Chapter 13 Bankruptcy Disposable Income: The U.S. Supreme Court Rules

The Bankruptcy Code requires that, when an individual files for bankruptcy protection under Chapter 13 and proposes a debt repayment plan to which the trustee or an unsecured creditor objects, the individual must either pay his or her unsecured creditors  in full or pay all “projected disposable income” he or she will receive over the duration of the plan.

The U.S. Supreme Court recently issued an important opinion in Hamilton v. Lanning, a case about how bankruptcy courts should calculate projected disposable income when a trustee or unsecured creditor objects to a proposed Chapter 13 bankruptcy repayment plan.  The question the Supreme Court addressed in Lanning was, how should bankruptcy courts calculate projected disposable income under this rule?

Prior to Lanning, lower courts had developed two different answers to this question.  Some calculated projected disposable income under a “mechanical approach” that–regardless of the bankruptcy petitioner’s circumstances–(1) multiplied average monthly income over the six months preceding the bankruptcy filing, (2) subtracted from that average reasonable expenses for maintenance and support, charitable contributions, and business expenditures, and then (3) multiplied the resulting figure by the number of months in the Chapter 13 repayment plan.  Other courts were more flexible and utilized the same formula as the mechanical approach in most cases, but also exercised discretion in exceptional cases to make adjustments where significant changes in a debtor’s financial circumstances were known or virtually certain.  The Supreme Court found the flexible approach to be more persuasive, and held that lower courts should calculate projected disposable income accordingly.

The facts of Lanning illustrate the effect of the ruling:  A woman was laid off and in exchange received  a one-time buyout from her former employer.  This payment significantly inflated her gross income for two months–one month she received nearly $12,000 and another she received over $15,000.  Shortly thereafter, she obtained a new job that paid less than $2,000 per month.  She then filed a Chapter 13 bankruptcy.  Based on only the income provided by her new job, the woman calculated monthly disposable income of $149.  The trustee, however, objected, arguing that the figure was too low because it failed to take into account the two months of inflated income from her prior employment.  Taking those months into account, the trustee argued that monthly disposable income was in fact $756.  The result of Lanning is that the bankruptcy petitioner’s calculation of $149 was correct.  Rather than mechanically calculate projected disposable income based on past income regardless of whether it is reasonable to extrapolate that income into the future, the Supreme Court encouraged bankruptcy courts to calculate in a way that makes sense in the circumstances of each case.

Special thanks for this guest-written by Brandon Moreno, Vice President of the Utah Bankruptcy Hotline.  The Utah Bankruptcy Hotline maintains a network of Utah bankruptcy attorneys who provide bankruptcy counsel to consumers in Utah.

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