Projected Does Not Mean Multiplication

In a recent U.S. Supreme Court decision, the Court held when a bankruptcy court calculates a debtor’s projected disposable income for the purposes of determining the required Chapter 13 plan payment, 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 Hamilton v. Lanning, No. 08-998, 2010 WL 2243704 (U.S. June 7, 2010), available at http://www.supremecourt.gov/opinions/09pdf/08-998.pdf, the Debtor received a one-time buyout from her former employer that caused her current monthly income for the six months preceding her Chapter 13 filing to exceed her State’s median income. However, at the time of the filing, based upon the income from her new job which fell below the state median, she filed a plan that would require her to pay $144 per month for 36 months. The Bankruptcy Court endorsed a $144 payment over a 60-month period concluding that “projected” requires courts to consider a debtor’s actual income at the time of filing. The Tenth Circuit Bankruptcy Appellate Panel subsequently affirmed, as did the Tenth Circuit.

The Chapter 13 Trustee objected to the confirmation of the plan claiming the mechanical approach of the Bankruptcy Code, which calculates projected income from the past six months income, is the proper way to calculate projected disposable income, and using that approach, the Debtor should pay $756 per month for 60 months. The Court found the Trustee’s arguments supporting the mechanical approach unpersuasive. “The claim that the Code’s detailed and precise disposable income definition would have no purpose without the mechanical approach overlooks the important role that this statutory formula plays under the forward-looking approach…” Instead, the Court reasoned the mechanical approach clashes with §1325’s terms in that reference to disposable income in §1325(b)(1)(B) strongly favors the forward looking approach if the mechanical projection does not accurately reflect disposable income “to be received.” Furthermore, the Court found that §1325(b)(1) directs the courts to determine projected disposable income “as of the effective date of the plan.” Additionally, §1325(b)(1)(B)’s requirement that projected disposable income “will be applied to make payments” is made useless if the Debtor lacks the means to pay into the plan what the mechanical formula determines to be the proper amount.

The Supreme Court looked at this issue in a very practical way, and paved the way for flexibility in crafting Chapter 13 plans that have a better chance of succeeding. Nobody benefits from requiring a debtor to commit to a plan payment that is far in excess of that the debtor’s actual cash flow permits.

Electricity is Good

In a recent case of first impression in the First Circuit, Judge Boroff held that a creditor’s supply of electricity constitutes a sale of goods under § 503(b)(9), and therefore the supplier’s claim against the Debtor enjoys an administrative priority claim under the Bankruptcy Code.

Rejecting the Debtor’s claim that the provision of electricity, an intangible phenomenon or service, is not covered under § 2-105(1) of the UCC, Judge Boroff In re Erving Industries, Inc., ___ B.R. ___, 2010 WL 1416148 (Bankr. D. Mass. Apr. 7, 2010) (downloadable from http://www.hendelcollins.com/website_pdfs/erving_apr_2010_decision.pdf)  first applied the scientific description of electricity concluding that “although the ultimate nature may be mystifying to most, electricity is tangible and does possess physical properties.” In distinguishing it from telecommunication signals, the court distinguished a marked difference between electricity and telecommunication signals in both physical attributes and the purposes for which they are purchased. Electricity is not “merely a medium of delivery, but is the thing the customer seeks when purchasing electricity.” Telecommunication signals are mechanisms by which non-goods like ideas, sounds, and images are sent from one location to another.

In addition, Judge Boroff found electricity easily meets the movability and identifiability requirement of § 2-105(1) of the UCC. In the debate whether electricity is movable at the time it is identified to the contract for sale, the Court disagreed with the Debtor’s conclusion that electricity is consumed at the same time it is identified by a meter and thereby no longer movable. In contrast, he found electricity continues to move past the meter, through the wiring, to the products seeking to be electrified, albeit at imperceptible speeds, and therefore is movable at the time it is identified to the contract.

The Court addressed the “predominant factor test”, in which the Court would view electricity as part-good, part-service, and decide which one is more predominant. Judge Boroff concluded the test to be irrelevant as to the value of the goods within the meaning of §503(b)(9).

The decision is on appeal as of this posting to the Bankruptcy Appellate Panel. Hendel & Collins, P.C. represents the Debtor. In the event this ruling stands, however, future debtors contemplating a trip through Title II will have to worry about one more expense that would have to be paid in full prior to emerging from Bankruptcy. An already expensive excursion through the Bankruptcy Court would get that much more expensive and risky.

Supreme Court decides United Student Aid Funds, Inc. v. Espinosa

Here’s a very brief summary; the full opinion is available at http://www.supremecourt.gov/opinions/09pdf/08-1134.pdf.

Facts:  A Chapter 13 debtor proposed a plan that would discharge a portion of his student loan debt without filing an adversary proceeding as required by Rule 7001(6).  The United Student Aid Funds never objected to the plan (though it had notice of the plan and the confirmation hearing).  The plan was confirmed and completed.  After completion of the plan, the Department of Education (which had been assigned the note under its reinsurance agreement with United Student Aid Funds) attempted to collect the unpaid portion of the debt, and the Debtor filed a motion in the Bankruptcy Court seeking to enforce the discharge injunction.

Issue: Whether the Chapter 13 plan and discharge were void because: (1) debtor failed to file an adversary proceeding seeking to determine the dischargeability of the debt as required by the Federal Rules, (2) the Bankruptcy Court never found undue hardship as required by 11 U.S.C. 523(a)(8), and/or (3) United Student Aid Funds’ due process rights were violated.

