Treasury Department) as found on the IRS website page” https://www.irs.gov/Individuals/Collection-Financial-Standards.

1. National Standards: Food, Clothing and Other Items

National Standards have been established for five necessary expenses: food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous.  The National Standard for Food, Clothing and Other Items includes an amount for miscellaneous expenses. This miscellaneous allowance is for expenses SBA debtors may incur that are not included in any other allowable living expense items, or for any portion of expenses that exceed the Collection Financial Standards and are not allowed under a deviation.  The standards are derived from the Bureau of Labor Statistics Consumer Expenditure Survey. The survey collects information from the Nation's households and families on their buying habits (expenditures), income and household characteristics.

1. National Standards: Out-of-Pocket Health Care Expenses

Out-of-Pocket Health Care standards have been established for out-of-pocket health care expenses including medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.).  The table for health care allowances is based on Medical Expenditure Panel Survey data and uses an average amount per person for SBA debtors and their dependents under 65 and those individuals that are 65 and older. The out-of-pocket health care standard amount is allowed in addition to the amount SBA debtors pay for health insurance.

1. Local Standards: Housing and Utilities

The housing and utilities standards are derived from U.S. Census Bureau, American Community Survey and BLS data, and are provided by state down to the county level. The standard for a particular county and family size includes both housing and utilities allowed for a SBA debtor’s primary place of residence. Housing and utilities standards are also provided for Puerto Rico.  Housing and Utilities standards include mortgage or rent, property taxes, interest, insurance, maintenance, repairs, gas, electric, water, heating oil, garbage collection, residential telephone service, cell phone service, cable television, and Internet service. The tables include five categories for one, two, three, four, and five or more persons in a household.

1. Local Standards: Transportation

The transportation standards for SBA debtors with a vehicle consist of two parts: nationwide figures for monthly loan or lease payments referred to as ownership costs, and additional amounts for monthly operating costs broken down by Census Region and Metropolitan Statistical Area (MSA). A conversion chart has been provided with the standards that lists the states that comprise each Census Region, as well as the counties and cities included in each MSA. The ownership cost portion of the transportation standard, although it applies nationwide, is still considered part of the Local Standards.  The ownership costs provide maximum allowances for the lease or purchase of up to two automobiles if allowed as a necessary expense. A single SBA debtor is normally allowed one automobile.  The operating costs include maintenance, repairs, insurance, fuel, registrations, licenses, inspections, parking and tolls.  If an SBA debtor has a car payment, the allowable ownership cost added to the allowable operating cost equals the allowable transportation expense. If an SBA debtor has a car, but no car payment, only the operating costs portion of the transportation standard is used to figure the allowable transportation expense. In both of these cases, the SBA debtor is allowed the amount actually spent, or the standard, whichever is less.

There is a single nationwide allowance for public transportation based on BLS expenditure data for mass transit fares for a train, bus, taxi, ferry, etc. SBA debtors with no vehicle are allowed the standard, per household, without questioning the amount actually spent.

If an SBA debtor owns a vehicle and uses public transportation, expenses may be allowed for both, provided they are needed for the health, and welfare of the SBA debtor or family, or for the production of income. However, the expenses allowed would be actual expenses incurred for ownership costs, operating costs and public transportation, or the standard amounts, whichever is less.

1. Other Necessary or Conditional Expenses

Additionally, an SBA debtor should also explore whether he or she has other expenses which may meet the "necessary or conditional" expense test so as to argue that these other expenses ought to be factored into a severe "financial hardship" calculation.  The Internal Revenue Manual (IRM) provision, 5.15.1.10 describes those other expenses which may be necessary or conditional.  Other necessary expenses meet the necessary expense test and generally should be allowed. The amount allowed must be reasonable considering the SBA debtor's individual facts and circumstances. Other conditional expenses may not meet the necessary expense test, but may be allowable based on the circumstances of an individual case.  There may be circumstances where expenses may be allowed even if they do not meet the necessary expense test. See IRM 5.15.1.2, Analyzing Financial Information to learn about how to argue these other conditional expenses as necessary and, therefore allowable so as to try and defeat an impending AWG order based on severe "financial hardship."

A copy of the financial collection standards discussed throughout this video blog can be found here:  https://www.irs.gov/Individuals/Collection-Financial-Standards