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.