10th Circuit Weighs In on Projected Disposable Income

14 Nov 10th Circuit Weighs In on Projected Disposable Income

One of the most vexing provisions of the 2005 BAPCPA amendments is the one requiring debtors to pay their “projected disposable income” over the life of their Chapter 13 plan. For below-median income debtors, this remains intuitive and the same as under previous law. However, for above-median income debtors “disposable income” is determined via a mathematical formula requiring the adding up past income and the subtracting certain standard allowances and real debtor expenses. At this point, it seems like almost every bankruptcy court in the country, along with many BAP panels and three circuit courts, has tackled the question: what does putting the word “projected” in front of the two words “disposable income” mean? It has been a stubborn question.

However, yesterday the 10th Circuit, In re Lanning, — F.3d —-, 2008 WL 4879134 (10th Cir. 2008), made the score (on the circuit court level) 2-1 in favor of having the word projected provide bankruptcy courts with flexibility in determining above-median plan payments. The 9th Circuit had come down in favor of strict adherence to the “disposable income” formula, In re Kagenveama, 541 F.3d 868 (9th Cir.2008), and the 8th Circuit read a great deal of flexibility into the provision, In re Frederickson, No. 07-3391, — F.3d —-, 2008 WL 4693132 (8th Cir. Oct. 27, 2008).

The arguments on both sides of this nationwide debate employ complex statutory interpretation and analysis of legislative history. I am not going to rehash any of that here (however, to read an excellent analysis of this done earlier this year by a Massachusetts judge, click here). That notwithstanding, one point that is interesting to me is how much latitude a bankruptcy court really has in departing from the “disposable income” formula in an above-median case. The Frederickson court found that courts had wide discretion, stating:

“[A] debtor’s ‘disposable income’ calculation on Form 22C is a starting point for determining the debtor’s ‘projected disposable income,’ but that the final calculation can take into consideration changes that have occurred in the debtor’s financial circumstances as well as the debtor’s actual income and expenses as reported on Schedules I and J.” Frederickson at 6 (emphasis added).

This seems to open the door for courts to completely replace the B22C “formula” with “real world” Schedules I and J. The Lanning court, however, did not seem quite so expansive, focusing on the facts of the case which involved a substantial change in circumstances on the income side of the equation. While Frederickson stands for the proposition that a court could deny plan confirmation if, say, a debtor deducted a standardized means test housing allowance instead of a lower Schedule J actual housing expense, this will likely end up being a minority position. I do not believe that the language of the statute can be bent that far.

There will be other circuit courts to opine on this issue. If a well-defined circuit split develops, it is probable the the U.S. Supreme will resolve the dispute. Until then, the method of determining an above-median chapter 13 plan payment will be intensely local.

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