Should Chapter 13 Plan Require ALL The Debtor’s Disposable Income

22 Jun Should Chapter 13 Plan Require ALL The Debtor’s Disposable Income

At the same time the bankruptcy community is pondering the Lanning decision on what “projected disposable income” is in a Chapter 13, I read Judge Eugene Wedoff’s thoughts on whether Chapter 13 plans ought to require the payment of all of that disposable income during the bankruptcy to the trustee. *

His point was that requiring payment of 100% of the calculated disposable income was a disincentive to choose Chapter 13. He likened it to a 100% tax on all income above the median income. (Of course it’s not 100% of “income”, but 100% of “disposable income” as figured on the B-22 form.) We would find an income tax that took 100% of any measure of wealth to be reprehensible. But that’s bankruptcy’s requirement.

Disposable income, in Chapter 13 parlance, is that remaining after you apply the allowable deductions, some real and some artificial, to the debtor’s income in the 6 month period before bankruptcy. It may or may not have any relationship to the debtor’s financial reality or ability to fund a bankruptcy plan.

I concur in Judge Wedoff’s thoughts, but would come at the issue a bit differently. A Chapter 13 debtor with above median income commits his earnings to the “supervision of the court” for five years. What an opportunity to develop new spending habits! Or, more precisely, new savings habits. Instead, the current system requires that every penny not calculated as required for basic living be spent.

We squander this opportunity to have debtors practice saving, a habit that most have not regularly indulged in. We require that they expend every cent that comes through their bank account. What a rotten pattern to reinforce.

No financial management class or counselor would see a budget with no provision for either the unexpected nor the inevitable old age as acceptable. Why does a bankruptcy plan of reorganization for consumers mandate such a result?

(Unfortunately, the article is in the member’s only portion of the Chapter 13 Trustees’ marvelous site.)

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Cathy Moran, Esq.

I'm a certified specialist in bankruptcy law (California State Bar Board of Legal Specialization) practicing in the San Francisco Bay Area for more than 30 years. In addition to practicing bankruptcy law, I train new practitioners at Bankruptcy Mastery.

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