Bankruptcy

Supreme Court Rules in Lanning

By Katie Porter

The Supreme Court has just issued its opinion in Hamilton v. Lanning, a case interpreting the "means test" that the 2005 bankruptcy amendments added to chapter 13. The issue was chapter 13's requirement that the debtor commit his or her "projected disposable income" to a plan, and whether projected disposable income should be determined in a mechanical way (based on the debtor's income for the past six months as defined in the means test) or whether projected disposable income should include reliance on some estimate of the debtor's income in the future during the plan period. The Supreme Court rejected the mechanical approach, which was argued for by the debtor and the National Association of Consumer Bankruptcy Attorneys, and adopted the forward-looking approach. The decision, authored by Justice Alito, was 8-1, with a dissent by Justice Scalia arguing the plain meaning of the text supported the mechanical approach.

I'm certain there will be loads of technical commentary forthcoming on this case, debating whether the Supreme Court's interpretation of the statute was correct. I have some non-technical observations.

First, it isn't clear that debtors are "hurt" or "helped" by this decision in terms of what they will be required to pay. Some debtors will have incomes that have picked up right on the eve of filing, so their forward-looking income is higher. But other debtors will have earned more in the past six months, filing in an income trough with bleak prospects. We could empirically test which system is better, but of course, to the best of my knowledge, nobody did this. (Query whether such data would have been persuasive to the Court if it had existed).

Second, I am quite sure this decision hurts debtors. How can I reconcile that with my first observation? Because it's not just the law that matters. In many contexts, including this one, the cost of the law will determine the justice received. The mechanical approach is easier to apply and is less likely to spawn litigation, which consumers filing bankruptcy can ill afford. Faced with a choice of filing a plan that is likely to begin a lawsuit, some consumers will just give up and drop out of chapter 13 or not bother to file at all. By holding that "only in 'unusual' cases, a court may go further and take into account other 'known or virtually certain information' about the debtor's future income or expenses," the Court will add a layer of complexity to lawyers' and debtors' decisionmaking in chapter 13. And legal decisions don't come free.

Full post as published by Credit Slips on June 07, 2010 (boomark / email).