Bankruptcy “Means Test” Doesn’t Dictate Chapter 13 Plan Payments, 5th and 7th Circuit Appeals Courts Say

29 Jul Bankruptcy “Means Test” Doesn’t Dictate Chapter 13 Plan Payments, 5th and 7th Circuit Appeals Courts Say

The chorus is growing — two more appeals courts have ruled that the bankruptcy “means test” (also known as Form B22C) doesn’t establish how much a chapter 13 debtor needs to pay each month into the plan. Instead, both the Fifth and Seventh Circuit Court of Appeals recently said that the means test only provides a “starting point” for determining the plan payment, and that, logically enough, the debtor’s actual monthly budget should establish how much is to be paid into the chapter 13 plan.

These two cases, In re Nowlin, No. 08-20066 (5th Cir. July 17, 2009), and In re Turner, No. 08-2163 (7th Cir. July 20, 2009), both involved debtors whose annual incomes exceeded their states’ median annual incomes. Each debtor therefore was required to propose a five year, rather than a three year, chapter 13 payment plan. In each case, the debtor’s proposed monthly plan payment relied upon the result obtained from the means test’s Form B22C to establish the plan payment. These amounts were much smaller than would have been obtained from the debtors’ schedules I and J, their actual monthly budgets.

The debtors in Nowlin and Turner therefore sought the appeals courts to adopt the so-called “mechanical approach” to calculating chapter 13 plan payments. Under this approach, the debtor simply consults Form B22C to find the means test-determined level of payment; it is irrelevant whether the debtor’s actual budget shows that he or she can afford more or less per month as a chapter 13 payment. The “mechanical approach” has been criticized because on one hand, debtors are caught in a financial bind if they cannot afford the payment dictated by Form B22C. On the other hand, the argument goes, creditors are shortchanged if the debtors can afford more than the payment dictated by the form.

The appeals courts rejected the debtors’ arguments, adopting instead what is sometimes called the “crystal ball” approach. This approach simply focuses on what the debtor’s monthly budget shows he or she can afford to pay into the plan, using shedules I and J. The appeals courts held that in requiring a chapter 13 debtor to submit his or her “projected monthly disposable income” into a chapter 13 plan, Congress intended bankruptcy courts to look beyond the means test to see what the debtor can actually afford to pay.

These decisions ease the way for debtors who hope to propose chapter 13 plans based upon reality, which they can successfully carry out with a good chance of success.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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