Southern California Bankruptcy Law Blog

In re Flores: An Important Recent Chapter 13 Bankruptcy Case

Posted in Chapter 13

How long must a Chapter 13 repayment plan last?

I.          The Statutory Authority

Section 1325(b)(4) of the Bankruptcy Code makes reference to the “applicable commitment period”:

[T]he “applicable commitment period”—

(A) subject to subparagraph (B), shall be—

(i) 3 years; or

(ii) not less than 5 years, if the current monthly income of the debtor and the debtor’s spouse combined, when multiplied by 12, is not less than—

(I) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner;

(II) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals; or

(III) in the case of a debtor in a household exceeding 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals, plus $525 per month for each individual in excess of 4; and

(B) may be less than 3 or 5 years, whichever is applicable under subparagraph (A), but only if the plan provides for payment in full of all allowed unsecured claims over a shorter period.

Huh?  What does this mean in plain English?  The gist is this:  calculate the current monthly income (“CMI”) as the six-month average of gross income from all sources — other than social security — for the six full calendar months prior to the month you file your bankruptcy papers.  Annualize CMI by multiplying by twelve to get the annualized CMI (“ACMI”).  If ACMI is less than the median income for a family of your size, you’re in a three-year plan, which can be lengthened with Court approval.  Otherwise, you’re in a five-year plan.  That seems simple enough.

The question I get whenever I discuss Chapter 13 with a potential client is:  How large are the plan payments?  This is a complicated question to answer.  However, if we ignore the other factors that go into determining the plan payment and just focus on income and expenses, one candidate is based on Form 22C, which is included in the bankruptcy papers.  Here’s the gist of Form 22C:

Go back to CMI and calculate disposable monthly income (“DMI”) by subtracting:  (1) the six-month average of taxes and social security paid over the same six-month period, (2) the IRS standard living expenses for a family of your size (these figures are based on the standard IRS family encased in plastic in Washington DC), and (3) any additional living expenses you can convince the judge are legitimate (examples include health insurance premiums, mortgage payments in excess of the standard IRS housing expense, child care or child support payments, and car payments).  DMI is thus a candidate for what’s left over each month for plan payments.

But what if DMI is negative?  Then the plan payments are negative.  Sweet!  The Court’s going to pay you to be in Chapter 13.  Hmmm.  Not quite.  Part of the problem is that there are two artificial things about DMI.  The first is in the calculation of CMI.  It’s based on a six-month average of income, which might not accurately predict your future ability to make plan payments.  The second is in using the IRS standard expenses when calculating DMI.  These expenses may bear little resemblance to your real life expenses.

Therefore, there is another candidate for “what’s left over each month” for plan payments.  The bankruptcy papers include a series of schedules, A through J, that give a financial snapshot of you on the day of filing.  Schedule I gives your real-life current monthly income, and Schedule J gives your real-life living expenses.  The difference between these figures is the “IJ difference,” which in some cases is a better measurement of your ability to pay than DMI.

II.        In re Kagenveama

A few years ago the Court of Appeals for the Ninth Circuit ruled that if DMI is negative, there is no applicable commitment period.  An above-median debtor’s plan does not have to be a five-year plan.  It can be any length up to five years (the statutory maximum).  The holding was in In re Kagenveama, 541 F. 3d 868 (9th Cir. 2008).

Thus, an above-median income debtor with a negative DMI could propose a three-year plan instead of a five-year plan, without running afoul of § 1325(b)(4).

But what if the debtor proposed a four-month plan?  Would that be reasonable, given that a below-median income debtor must be in a 36-month plan?  To my knowledge, no one has had the temerity to propose an under 36-month plan pursuant to the holding in Kagenveama.  The minimum has been three years.  I have a client who is an above-median debtor with a negative DMI, who is in a confirmed four-year plan to pay off a prepetition mortgage arrearage.

By the way, in its Kagenveama decision the Court discussed DMI.  However, as its focus was on “applicable commitment period,” the Court merely adumbrated the position that in positive DMI cases DMI is the appropriate amount to devote to plan payments.

Subsequent to the Kagenveama decision, the United States Supreme Court handed down a decision that complicated things.

III.       Hamilton v. Lanning

In Hamilton v. Lanning, 130 S. Ct. 2464 (2010) the Supremes (sans Diana Ross — I know it’s an old joke, but I just couldn’t resist) dealt with a different, but related, question:  Which “what’s left over each month” amount must the debtor devote to Chapter 13 plan payments?  DMI or the IJ difference?

The Supremes said that the Court should use the one that provides a better picture of the debtor’s future ability to pay.  In some cases it might be DMI, in others the IJ difference.  For example, if DMI is negative, then the IJ difference is the right candidate.  On the other hand, if the debtor is on temporary disability for a month at the moment of filing, then the IJ difference might be small.  But if the debtor will return to a relatively high paying job in a couple of weeks, then DMI might be the better measurement.

The Supremes did not address the question of applicable commitment period.  That suggested that the holding in Kagenveama was still good law.  But the Chapter 13 Trustee in Riverside had a different reading of Hamilton.

IV.       In re Flores

In a case that is hot off the presses — ouch!  I just burned my fingers on the printout! — the Ninth Circuit reaffirmed its Kagenveama holding.

Cesar Flores filed Chapter 13 papers in the Riverside Division of the Central District of California, and even though he was an above-median debtor, he proposed a three-year plan.  He did so relying on Kagenveama because his DMI was negative.  The Chapter 13 Trustee objected to plan confirmation on the grounds that the holding in Hamilton overruled Kagenveama.  The bankruptcy judge sided with the Trustee, but certified the case for direct appeal to the Ninth Circuit (bypassing the usual intermediate step of appealing to the Bankruptcy Appellate Panel or the District Court).

In In re Flores, No. 11-55452 (9th Cir. Aug. 31, 2012) the Ninth Circuit said that Kagenveama is still good law, so Mr. Flores could be in a three-year plan.

This was good news for me because I have a Chapter 13 client who is an above-median debtor with a negative DMI.  Therefore, we proposed a three-year plan.  The Flores holding is so new that when we went to the 341 meeting in Los Angeles, the Chapter 13 Trustee’s staff attorney didn’t know about it and said that the plan had to be five years.  I sent her a copy of the Flores holding.  We’ll see where things go from here.

V.        The Appeal

The Riverside Chapter 13 Trustee appealed again to the Ninth Circuit and requested an en banc rehearing of the case.  He has indicated that if things don’t go his way he’ll appeal to the Supremes.  Thus, the matter isn’t settled just yet.

Stay tuned.