Another Unfavorable Bankruptcy Means Test Decision

20 Oct Another Unfavorable Bankruptcy Means Test Decision

Recently I posted a Blog on the unfavorable In re Martinez decision recently handed down by the Ninth Circuit BAP on October 5, 2009.  Well, the Ninth Circuit BAP did it again that same day in another case with a slightly different twist in the Smith matter.

The BAP essentially issued almost the same opinion, but applied its rational to property that was being surrendered as opposed to being stripped.  Thus the BAP now holds that if a debtor will surrender vehicles, real estate, or other secured assets, one can no longer take a deduction on Form B22’s “projected disposable income” test.  Perhaps the BAP didn’t realize how absurd this new ruling would play out?

Such an absurdity now arises from the irreconcilability between the Chapter 7 “means” test and the Chapter 13 “projected disposable income” test since deductions are allowed in chapter 7 cases on secured debt whose collateral will be surrendered, yet not allowed in chapter 13.

An example best illustrates this fatuousness.  If a debtor proposes to surrender a vehicle in chapter 7 which provides a $300 per month deduction(assuming a $9,000 car with an $18,000.00 debt), he is still entitled to secured debt deductions on Form B22. Assuming Form B22 results in negative disposable monthly income of -($100.00),however, that same debtor would not be allowed the same deduction in chapter 13, which in turn would result in a positive $200.00/month for projected disposable income purposes.

Thus if this debtor had great intentions and desired to pay back creditors in chapter 13 instead of eliminating the same in chapter 7, he could be penalized a $200.00/month surcharge to unsecured creditors for 60 months simply by surrendering the vehicle.

Yet that same surrender in chapter 7 is completely proper and results in$0.00 to unsecured.  That’s right, pay a mandatory $12,000.00 in chapter 13 or $0.00 in chapter 7,  if you want to surrender the vehicle.  But wait, it gets worse!

If the same debtor chose not to surrender the vehicle in chapter 13 and kept the vehicle instead, he now avoids the $200.00 per month unsecured surcharge and will eventually own the car free and clear.  Instead, he pays about $150.00 per month with interest for 60 months and owns the car free and clear.  Huh?  Pay $200 per month and not own the car or pay $150 per month with interest and own the car????

If you think this is ridiculous, you are not alone.  Many attorneys are struggling to make sense of the BAP decision right now, and it is anticipated that many Bankruptcy Courts will disregard its decision.  But that is what happens when a court decides to stray away from the plan language of a statute and create its own interpretation solely based upon assumptions.

Due to assumptions, as in this case where property is being surrendered, it makes absolutely no sense to allow secured deductions in chapter 7 and disallow the same deductions in chapter 13.  Such a disparity between the chapters completely disregards Congress intent of incorporating the chapter 7 “means” test in chapter 13 via 1325(b)(3).

But its not over yet.  The BAP certified this case to the 9th circuit court of appeals.  Perhaps the 9th circuit will get it right and reverse.

Written by Michael Doan

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