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How to determine your projected disposable Income for a Chapter 13 Plan

Posted by attorney Michael Goldstein

In order to determine how much money you will have to pay each month into your chapter 13 plan payment, you need to first determine how much disposable income you have both as it relates to your B22 form under the means test, and also based upon your actaul expenses listed on your Schedule J.

Prior to passage of the 2005 Amendment to the Bankruptcy Code, “disposable income" was defined as “income which is received by the debtor and which is not reasonably necessary to be expended" for the debtor’s maintenance, support, charitable contributions, and business expenses. 11 U.S.C. §1325(b)(2)(A). Under this definition, a debtor’s income for the term of the plan was determined with prepetition income as of date of filing. The “disposable income" was the amount known at the date of filing and the plan amount was set for the terms of the plan according to the date of filing. So, once the plan was confirmed it was generally set for the term of the plan unless something unusual occurred like the debtor increase income over 10% of the previous income or some inadvertent calculation error occurred with the debtor (well I may have forgotten that I make more than I disclosed).

The 2005 Amendments to the Bankruptcy Code changed the definition of “disposable income" as well as the entire practice of Chapter 13 bankruptcies. Congress changed the definition of “disposable income" by tying it to a new term, “current monthly income," 11 U.S.C. §1325(b)(2), and adding the definition of “current monthly income" that in relevant part, as noted above, looks at the debtor’s six-month pre-petition income, id. § 101(10A)(A)(i). Finally, Congress added a new clause to §1325(b) that, for above-median debtors, requires the use of the standardized expenses and deductions calculated on Form B22C as the “[a]mounts reasonably necessary to be expended" under §1325(b)(2) (with the exception of charitable contributions under (b)(2)(A)(ii)). See id. §1325(b)(3) The result is that a Chapter 13 plan payment will no longer be determined on disposable income as of the date of filing the Chapter 13 case, but on all income as of the date of filing and any “projected disposable income."

It is best to review the reasoning of the first court to address the issue of this new definition of income. In re Hardacre, 338 B.R. 718 (Bankr. N.D. Tex. 2006) was the first case to interpret these provisions. In Hardacre, the court expressed concern about the consequences when “current monthly income" derived from Form B22C is used as the sole determinant of the “income" side of the “projected disposable income" calculation. Id. at 722. The court reasoned that a debtor expecting a significant increase in future income would file as quickly as possible, resulting in the commitment of less money to repay unsecured creditors than the debtor would actually be capable of paying during the commitment period. Id. Conversely, the court observed that a debtor who experiences a decrease in income after filing might not be able to confirm a plan because she would be unable to commit the amount of disposable income calculated on Form B22C. Id.

The Hardacre court offered three justifications in support of its conclusion that “projected disposable income’ must be based upon the debtor’s anticipated income during the term of the plan, not merely an average of her prepetition income." Id. First, noting the rule of statutory construction that requires a court “to presume thatCongress acts intentionally when it includes particular language in one section of a statute but omits it in another,’" the court reasoned that “Congress must have intended projected disposable income’ to be different thandisposable income’" when it chose to define only the latter term. Id. at 723 (quoting BFP v. Resolution Trust Corp., 511 U.S. 531, 537 (1994)). Second, the court viewed the phrase “to be received" in §1325(b)(1)(B) as an expression of congressional intent “to refer to the income actually to be received by the debtor during the commitment period, rather than the prepetition average income"; an alternative interpretation, the court said, would render “to be received" superfluous. Id. And third, the court considered §1325(b)(1)’s prefatory language — “as of the effective date of the plan" — to be an indication that “`projected disposable income’ . . . refers to income that a debtor reasonably expects to receive during the term of her plan." Id.

In a nut shell, the court reasoned that a Chapter 13 plan should be based upon income that is received throughout the Chapter 13 plan term. So, the days of locking into an amount and confirming a plan are long gone. A Debtor will now have to present the potential for all anticipated income that will be received through the bankruptcy case. Therefore, bankruptcy counsel filing a Chapter 13 case must advise their clients that is it possible for a Trustee if he/she finds out about increase of income or an award for damages in litigation, that a modified plan request can be raised by the Trustee. To answer my colleague inquiries, the answer is “yes" a Trustee can move to modify an already confirmed plan.

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