Past income the correct measure of Chapter 13 payments

The Ninth Circuit issued its long awaited opinion on whether the debtor’s Chapter 13 payment is fixed by means test formula looking backward or the present income level in Schedule I. It’s the means test, said the circuit court.

“Projected disposable income ” is the product of the means test calculation in form B22C, holds the Kagenveama opinion. If that number is a negative, the debtor not only has no income-based obligation to unsecured creditors, but neither does the plan have to run for five years.

This issue of whether the new bankruptcy law’s provision that the debtor’s disposable income was “current monthly income” less living expenses, or the product of the debtor’s income and expenses on the day the bankruptcy was filed has split courts from almost the first published decision after BAPCPA became law.

Prior to “reform”, courts looked at the debtor’s income and expense at filing to figure what income was available to pay creditors going forward. Congress felt that gave judges too much lee way (and by implication, was too generous to debtors). The means test was designed (badly in my opinion) to impose a standard set of expense allowances that would be applied, not to the income the debtor was making when the case was filed, but to the average income they had made in the past six months. The opportunities for anomalies is obvious: the debtor’s actual fixed expenses are different, or, the debtor’s income prior to filing was lower than his income when he filed.

Some courts have been unwilling to depart from the “old” way of doing things, which was probably more predictive of the debtor’s real capacity to repay. They wanted to gloss over the new, statutory language that said the debtor’s disposable income shall be his current monthly income and find that the word “projected” modifying “disposable income” gave them free rein to look at future ability to repay, untethered by the recent past income reflected in B22C.

This decision is particularly sweet for me, because I argued for this result at the Bankruptcy Appellate Panel without success.  It’s gratifying to know that the higher ups saw the law as I did.

So, at least in the Ninth Circuit, we have a binding decision about how we measure what the debtor must provide to unsecured creditors by reason of his income. One of my gripes about BAPCPA has been the sloppy drafting which has lead to enormous uncertainty and variation on how the new law is applied. It has taken more than 2 1/2 years to get this circuit court decision that fixes, for one circuit only, one of the statutory mysteries of BAPCPA.