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New Supreme Court Decision on Projected Disposable Income in Bankruptcy

Posted by attorney Jeff Biddle

In order to confirm a plan in a Chapter 13 bankruptcy, unless creditors are paid in full, the Debtors must pay all “projected disposable income" for the duration of the plan (36 or 60 months). Since the enactment of 2005 Bankruptcy reform act, what “projected disposable income" means has been an issue forcing some debtors into a Chapter 13 when they would be better suited for a Chapter 7. The Supreme Court has now put at least some of that dispute to rest.

In Hamilton v. Lanning, decided on June 7, 2010, the Supreme Court held that “when a bankruptcy court calculates a debtor’s projected disposable income, 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 other words, rather than mechanically applying the 6 full month calculation of the Means Test or looking solely at current monthly income from the Debtor's schedules, the court can consider changes in income or expenses that have occurred or are known or virtually certain to occur at or by the time of confirmation.

In Lanning, the Debtor had received a lump-sum severance from her former employer. By including this in her “current monthly income," her income was far more than she was actually making. This would cause her to be required to pay a higher plan payment than she possibly could afford. Because after the buyout she was making wages well below the state median income, the Supreme Court held that this change in income could be considered in calculating her “projected disposable income."

But this “forward looking" approach should not give the Court or the Trustee, or the Debtor, a blank check: as the Supreme Court stated, “a court taking the forward-looking approach should begin by calculating disposable income, and in most cases, nothing more is required. It is only in unusual cases that a court may go further and take into account other known or virtually certain information about the debtor’s future income or expenses."

Another factor in determining “projected disposable income" is the Debtor's expenses. While this issue was not specifically before the Court, the Lanning Court did state that changes in income or expenses may be considered when calculating projected disposable income.

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