Asian Journal- The Filipino-American Community Newspaper

DISPOSABLE income is the amount of money debtor is left with in his pocket after applying the means test. To illustrate, if debtor’s net income is $3,000 and his monthly expenses applying IRS standards is $2,700, his disposable income is $300 monthly. This means that debtor must offer at least $300 a month as plan payment in a Chapter 13 case for a period of between 36 to 60 months. If debtor does not offer at least $300 a month as plan payment, the trustee will object to confirmation of his plan on the ground of ‘bad faith’ because debtor has not offered all of his disposable income to pay creditors. Since a Chapter 13 plan will last at least 36 months, the issue of debtor’s future or projected disposable income becomes important. The bankruptcy code says that the average income of debtor for the last 6 months pre-filing is the debtor’s average monthly income. The ‘mechanical’ method of projecting disposable income states that 12 months multiplied by monthly average income results in projected disposable income. The problem is that debtor may have certain circumstances in the future that may cause a reduction of income. In this situation, should the ‘mechanical’ method of projecting disposable be used in debtor’s Chapter 13 plan, or should a ‘forward looking approach’ be used instead?

In Hamilton v. Lanning, the Supreme Court recently granted certiorari to decide how a bankruptcy court should calculate a debtor’s projected disposable income under Section 1325(b)(1)(B) which states, "The plan provides that all of the debtor’s projected disposable income to be received in the applicable commitment period…(2)…The term ‘disposable income’ means current monthly income received by the debtor…less amounts reasonably necessary to be expended…"

The trustee objected to confirmation because the amount debtor proposed to pay was less than the full amount of claims against her because in the trustee’s view debtor was not committing all of her projected disposable income. Section 1325(b)(1)(B) says that the court may not approve a plan unless it provides that all of the debtor’s projected disposable income to be received in the applicable commitment period will be paid to unsecured creditors. Trustee used the ‘mechanical’ approach to calculate debtor’s projected disposable income by multiplying past average monthly disposable income by the number of months in the plan. Under the mechanical approach, the debtor’s actual income was insufficient to make the payments because, during the six months pre-filing, debtor received one-time buyout from her employer that greatly inflated her gross income. The bankruptcy court ruled in favor of debtor, applying the ‘forward-looking approach,’ under which the word ‘projected’ in Section 124(b)1)(B) requires consideration of the debtor’s actual income at confirmation. The 10th Circuit Court of Appeals affirmed. Justice Samuel Alito said, "We hold 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." The forward looking approach was supported by the ordinary meaning of ‘projected.’ Congress has rarely used the word ‘projected’ to mean simple multiplication. Moreover, case law pointed in favor of the forward looking approach, and Travelers Casualty & Surety v. Pacific Gas & Electric (U.S.2007), teaches that the Code is not to be read to erode past practice absent a clear indication that Congress intended to such a departure. Justice Alito found also that the mechanical approach repeatedly clashed with the terms of Section 1325. For example, the phrase ‘to be received in the applicable commitment period’ in Section 1325 strongly favored the forward looking approach. Justice Anton Scalia dissented, opining that the Code provides a formula for projecting what a debtor’s ‘disposable income’ will be, which, with respect to earnings, turns only on past income.

Hence, if your previous income includes an unusual nonrecurring income, you should not include that in your calculation of disposable income in computing your Chapter 13 plan. Bonuses which are determined by the company’s performance are probably excludable.

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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803.