Holding: (1 & 2) Although the Bankruptcy Court may have erred by failing to find undue hardship and by confirming the plan, the plan was not void ab initio.  Because United Student Aid Funds failed to file a direct appeal in the context of the plan confirmation, it had essentially lost its ability to challenge the plan and the discharge order.  (3) Although an adversary proceeding provides greater notice and more rights to the parties, United Student Aid Funds received notice of the plan and its confirmation.  Its rights to due process, therefore, were not violated.

Consumer Bankruptcy Basics Part III: Chapter 7

So you've read my last two posts and have decided that the benefits of filing bankruptcy outweigh the drawbacks. Now you have to decide what chapter to file under. For the average consumer debtor, your choices will be between filing under Chapter 7 or Chapter 13 (Chapter 11 is usually reserved for business bankruptcies and individuals with complex debt). Chapter 7 is commonly referred to as liquidation bankruptcy and Chapter 13 is known as wage earner's plan.

A future post will focus more closely on the process of filing for bankruptcy protection--right now, we are just talking about what you can expect from a Chapter 7 filing.  As noted above, Chapter 7 is known as the liquidation chapter.  The basic idea of Chapter 7 is to collect the assets of a debtor, sell them, and distribute the proceeds to the debtor's creditors.

Once a debtor files a Chapter 7 petition, a Trustee will be appointed.  The Chapter 7 Trustee's job in a nutshell is to look out for the best interests of unsecured creditors and to liquidate and distribute the debtor's assets.  Lets say, hypothetically, that a debtor has $200,000 in assets, and $600,000 in unsecured (non-mortgage) debts--$200,000 owed to creditor A and $400,000 owed to creditor B.  The Trustee will sell the debtor's assets and distribute the proceeds on a pro rata basis.  In our example, this means that creditor A will get $66,666.67 and creditor B will get $133,333.33.  Remember from Part I that the debts will be discharged, so this is all the creditors will ever get paid--one-third of the amount actually owed to them.

Consumer Bankruptcy Basics Part II: The Drawbacks of Personal Bankruptcy

Last week I introduced this series of posts on consumer bankruptcy with a description of the primary benefits of filing bankruptcy.  This week we discuss a couple of the reasons that bankruptcy may not be the right choice for many individuals.  Specifically, I am going to focus on the effects bankruptcy has on your credit and the distribution to creditors.

As we all know, the world runs on credit.  A retail store is more likely to take Visa than a check these days.  It is, therefore, important to most individuals that they have decent credit and have at least one major credit card.  Much of what determines your creditworthiness is your FICO Score. Your FICO score is based on a scale of 300-850.  I do not purport to be an expert on credit agencies or scores, and there are plenty of websites out there that can give you much more information on those subjects.  Suffice it to say, however,  a bankruptcy filing can decimate your credit score and will generally stay on your credit report for 10 years.  A recent Baltimore Sun article notes that a bankruptcy filing can lower your Vantage Score (FICO's primary competitor score on a scale of 501 to 990) by 355-365 points.  While it certainly is not impossible to get credit after you file for bankruptcy, it is definitely a lot more difficult for the average consumer.  It's worth noting though, that if you are already considering bankruptcy, your credit score is likely on the decline in the first place--and, because all your debts will be discharged in bankruptcy (see last week's post), you know your score can't go much lower once you receive your discharge.

The other drawback of filing bankruptcy is the distribution of the bankruptcy estate to creditors.  My post next week will focus in much greater detail on the mechanics, but essentially, once you file for bankruptcy, a "trustee" is appointed to manage the "bankruptcy estate."  In Chapter 7, this means that a trustee will liquidate a debtor's assets and distribute them to creditors.  In Chapter 13, this means that the debtor will have to continue making payments to creditors for 3-5 years.

Judge Boroff Issues Opinion

This is an interesting new Judge Boroff case from the District of Massachusetts. If an attorney represents a Chapter 7 Debtor, he cannot also undertake the representation of a third party (such as the Debtor's spouse) in an avoidance action (attempting to undo a transfer or sale of property) brought by the Trustee. The rationale is that counsel to a Chapter 7 debtor assumes duties to cooperate with the Trustee and that it would be a breach of those duties to accept any representation adverse to the Bankruptcy Estate.

Consumer Bankruptcy Basics Part I: The Benefits of Personal Bankruptcy

In contemplating potential topics for a blog post this week, I was reminded of the debt-ridden Michael Scott, in NBC's The Office, attempting to free himself of his debt obligations by announcing to his colleagues in a loud voice, "I DECLARE BANKRUPTCYYYYYYYY!"  Moments later, a coworker gently informed him, "I just wanted you to know that you can't just say the word 'bankruptcy' and expect anything to happen."  Scott's response: "I didn't say it, I declared it." 

This exchange, though comedic hyperbole, portrays a pervasive misunderstanding of the bankruptcy process and the bankruptcy options available to individual consumers.  So, in an effort to provide individuals with a better understanding of their options and to dispel some common myths and misconceptions, I begin a multi-part series of weekly posts to explain the consumer bankruptcy process.  This week, we begin with the benefits of filing for bankruptcy.

A brief disclaimer:  To be clear, this series of posts is not intended to be legal advice or a primer on how to file bankruptcy and navigate the process, but rather a plain-English description of the process and the options available.  Always consult a competent attorney before making decisions about taking legal action.

With that out of the way, we start with the benefits of bankruptcy.  The two primary benefits of personal bankruptcy are the Automatic Stay and the Discharge.