“Projected Disposable Income” in Chapter 13 Cases: Rearview Mirror, or Crystal Ball?

28 Dec “Projected Disposable Income” in Chapter 13 Cases: Rearview Mirror, or Crystal Ball?

A recent New York bankruptcy court decision, In re Almonte, Case No. 808-74084-reg (Bky.E.D.N.Y. December 8, 2008), held that a chapter 13 debtor should commit his “projected disposable income” to payments under his chapter 13 plan, rather his “current monthly income” or monthly “disposable income.” The court held that the conflict between section 1325(b)(1)(B) and section 101(10A) should be resolved in favor of requiring a debtor to pay only what he could actually afford under his plan, rather than forcing a debtor to rely on historical income which might not continue into the future.

In a rhetorical flourish, the court observed that there were two competing viewspoints for determining this question: the “crystal ball” approach, and the “rearview mirror” approach. The “crystal ball” approach is forward looking: it uses a debtor’s current monthly income, arrived at under section 101(10A), as merely a starting point for determining projected disposable income. This approach was adopted by the Eighth Circuit Court of Appeals in In re Frederickson, 545 F.3d 652 (8th Cir. 2008), and by the Tenth Circuit Court of Appeals in In re Lanning, 545 F.3d 1269 (10th Cir. 2008).

The “rearview mirror” approach employs a mechanical application of current monthly income, minus expenses allowed on Form B22, to arrive at projected disposable income (or lack thereof). This appraoach was adopted by the Ninth Circuit Court of Appeals in In re Kagenveama, 541 F.3d 868 (9th Cir. 2008).

The court in In re Alamonte found fault with the “rearview mirror” approach, because under that analysis a debtor could have actual disposable income shown on Schedules I and J, but have no obligation to pay that income into the chapter 13 plan. Conversely, the “rearview mirror” approach could also demand that a debtor pay income into the chapter 13 plan at a level he or she could no longer afford, based simply on a higher pre-bankruptcy income level which was no longer present.

The court determined that it was more consistent with the intent of section 1325(b)(1)(B) to require that the debtor base his or her chapter 13 payments on actual projected monthly disposable income. Using a prediction (or “crystal ball” projection) of future income would ensure that a debtor paid what was affordable into the chapter 13 plan. This would also avoid the problem of expecting a debtor to pay impossibly high chapter 13 payments, or letting a debtor escape the obligation to pay what was actually affordable into a chapter 13 plan.

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Craig Andresen is a Minnesota bankruptcy attorney who represents both consumers and small business owners in chapter 7 and chapter 13 cases. With thirty years experience, Mr. Andresen is a frequent speaker on the topics of stopping mortgage foreclosures, and stripping off second mortgages in chapter 13. His office is located in Bloomington just across the street from the Mall of America. Call his office at (952) 831-1995 for a free consultation about protecting your rights using bankruptcy.

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