Computing “disposable income” for debt payments
on Mar 14, 2010 at 9:52 am
Below, law professor M. Jonathan Hayes, who writes the BankruptcyProf Blog, previews the oral argument in Hamilton v. Lanning (08-998).Â For briefs and later updates in the case, check the Hamilton v. Lanning SCOTUSwiki page.Â [Disclosure:Â Akin Gump and Howe & Russell serve as counsel to respondent Stephanie Lanning in the case, but Professor Hayes was not involved in the case.]
Hamilton v. Lanning will be argued on March 22, 2010.Â In it, the Supreme Court will consider the issue of whether a bankruptcy court â€œmay consider evidence suggesting that [a chapter 13] debtorâ€™s income or expenses during [the plan period] are likely to be different from her income or expenses during the pre-filing period.â€
Respondent Stephanie Lanning filed a chapter 13 bankruptcy petition in October 2006.Â Shortly thereafter, as required by the Bankruptcy Code, she filed a chapter 13 Plan that proposed to pay the chapter 13 trustee (petitioner Jan Hamilton) monthly payments of $144 for thirty-six months â€“ an amount based on her actual salary at the time of filing less her actual monthly living expenses.
Hamilton objected to the confirmation of the plan, arguing that the plain language of section 1325(b) of the Bankruptcy Code requires Ms. Lanning to make payments of $1,115 for sixty months.Â That provision provides a specific framework for computingÂ the debtorâ€™s â€œdisposable income,â€ which is then projected for the plan period.Â Because such a plan would pay all creditors in full over approximately thirty-seven months, the trustee proposed that the debtor make payments of $756 for sixty months, although acknowledging that Ms. Lanning currently had no ability to make those payments.Â The difference between the debtorâ€™s plan payment and the trusteeâ€™s plan payment arises from section 1325(b), which provides that the debtorâ€™s income for plan purposes is her actual income for the previous six months and not her actual income at the time of filing the plan.Â Here, Ms. Lanning had received a bonus in the past six months that artificially increased her â€œincome.â€
The bankruptcy court agreed with Hamilton on the sixty-month requirement but overruled his objection with regard to the amount of the payment.Â Both the Bankruptcy Appellate Panel and Tenth Circuit affirmed.Â Hamilton then filed a petition for certiorari, which the Supreme Court granted on November 2, 2009.
Hamilton argues that section 1325(b) provides a specific â€œmechanical testâ€ for computing how much chapter 13 debtors must pay.Â The payment must be based on the debtorâ€™s â€œcurrent monthly income,â€ a term defined in section 101(10A) as all income for the past six months, not on the debtorâ€™s current ability to pay.Â Why? Because that is what Congress said in the statute.Â He argues that the legislative history leaves â€œno questionâ€ but that Congress specifically intended to â€œreduce judicial discretionâ€ by requiring the use of the mechanical test.Â By contrast, the â€œwell intentionedâ€ â€œforward-looking testâ€ that Lanning urges the Court to adopt is â€œresult drivenâ€ and ignores the plain language of the Bankruptcy Code.Â Holding that the application of the mechanical test is not required in every case, and therefore a court may â€“ as the Tenth Circuit held â€“ consider a â€œsubstantial change in circumstances,â€ would add language and concepts to the Code that are simply not there.Â Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), the amount that a chapter 13 debtor was required to pay was determined using a simple â€œability to payâ€ test, and that amount was then multiplied, i.e., â€œprojected,â€ by the number of months in the payment plan.Â Congress changed that in 2005 by redefining disposable income.Â According to the trustee, the Code now says that the court â€œshallâ€ approve a plan such as the debtorâ€™s only if the plan payment is computed using the mechanical test.Â Nothing in the Code permits the court to modify the computation by looking at â€œspecial circumstances.â€
Finally, Hamilton argues that the mechanical test does not lead to a harsh result here because the debtor could have waited to file her petition (which would have changed the calculation of disposable income because there would then be a different prior six months) or could have simply filed under chapter 7 instead.Â It also does not lead to an absurd result simply because this debtor cannot get a plan confirmed.Â Someone is always disadvantaged by the limits placed in a statute.
Lanning responds that the Court must look to the statute as a whole.Â Congress intended that chapter 13 debtors pay as much as they can afford, and that has been the test since chapter 13 was originally enacted.Â Language in the Code supports the arguments:Â the debtor must pay projected disposable income â€œto be receivedâ€ in the future; courts are permitted to modify plans without using a mechanical test; and courts must look at the debtorâ€™s projected disposable income â€œas of the effective date of the plan.â€Â All of these statutory provisions lead to the conclusion that courts must be able to consider factors other than those which existed on the petition date.Â It makes no sense to allow the court to consider something the day after the plan is confirmed but not the day before.Â Moreover, the term â€œprojectedâ€ must mean to look into the future.Â To â€œprojectâ€ the debtorâ€™s disposable income, the court must be permitted to consider changed circumstances.Â If Congress meant disposable income â€œmultipliedâ€ by x months, it would have said so.
Lanning concedes that the mechanical test is usually the starting point for the determination of the plan payment and usually also the end.Â That said, Congress could not have intended â€œsignificant anomaliesâ€ to contravene the structure of chapter 13.Â The plan must be feasible and proposed in good faith.Â Debtors whose prior six months of earnings are lower than their current earnings â€œas of the effective dateâ€ will be able to confirm a plan paying less than they can afford using the mechanical test, i.e., the opposite of this case.Â Also, the trusteeâ€™s arguments encourage debtors to manipulate the system by timing the petition date to coincide with the ability to propose artificially low payments.
In his reply, Hamilton counters that Lanning concedes that the word â€œprojectedâ€ means computing some monthly amount and multiplying that by some number of months.Â Â Here, he argues, she is simply unhappy with the amount required to be multiplied.Â He asserts again that section 1325 mandates the use of â€œcurrent monthly incomeâ€ as defined in section 101(10A) and reasserts that Lanning could have changed the results by filing at a different time or asking the court to use a different period.Â He reminds the court that in the Ninth Circuit case, Haney v. Kagenveama (In re Kagenveama), it was the chapter 13 trustee arguing for the forward-looking test, and therefore the mechanical test does not result in a blanket benefit for either side.Â It is a matter of what Congress intended, not which side benefits the most.