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Supreme Court Rules on Calculation of Chapter 13 Plan Payment

On June 7, 2010, the Supreme Court decided the case of Hamilton v. Lanning, 560 U.S. ___ (2010), for which the lower court decisions have been reported in detail in Becket & Lee's newsletter, Bankruptcy Report.

In the six months prior to filing her petition, the debtor accepted a buyout from her employer, coincident with her termination. This financial "bump" placed her "current monthly income" above the median income for Kansas. Recognizing the transience of this income figure, the debtor proposed a chapter 13 plan payment based on her far lower income and expenses at the time of her petition and as anticipated thereafter.

The chapter 13 trustee objected to the confirmation of the debtor's proposed plan, arguing that the Bankruptcy Code determined the plan payment to be the amount found on the "bottom line" of Official Form 22C. This bottom line is the result of subtracting the Form's expenses from the debtor's "current monthly income," which is also calculated in strict compliance with the statute.

The Supreme Court of the United States affirmed the United States Court of Appeals for the Tenth Circuit, rejecting the so-called mechanical approach as inconsonant with the Code. It held that "when a bankruptcy court calculates a debtor's projected disposable income, the court may account for changes in the debtor's income or expenses that are known or virtually certain at the time of confirmation." Echoing the appeals court's analysis, the Court opined that the meaning of statutory language such as "projected" (as in "projected disposable income"), "to be received in the applicable commitment period," and "as of the effective date of the plan" (being defined by the Court as the confirmation date), lead to a holding that "the 'forward-looking approach' is correct." Such an approach is further supported by pre-BAPCPA practice, still valid "'absent a clear indication that Congress intended such a departure.'" The Court rejected as flawed each of the trustee's suggested "work arounds" to avoid or mitigate the effects of the mechanical approach he urged.

The dissent agreed that while "expenses at least arguably depend on estimations of the debtor's future circumstances," a debtor's current monthly income is a statutorily defined fixed amount based strictly on historical data. Such result was the only proper outcome considering the strict language of the statute. If this result runs counter to that which Congress intended, it may correct it.

As a practical matter, Lanning should drive courts to require debtors to propose chapter 13 plans that more realistically reflect their ability to pay creditors. Also, this decision should have some effect on the case of Ransom v. MBNA, Am. Bank, N.A. (In re Ransom), currently before the Supreme Court. Litigated successfully by Becket & Lee through the Ninth Circuit Court of Appeals, Ransom denied an "above-median" chapter 13 debtor an expense for vehicle ownership for a vehicle unencumbered by a loan or lease obligation, holding that the plain language of the Bankruptcy Code prohibited the debtor from deducting the expense for a car he owns "free and clear." It would not permit the debtor to reduce his payments to his unsecured creditors on the basis of a "fictitious expense."

On June 8, 2010, Becket & Lee partner Alane Becket participated in a teleconference sponsored by the American Bankruptcy Institute in which she, a chapter 13 trustee and several law professors discussed Lanning and its practical impact for both creditors and debtors. A recording of the teleconference is available on the ABI's website (www.abiworld.org).

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