Monday, July 19, 2010

Chapter 13 Plan contributions

In our continuing series of posts regarding Chapter 13 bankruptcy, this month's topic discusses how much money a debtor must contribute to their Chapter 13 bankruptcy Plan. More specifically, what Plan contribution is required for a debtor whose income is over the median income (in New York State, the median income is currently $46,320 for a family of one, $57,902 for a family of two, $69,174 for a family of three, and $82,164 for a family of four (add $7,500 for each additional individual in excess of four)?

Prior to 2005, a Chapter 13 debtor was required to contribute their disposable income to fund a Chapter 13 plan. The disposable income number was based on the debtor's actual expenses on Schedules I (income) and J (expenses). However, as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Congress added complexity by modifying and further detailing the definition of "disposable income" (in Section 1325(b)(2) of the Bankruptcy Code) and by requiring that debtors who exceed the median household income for their state contribute their "projected disposable income" to fund a Chapter 13 Plan.

Although "disposable income" is a defined term, both Bankruptcy Courts and bankruptcy attorneys have struggled with the definition of "projected disposable income." Recently, both the Supreme Court (in Hamilton v. Lanning, 560 U.S. ___, 130 S. Ct. 487 (2010)) and the Bankruptcy Court for the Eastern District of New York (in In re Almonte, 397 B.R. 659 (2008) and In re Mendelson, 412 B.R. 75 (2009), both decided by Bankruptcy Judge Grossman) have addressed this issue.

A common element in all three cases is that in the six months prior to the debtor's bankruptcy filing (which is the lookback period for "current monthly income," the starting point for determining "disposable income") they had non-recurring extraordinary incomesuch as severance pay for being terminated from a job and gifts or loans from friends or family. In these cases, the Chapter 13 Trustees said that based on their interpretation of the meaning of "projected disposable income," the debtor would have to fund a chapter 13 plan strictly based on their Chapter 13 Form 22C "means test" results. Counsel for the Chapter 13 debtors uniformly argued that the means test (in these cases) included sources of income that were extraordinary and not recurring, and this form should not be the sole basis for calculating Plan payments for the Chapter 13 debtor (which could be 36-60 months of future payments).

Judge Grossman in In re Almonte and In re Mendelson and the Supreme Court in Hamilton v. Lanning ruled for the Chapter 13 debtors, and indicated that the chapter 13 monthly payments should not include these extraordinary and non-recurring sources of income. Rather, they should use a "crystal ball" approach and look at the expected future monthly income of the debtor over the applicable commitment period of the proposed Plan.

Any individuals with questions about Chapter 13 bankruptcy should contact Jim Shenwick.

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