Supreme Court Rules in Favor of Chapter 13 Bankruptcy Debtors

In a case before the Supreme Court the Court today issued their opinion favoring the debtor in this case.

In HAMILTON, CHAPTER 13 TRUSTEE v. LANNING the bankruptcy trustee, Hamilton, a private trustee objected to the monthly payment the debtor, Stephanie Kay Lanning, stated she could reasonably afford to pay. The trustee had followed a mechanical calculation to determine the amount Lanning could pay in the Chapter 13 bankruptcy plan and came up with $756 per month for 60 months. Lanning said that amount was unfair since the only reason the calculation could come up with an amount that large was by factoring in the one-time employment separation payment Lanning had received during the preceding six months. Even the Bankruptcy Court had determined that by factoring in Lanning’s actual future income she would be unable to make such payments.

From the opinion issued by the Supreme Court:

Respondent [Stephanie Kay Lanning] had $36,793.36 in unsecured debt when she filed for Chapter 13 bankruptcy protection in October 2006. In the six months before her filing, she received a one-time buyout from her former employer, and this pay­ ment greatly inflated her gross income for April 2006 (to $11,990.03) and for May 2006 (to $15,356.42). App. 84, 107. As a result of these payments, respondent’s current monthly income, as averaged from April through October 2006, was $5,343.70—a figure that exceeds the median income for a family of one in Kansas. See id., at 78. Re­ spondent’s monthly expenses, calculated pursuant to §707(b)(2), were $4,228.71. Id., at 83. She reported a monthly “disposable income” of $1,114.98 on Form 22C.

On the form used for reporting monthly income (Schedule I), she reported income from her new job of $1,922 per month—which is below the state median.

On the form used for reporting monthly expenses (Schedule J), she reported actual monthly ex­ penses of $1,772.97. Subtracting the Schedule J figure from the Schedule I figure resulted in monthly disposable income of $149.03.

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Respondent filed a plan that would have required her to pay $144 per month for 36 months. Petitioner [Hamilton], a private Chapter 13 trustee, objected to confirmation of the plan because the amount respondent proposed to pay was less than the full amount of the claims against her and because, in petitioner’s view, respondent was not committing all of her “projected disposable income” to the repayment of creditors. According to petitioner, the proper way to calculate projected disposable income was simply to multiply disposable income, as calculated on Form 22C, by the number of months in the commitment period.

Employing this mechanical approach, petitioner calculated that creditors would be paid in full if respondent made monthly payments of $756 for a period of 60 months.

There is no dispute that respondent’s actual income was insufficient to make payments in that amount.

The Bankruptcy Court endorsed respondent’s proposed monthly payment of $144 but required a 60-month plan period. No. 06–41037 etc., 2007 WL 1451999, (Bkrtcy. Ct. Kan. 2007). The court agreed with the majority view that the word “projected” requires courts “to consider at confirmation the debtor’s actual income as it was reported on Schedule I.” This conclusion was warranted by the text of §1325(b)(1), the Bankruptcy Court reasoned, and was necessary to avoid the absurd result of denying bankruptcy protection to individuals with deteriorating finances in the six months before filing.

Petitioner appealed to the Tenth Circuit Bankruptcy Appellate Panel, which affirmed. 380 B. R. 17, 19 (2007). The Panel noted that, although Congress redefined “disposable income” in 2005, it chose not to alter the pre­ existing term “projected disposable income.” Thus, the Panel concluded, there was no reason to believe that Congress intended to alter the pre-BAPCPA practice under which bankruptcy courts determined projected disposable income by reference to Schedules I and J but considered other evidence when there was reason to believe that the schedules did not reflect a debtor’s actual ability to pay.

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