Chapter 13 Bankruptcy and Projected Disposable Income

In order to confirm a plan in a Chapter 13 bankruptcy, unless creditors are paid in full, the debtor must pay to unsecured creditors his or her “projected disposable income” expected to be received in an “applicable commitment period”, either 36 or 60 months depending on the Chapter 13 plan.  Since the enactment of the 2005 BAPCPA, there has been a dispute over what “projected disposable income” meant.  A recent decision of the United States Supreme Court has resolved that issue, at least partially.

In Hamilton v. Lanning, decided on June 7, 2010, the Supreme Court 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.”  In other words, rather than simply applying the calculation of “current monthly income,” which looks at the debtor’s income for the 6 calendar months before the filing of the petition, the court may consider changes in income that have occurred, or are expected to occur, or virtually certain to occur at the time of confirmation.

In Lanning, the debtor had received a termination buyout from her former employer which, when included in “current monthly income,” dramatically increased her income over what she was really making, and the mechanical application of the current monthly income approach would have resulted in her having to pay more into the plan than she possibly could afford.  Because after the buyout she was making wages well below the state median income, the Supreme Court held that this change in income could be considered in calculating her “projected disposable income.”

While being practical and understandable, this “forward looking” approach should not give the bankruptcy court or the bankruptcy trustee, or the debtor, an opportunity to make unsubstantiated claims. The Supreme Court stated that “a court taking the forward-looking approach should begin by calculating disposable income, and in most cases, nothing more is required. It is only in unusual cases that a court may go further and take into account other known or virtually certain information about the debtor’s future income or expenses.”

While the debtor’s expenses as included in the “projected disposable income” were not specifically before the Court, the opinion stated that the court may consider changes in income or expenses when calculating projected disposable income.  In Lanning, the Supreme Court stated that what is required is a “change” in income or expenses, not a discrepancy between the expenses allowed on the “means test” and the debtor’s actual expenses.   As I previously discussed, debtors whose “current monthly income” is above the state median, many expenses are determined based on fixed allowances, not on what the debtor’s actual expenses are.   For example, the food and related items allowance (set by the IRS) is $1,000 for the debtor’s household size, but the debtor only spends $500 on these items, he or she can claim the full allowance in calculating “projected disposable income.” Under the statute, the bankruptcy trustee is not be allowed to recapture that difference, and require that it be paid to creditors.  Conversely, if the debtor spends $2,000, he can still only claim the allowance. As a result, for many debtors, the fixed “means test” numbers result in a more favorable result than their real expenses as stated on Schedules I and J. Because the difference between the means test expenses and expenses reported on Schedule J, Lanning does not change the existing differences between them.

At the same time, under Lanning, the debtor may be disadvantaged if the debtor is disallowed a deduction for secured debt payments where property is being surrendered or perhaps where liens are being stripped down or off. Under Lanning, such change in the debt payments may be seen as “change” in expenses.  However, unless there is a “change” in those secured debt expenses that are allowed as real figures on the means test, the means test expenses will remain the same.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, New York, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

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