Chapter 13 Bankruptcy: What Gets Paid to the Unsecured Pot in the Ninth Circuit?

21 Feb Chapter 13 Bankruptcy: What Gets Paid to the Unsecured Pot in the Ninth Circuit?

Under the old laws, Chapter 13 payments were not that difficult to figure out.  Reasonable monthly expenses were subtracted from monthly net income to arrive at a monthly disposable income figure, which then gets paid for 36 to 60 months, paying off secured, priority, and unsecured claims to the extent possible.  Under BAPCPA laws passed in October, 2005, all that changed.  In the Ninth Circuit (California and other western states), the amount that gets paid first depends upon a lengthy test, and starting first by determining whether you are above median family income or less than median family income.

If you are above median family income, you need to fill out the long form of B22.   By doing so, it ascertains your current monly income (“CMI”) and subtracts from that the artificial expenses (set forth by the IRS) to arrive at your Monthly Disposable Income.  Whatever this artifical amount is, it then gets multiplied out by 60 months to determine the whole “pot” that needs to be paid to “unsecured creditors” over 5 years.  To this is then added any secured creditors in the plan, trustee fees, and attorney fees and costs.  Again, this has nothing to do with reality since you are using fake income for the past 6 months to project future income which may not be the same, and you are using artificial expenses made up by the IRS which are probably totally different than your actual expenses.


If you are below median family income, you do not need to fill out all of B22, but instead simply need to calculate your CMI and subtract from that your reasonable living expenses.  The remaining amount then gets multiplied by 36 months to determine the “pot” that then gets paid to “unsecured creditors” over a period of 3 years.  Again, you still must add to that any secured claims in the chapter 13 plan, as well as turstee fees, attorney fees and costs.  This calculation has a little closer basis to reality since it compares artificial income from the past with expenses more in synch with your actual expenses.


One caveat to the forgoing is the recent 9th circuit case of In re Kagenveama as discused below.  If under either of the forgoing scenarios you end up with a negative monthly disposable income amount, then there is no set time frame to pay “unsecured creditors” which technically allows a plan length of 1 month to 60 months, and no “pot” for unsecured creditors.


If the forgoing is confusing to you, you are not alone.  Attorneys, Trustees, and Judges struggle on a day to day basis trying to determine what should be the proper CMI and “fake IRS expenses” or “reasonable expenses” in most chapter 13 cases.  And it doesnt stop there once the “pot” amount is figured out. This is because although this pot needs to be paid to unsecured creditors over the life of the chaper 13 plan, there are different interpretations over what exactly “unsecured creditrs” mean?  You would probably think it simply means all “unsecured creditors” right?  Of course that is the plain meaning.


Wrong!  Believe it or not, most creditors and Trustees believe that “unsecured creditors” means something else that its plain meaning.  They believe that unsecured creditors means “unsecured general creditors” and can not include “unsecured priority creditors.”  In furtherance of their position, they argue that the plain meaning can not be given to the words “unsecured creditors” as used in 1325(b) of the Bankruptcy Code since Congresss probably made a mistake when it was written. 


They then back their position up by stating that applying such a plain meaning would lead to an absurd result.  This is because they argue that monthly disposable income on form b22 has already subtracted out monthly unsecured priority debt payments, so to subtract it out again woud be a DOUBLE DEDUCTION and therefore ABSURD.  At first blush, this argument has appeal and has a common sense deduction.  However, if one digs deaper, this argument is flawed, since DOUBLE DEDUCTIONS do not always occur:

1) If a debtor understates a unsecured priority creditor amount in the schedules and Form B22, there is NO DOUBLE DEDUCTION on the entire amount.

2) Form B22 fails to take into account the unsecured priority debt of post petition attorney fees and costs which results in NO DOUBLE DEDUCTION.

3) Form B22 fails to take into account any unsecured Post Petition Priority Debt which results in NO DOUBLE DEDUCTION.

Additionally, as discussed above, in under medium cases, Form B22 does not need to be completed in full, since the monthly disposable income is current monthly income (“CMI”) less “amounts reasonable necessary to be expended” per 1325(b)(2).  Accordingly, in those cases, unsecured priority creditors are never dealt with in the test since they can not be considered a deduction under 1325(b)(2) by law.

Thus for under median debtors, the final amount of disposable monthly income to be applied to “unsecured creditors” in 1325(b)(1)(B) contains NO DOUBLE COUNTING since the CMI subtracts “J” expenses which can not contain pre-petition priority debt amounts.  Thus, to interpret unsecured creditors differently for under median debotrs would then read two seperate meanings to “unsecured creditors” in 1325(b)(1)(B) depending upon a debtor’s income.  Now that would be ABSURD!  Accordingly, even though form B22 uses artifical income and artificial orreasonable expenses, the final amount to “unsecured creditors” does not appear to be absurd in every case and has a rational basis to mean just that “unsecured creditors.”  


In addition to the forgoing, Courts in the Ninth Circuit are also now bound to apply the plain meaning to “unsecured creditors” in light of the recent case of Maney v. Kagenveama (In re Kagenveama), 527 F.3d 990, (9th Cir. Ariz. 2008).  In that case, the Ninth Circuit extensively analyzed 11 USC 1325(b), and started with the plain meaning of the statute:

The starting point for resolving a dispute over the meaning of a statute begins with the language of the statute itself. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S. Ct. 1026, 103 L. Ed. 2d 290 (1989). Where statutory language is plain, “the sole function of the courts–at least where the disposition required by the text is not absurd–is to enforce it according to its terms.” Lamie v. United States Tr., 540 U.S. 526, 534, 124 S. Ct. 1023, 157 L. Ed. 2d 1024 (2004). Id at 994.


In doing so, the Ninth Circuit affirmed the Bankruptcy Court’s confirmation of the Chapter 13 plan, and concluded that 1325(b) required a plain meaning interpretation.  Moreover, the Ninth Circuit specifically held at 997 that the plain meaning was not absurd:

Finally, the disposition required by the plain text of § 1325(b) is not absurd.

We “will not override the definition and process for calculating disposable income under § 1325(b)(2)-(3) as being absurd simply because it leads to results that are not aligned with the old law.” In re Alexander, 344 B.R. at 747.

If the changes imposed by BAPCPA arose from poor policy choices that produced undesirable results, it is up to Congress, not the courts, to amend the statute. See Lamie, 540 U.S. at 542.


Thus the most likely disposition now to deciphering the term “unsecured creditors” now comes from stare decisis as laid down by the Ninth Circuit, that the plain meaning of 1325(b) is not absurd, and the term “unsecured creditors” includes both general unsecured creditors and priority unsecured creditors.


Notwithstanding the forgoing, no cases have yet to be decided interpreting “unsecured creditors” under Kagenveama precedent.  Stay tuned.  A case directly dealing with the forgoing issues is now starting to heat up in the Southern District Bankrutpcy Court and we will have a court ruling soon.  Of course while such a ruling will probably be appealed by either party, it will provide interim guidance until an eventual appeal order establishes final resolution of the tern “unsecured creditors.”


Written by Michael G. Doan

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