November 2, 2009
The U.S. Supreme Court Makes a Rare Foray Into Bankruptcy Law.
The U.S. Supreme Court has agreed to hear the case of In Re Lanning (opens PDF) to decide this limited question: “Whether, in calculating the debtor’s “projected disposable income” during the plan period, the bankruptcy court may consider evidence suggesting that the debtor’s income or expenses during that period are likely to be different from her income or expenses during the pre-filing period.”
The underlying bankruptcy case, In Re Lanning, raised the issue of how a debtor is to determine her chapter 13 payment. A chapter 13 bankruptcy is a monthly payment plan and under the bankruptcy code a chapter 13 debtor is to devote all her projected disposable income to the chapter 13 plan. The problem with the 2005 bankruptcy code amendment is that it created 2 sections where a debtor’s disposable income is calculated. Form B-22C, the means test; and Schedules I and J, the schedules of “current” income and expenses. Form B-22C calculates a debtor’s income based on an average of the person’s previous 6 months income and expenses based on IRS and Census data for average expenses; whereas Schedules I & J are a snap shot of a debtor’s actual, “current” and to some degree “estimated future” monthly income and expenses. The battle is over how to interpret conflicting language in the amended bankruptcy code (thank you Congress and the lawyers from the credit card industry that wrote the amendments).
The problem arises when the B-22C disposable income figure is higher than the Schedule I & J figure. Ms. Lanning proposed a monthly payment of $147 per month based on her Schedules I & J, (her income significantly decreased) but because of a severance payment from her prior employer, Form B-22C showed disposable income of $1,114.98. Thus, the chapter 13 trustee objected to the debtor’s chapter 13 plan payment. So far, each step of the appeal process has favored the debtor, the bankruptcy court, the Bankruptcy Appellate Panel (BAP) and the 10th Circuit Court of Appeals have ruled in favor of the debtor (note Colorado is in the 10th Circuit).
Common sense would seem to dictate that a chapter 13 plan must be based in “reality.” Most bankruptcy circuits have adopted the “forward looking approach” and only use Form B-22 to determine if a debtor belongs in a chapter 7 or chapter 13, but once the court determines if a debtor should be in a chapter 13 bankruptcy, the court uses real numbers in determining the actual monthly payment for a chapter 13. Let’s hope the U.S. Supreme Court agrees.
The U.S. Supreme Court Makes a Rare Foray Into Bankruptcy Law.
The U.S. Supreme Court has agreed to hear the case of In Re Lanning (opens PDF) to decide this limited question: “Whether, in calculating the debtor’s “projected disposable income” during the plan period, the bankruptcy court may consider evidence suggesting that the debtor’s income or expenses during that period are likely to be different from her income or expenses during the pre-filing period.”
The underlying bankruptcy case, In Re Lanning, raised the issue of how a debtor is to determine her chapter 13 payment. A chapter 13 bankruptcy is a monthly payment plan and under the bankruptcy code a chapter 13 debtor is to devote all her projected disposable income to the chapter 13 plan. The problem with the 2005 bankruptcy code amendment is that it created 2 sections where a debtor’s disposable income is calculated. Form B-22C, the means test; and Schedules I and J, the schedules of “current” income and expenses. Form B-22C calculates a debtor’s income based on an average of the person’s previous 6 months income and expenses based on IRS and Census data for average expenses; whereas Schedules I & J are a snap shot of a debtor’s actual, “current” and to some degree “estimated future” monthly income and expenses. The battle is over how to interpret conflicting language in the amended bankruptcy code (thank you Congress and the lawyers from the credit card industry that wrote the amendments).
The problem arises when the B-22C disposable income figure is higher than the Schedule I & J figure. Ms. Lanning proposed a monthly payment of $147 per month based on her Schedules I & J, (her income significantly decreased) but because of a severance payment from her prior employer, Form B-22C showed disposable income of $1,114.98. Thus, the chapter 13 trustee objected to the debtor’s chapter 13 plan payment. So far, each step of the appeal process has favored the debtor, the bankruptcy court, the Bankruptcy Appellate Panel (BAP) and the 10th Circuit Court of Appeals have ruled in favor of the debtor (note Colorado is in the 10th Circuit).
Common sense would seem to dictate that a chapter 13 plan must be based in “reality.” Most bankruptcy circuits have adopted the “forward looking approach” and only use Form B-22 to determine if a debtor belongs in a chapter 7 or chapter 13, but once the court determines if a debtor should be in a chapter 13 bankruptcy, the court uses real numbers in determining the actual monthly payment for a chapter 13. Let’s hope the U.S. Supreme Court agrees.
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