Bankruptcy

Supreme Court decides Hamilton v Lanning: Projected Disposable Income in Chapter 13 Bankruptcy is not Strictly Mechanical

By Dan Press, Virginia and D.C. Bankruptcy Attorney

One of the fundamental requirements to confirm a plan in a Chapter 13 bankruptcy is that (unless creditors are paid in full) the Debtor must pay for the benefit of unsecured creditors his or her “projected disposable income” to be received in an “applicable commitment period” (36 or 60 months).  Since the enactment of 2005 Bankruptcy reform act, what “projected disposable income” means has been a matter of some dispute.  The Supreme Court has now put at least some of that dispute to rest.

In Hamilton v. Lanning, decided today (June 7, 2010), the Supreme Court held in an 8-1 decision 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 mechanically 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 can take into consideration changes in income that have occurred or are known or virtually certain to occur at the time of confirmation.

In Lanning, the Debtor had received a 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 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.”

But this “forward looking” approach should not give the Court or the Trustee, or the Debtor, a blank check: as the Supreme Court stated, “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 expense side of “projected disposable income” was not specifically before the Court, the Lanning opinion did state the court may consider changes in income or expenses when calculating projected disposable income.  But it is important to note what was said and not said.  The Lanning opinion requires a “change” in income or expenses, not a discrepancy between the expenses allowed on the “means test” and the Debtor’s actual expenses.   For debtors whose “current monthly income” is above the state median, many expenses are determined based on fixed allowances, not on what the Debtor really spends.   If the food and related items allowance (set by the IRS) is $1152 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.” The trustee should not be allowed to recapture that $652 and require that it be paid to creditors.  Conversely, if the Debtor spends $1500, he can still only claim the allowance.   Similarly, if the Debtor’s rent is $500 but the IRS allowed mortgage/rental expense is $1187, the Debtor can claim the full $1187 deduction.   As a result, for many debtors, the fixed “means test” numbers result in a more favorable result than reality as reflected on Schedules I-J (which helps offset the fact that certain other necessary expenses are simply not allowed as deductions on the “means test” calculation).    Because this is not a “change,” Lanning should not result in the IRS-allowed expenses being disregarded.

That said, the Lanning opinion could result in disallowance of deductions for secured debt payments where property is being surrendered or perhaps where liens are being stripped down or off, as those could be seen as “changes” in expenses.  But otherwise, unless there is a “change” in those expenses (such as secured debt payments) that are allowed as real numbers on the means test, the means test expenses should apply as written. 

Full post as published by Bankruptcy Law Network on June 07, 2010 (boomark / email).