High Income Bankruptcy Debtor? Be Prepared for a 5 Year Chapter 13 Plan!

12 Sep High Income Bankruptcy Debtor? Be Prepared for a 5 Year Chapter 13 Plan!

ping pongOn August 29, 2013, the 9th Circuit Court of Appealscourt issued a decision in a bankruptcy case dealing with above average income debtors; the case name is In Re Flores (Ana Flores v. Rod Danielson). That decision will have a huge impact on bankruptcy debtors on the West Coast (the 9th Circuit is made up of California, Hawaii, Idaho, Oregon, Washington, Arizona, Nevada, Montana) who make more than the average bankruptcy debtor or consumer. The Flores 2013 case states that an above-median-income debtor MUST be in a 60-month Chapter 13 repayment plan.

In 2012, in an appeal in this same case, the 9th Circuit Court of Appeals court ruled that the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act did not require that above median income debtors pay their creditors for at least five years (60 months), citing yet another 9th circuit court of appeals case, In re Kagenveama (Maney v. Kagenveama), 541 F.3d 868 (9th Cir. 2008). .

However, in early 2013, the 9th Circuit Court of Appeals decided to sit en banc and look at a number of decisions made since that 2005 act became federal law in October 2005. The 2013 decision applied a Supreme Court Case out of the 8th Circuit, Lanning v. Hamilton, 130 S. Ct. 2464 (2010),to find that the expansion of the committment period was proper for higher income debtors. The 9th Circuit Court of Appeals noted in their decision that they were joining the 6th, 8th, and 11ths circuits in finding that: the applicable commitment period acts as a temporal, as distinct from a monetary, requirement that defines a plan’s minimum duration. It was not a unanimous decision. 9 Judges agreed, 2 disagreed. The average income for each state is found on the U.S. Trustee’ s website and varies widely from state to state.

What does that mean? The 2005 Bankruptcy Act modified a section of the United States Bankruptcy Code that allowed a “subjective” analysis of a debtor’s income by the chapter 7 trustee, the United States Trustee and ultimately, the Chapter 13 Trustee. The new analysis was to be “objective” and imposed a formula to apply to debtors’ income, their secured debts, and to their expenses, both actual and reasonablely anticipated expenses. Section 1325(b)(1)(B) imposed a committment period if debtors had disposable income after applying this formula to the average income from the past six months.

What does that mean? Well, in 2005, a new form was created and every debtor with above median income (above average, as determined by the IRS and the United States Trustee’s Office and re-evaluated every six months) must use this new 7-page form, a Form 22, which applied this new formula taking deductions from the monthly average until the end of the form. At the end of the form will be a number — either a positive number or a negative number. That number determines whether folks should not have to pay their unsecured creditors (a negative number) or should have to pay their unsecured creditors a certain amount (that positive number times 60 months). Over the past 8 years, there have been many court cases which tried to interpret what this new formula means for everyday folks. And watching these court cases has been like watching a table tennis match between players as the ball bounces back and forth.

To recap:

1. The 2008 Kagenveama court ruled that 9th circuit bankruptcy debtors could file a 36-month plan if their disposable income was negative and didn’t have to pay anything to unsecured creditors. (a negative number x 6o months is a negative number)

2. The 2009 Lanning case (U.S. Supreme Court) held that when a court gets ridiculous results when using the formula — that the court could apply common sense (no 60-month plan if the debtor ends up with a negative number)

3. The 2012 Flores court ruled that 9th circuit bankruptcy debtors could file a 36-month plan and did not have to be in a 60-month plan. (again, negative numbers equals no 60-month committment period)

4. The 6th Circuit Court of Appeals held in Baud v. Carroll, 634 F.3d 327, 336–38 (6th Cir. 2011) (describing split of decisions and collecting cases), cert. denied, 132 S. Ct. 997 (2012) that there was a split of decisions and three ways to look at this problem: (a) held that where there is no disposable income, that the total amount which would be paid is the important number (so that a 36-month plan could be proposed); (b) that where there is a negative number, that there is no time requirement; and (c) that there is a committment period required for above median income debtors, period.

5. The 2013 Flores decision finds that the debtors must be in a 60-month plan. Thus, even though a debtor’s payments to unsecured creditors will, at least initially, amount to $0 if the debtor has no projected disposable income, the statute requires the debtor to commit to the plan for the duration of the applicable commitment period. Flores, at page 11.

That’s right folks, a zero payment but that zero payment must continue for 60 months. Because that’s what the statute says. This is a game of ping pong as the opinions of the Courts are flipping back and forth.

Image: Max Braun/Flickr

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I'm a consumer protection lawyer in Oregon, working with people in Klamath; Lake; Jackson; Josephine; Curry; and Deschutes County. I speak regularly on bankruptcy and consumer protection issues nationwide.
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