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Cases of Interest

Disposable Income: Then or Now?

The last issue of the Bankruptcy Report introduced a few early cases addressing the requirement for a Chapter 13 plan to devote all of a debtor's projected disposable income to paying unsecured creditors. Since then, more decisions have been issued, as creditors, Trustees, and courts increase their scrutiny of debtors' plans as part of the plan confirmation process.

I. What is projected disposable income and why is it important?

First, a brief review of the issue. It has always been the case that, in order to gain confirmation of a Chapter 13 plan, a debtor must pay in full each allowed unsecured claim or devote to the plan all "projected disposable income" "to be received" during the plan term.

BAPCPA added to this requirement a definition of "disposable income". Since the definition does not include the word "projected", some courts have found that "projected disposable income" can potentially be an amount different from the new definition of "disposable income". Others, by various devices, have not.

This, then, is the issue: whether "projected disposable income" is distinguishable from "disposable income" for the purposes of plan confirmation. The Bankruptcy Code explicitly defines disposable income as current monthly income, less reasonable monthly expenses. If a debtor's current monthly income exceeds the median family income of her state, the reasonableness of the expenditure amounts is determined by tests set forth in 11 U.S.C. § 707(b)(2), otherwise known as the "means test". If a debtor is below the state's median, the debtor's expenses are examined under the standard of "reasonable and necessary."

According to some, a debtor's projected disposable income is not the same as the debtor's "disposable income," calculated according to the formula noted above. By the addition of the word "projected", as well as the language "to be received", the Bankruptcy Code appears to require a determination of a debtor's anticipated income, rather than the debtor's income determined at the petition date and by the formula.

II. "Projected" disposable income is consequentially different from disposable income.

In the last issue, we revisited the case of In re Hardacre. In that case, the United States Bankruptcy Court for the Northern District of Texas concluded that projected disposable income "necessarily refers to income that the debtor reasonably expects to receive during the term of her plan." Many others agree. For example, the court, in In re Dew, opined that "disposable income in § 1325(b)(2) is not necessarily the same as projected disposable income in §1325(b)(1)(B)....To hold otherwise would assign no meaning to the term 'projected', which would be contrary to rules of statutory construction." Other decisions agreed, holding that Congress intended, by the inclusion of the word "projected", a forward-looking examination of a debtor's anticipated income, realizing that, possibly because of the circumstances that resulted in bankruptcy, a debtors after-bankruptcy income may not be similar to her before-bankruptcy income.

The Bankruptcy Report's last issue also reviewed In re Jass, which focused not only on the language of the statute, but its purpose as well. Other courts followed, using similar reasoning, including In re Grady, which found, on the basis of the plain language of the statute and the policy goals of the Bankruptcy Code, that determination of projected disposable income necessarily requires a consideration of a debtor's future and historical finances. In In re Risher, the court required that income tax refunds go into plan payments because projected disposable income is based on anticipated income over the term of the plan. Another case, In re Pak, declared that, for the purposes of confirmation of a Chapter 13 plan, a determination of projected disposable income must include a debtor's actual and anticipated future income. In another case, In re Fuger, the court decided that the term "projected disposable income" requires that a plan's payments be based on disposable income as projected into the future.

III. "Projected" disposable income is the same as disposable income.

Predictably, another approach denies any independent operation of the term "projected" as used to modify "disposable income". The United States Bankruptcy Court for the Eastern District of North Carolina held that the Code "plainly sets forth a new definition and method for calculating disposable income," to which projected disposable income is "linked", and that determination of disposable income is a mathematical calculation mandated by the formula set forth in Section 1325(b)(2). As a result, "debtors with no disposable income under the new law have no projected disposable income." The Court noted that there may be cases where the formula allows debtors who actually have excess income each month to avoid paying anything to their unsecured creditors; however, it felt that the already determined disposable income was the most obvious interpretation of the language of the amendment. The Court did note that, "Perhaps Congress, in an effort to make higher income debtors pay more to their unsecured creditors, unwittingly reached the opposite result(In re Alexander)."

IV. Projected disposable income is a function of projected expenses.

Recall that projected disposable income is a "net" figure rather than a "gross" amount. Consequently, a few objections to confirmation have focused on the expense side of the ledger. Thus, the issue becomes whether to use, in the words of the United States Bankruptcy Court for the Western District of Missouri, "historical or projected expenses to determine the amount of a debtor's disposable income that must be devoted to a chapter 13 plan" (In re Renicker). The Renicker court, examining statutory language that disposable income is net of amounts reasonably necessary "to be expended", decided that the plain language of the statute "unambiguously indicates that prospective - not historical - expenses are to be used to calculate disposable income."

V. Disposable income may not consider projected expenses.

Following the same logic as the debate over income, a court stated that expenses for above median income debtors cannot be what "may" occur. Instead, expenses are limited to those disclosed on Form B22C, completed in strict compliance with the expenses allowed under the means test (In re Guzman). The Court admitted that "the result of such enforcement is contrary to the popular notion that BAPCPA would require well-to-do debtors to repay as much of their debts as possible."

The court In re Fuller ruled that "above-median debtors may not deduct from their income their actual expenses." "Rather, they must use the specific, standardized dollar amounts listed in certain IRS publications....It doesn't matter if the debtor feels those amounts are unreasonably low, if the Trustee feels those amounts are unreasonably high..." By the statute's terms, only a below median income debtor is permitted to use "actual" expenses, subject to a determination of reasonableness.

Clearly, "disposable income" and "projected disposable income" are grist for much judicial consideration and perhaps apt subjects for Congressional clarification.

Bankruptcy Report is produced by Becket & Lee LLP, Attorneys at Law, as a service to our clients. Copyright 2006 by Becket & Lee LLP, except as otherwise noted. Reproduction of this newsletter is strictly prohibited without written permission from the publisher.

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