In Part 1 of my two-part series discussing the issue of filing for bankruptcy after a previous bankruptcy had been filed, I mentioned “disposable monthly income” in the context of Chapter 13 bankruptcy and told you that this post would discuss it in detail. This isn’t the first time I have promised to discuss this topic. I have put it off because of the somewhat esoteric, indeed recondite, dare I even say arcane, nature of the subject. However, there have been some very recent developments in the case law on “disposable monthly income” that make it ripe for discussion. Therefore, this post makes good on my promises.
I. Chapter 13’s Best Efforts Repayment Requirement
One of the statutory requirements for the confirmation of a Chapter 13 plan that proposes to pay the general unsecured creditors less than 100% of what they are owed is that the debtor must devote all of the “projected disposable income” to the plan payments (with emphasis added):
If the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan—
(A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or
(B) the plan provides that all of the debtor’s projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan.
Even though, as we shall soon see, there are two candidates for “projected disposable income” we will use the term “DMI” – disposable monthly income as a shorthand for now.
The concept of DMI has evolved over the last several years. A relatively recent U.S. Supreme Court case, Hamilton v. Lanning, 130 S. Ct. 2464 (2010), has addressed the meaning of DMI in Chapter 13 cases. In order to appreciate the meaning of that case it helps to describe things as they were just before it was decided.
II. DMI Calculated Using Form 22
DMI has two meanings: one for Chapter 7, the other for Chapter 13. Each is calculated using a version of Form 22. The Chapter 7 version is Form 22A, and the Chapter 13 version is Form 22C . (There is a Chapter 11 version, Form 22B, but I am restricting this discussion to Chapters 7 and 13. Form 22B is much shorter than Forms 22 A and 22C because it doesn’t consider living expenses at all. Therefore, it has no real bearing on the matter of DMI.) On the surface the two forms, 22A and 22C, look very much alike, but there are some important differences which we will discuss later.
In both cases the big picture idea in calculating DMI has been to answer a question, to wit: Suppose the debtor doesn’t have any of the pesky unsecured debts that have led to bankruptcy. How much money is left over each month after the debtor has paid taxes and social security, and covered his or her reasonable living expenses? In rough terms, if the answer is: “Nothing,” then Chapter 7 is the appropriate chapter under which to file. Otherwise, the debtor must consider Chapter 13.
To be a bit more precise, without getting bogged down in Form 22’s arithmetic details, we start by calculating current monthly income (“CMI”). This is the six-month arithmetic average of gross income from (almost) all sources for the six full calendar months immediately prior to the month of filing. See 11 U.S.C. § 101(10A) for the detailed definition of CMI. It is worth noting that social security income is not included in this calculation.
Next, from CMI we subtract the IRS standard monthly living expenses for a family of the debtor’s size, subtract the six-month arithmetic average of taxes and social security for the same six-month period, and subtract any additional living expenses the debtor has that are not envisioned in the IRS standard expense tables, but that can be justified to the judge assigned to the case. The result is DMI.
What can be included in the additional living expenses not envisioned in the IRS standard expenses? Typical examples of these additional expenses are: car payments, health insurance, mortgage payments that exceed the IRS housing allotment, child care, and domestic support obligations. However, credit card payments do not qualify as additional expenses because of the premise on which the question posed was based: “Suppose the debtor doesn’t have any of the pesky unsecured debts that have led to bankruptcy.”
Chapter 7’s Form 22A is based on 11 U.S.C. §707(b)(2), and is used to determine eligibility for Chapter 7 relief. If DMI is too high, in a way that can be made precise, then the debtor is ineligible for Chapter 7 relief. See 11 U.S.C. § 707(b)(2)(A)(i) for what it means to be “too high.”
Chapter 13’s Form 22C is based on 11 U.S.C. §§ 1322(d) and 1325(b) – which do relate back to § 707(b)(2) – and has been used to determine the size of plan payments (i.e., the amount on line 59 of Form 22C).
It is important to observe that Form 22’s calculation of DMI is based on the debtor’s past income over the six-month period prior to filing. In other words, it depends on a retrospective, as opposed to a prospective, picture of the debtor’s income. In addition, it contains an obvious fiction: most of the expenses listed in Form 22 are IRS standard expenses, which may bear little resemblance to the debtor’s actual expenses. It has been argued therefore, that Form 22C provides a poor measurement of the debtor’s future ability to make Chapter 13 plan payments.
III. DMI Calculated Using Schedules I And J
Schedules I (monthly income) and J (monthly expenses) can also be used to calculate a candidate for leftover money available for Chapter 13 plan payments. Compute the difference between Schedule I, line 16, and Schedule J, line 18 (referred to as the “I, J difference”).
Since the income reported in Schedule I is supposed to be the actual current income, as opposed to the six-month average CMI, and since the expenses reported in Schedule J are supposed to be the debtor’s actual expenses, as opposed to the fictional expenses of Form 22C, it has been argued that the I, J difference is the better metric.
IV. In re Kagenveama
An important Ninth Circuit case that generated a variety of opinions on whether the Form 22C DMI should be used, or if the I, J difference could be required, is In re Kagenveama, 541 F.3d 868 (9th Cir. 2008).
A. A Brief Digression
The main issue in Kagenveama was whether a negative Form 22C DMI freed the above-median income debtor from having to complete a five-year plan – meaning the plan could be shorter. The Court held that the plan did not have to be a full five years.
This holding is currently under attack by the Chapter 13 Trustee in Riverside, California. Although the Ninth Circuit recently upheld the Kagenveama holding in In re Flores, No. 11-55452 (9th Cir. Aug. 31, 2012), the Riverside Trustee appealed and asked the Ninth Circuit to hear the matter en banc, which the Ninth Circuit agreed to do.
For a good discussion of the status of the law up to the Ninth Circuit’s agreeing to hear the matter en banc, take a look at my recent post on the topic.
B. Back To The DMI Discussion
The Kagenveama Court appeared to say, en passant, that the Form 22C DMI controlled in determining the size of Chapter 13 plan payments if DMI were positive. For most Chapter 13 debtors this was good news because the IRS standard expenses are usually higher than what they actually spend.
V. Hamilton v. Lanning
It is against this historical backdrop that Hamilton v. Lanning should be read. While the Lanning Court did not address the question of plan length if Form 22C’s DMI is negative – meaning that for the erudite among us Kagenveama is still good law in that situation – it held that a forward looking calculation was necessary to determine the Chapter 13 plan payments. Thus, if a debtor anticipates future income that is higher than Form 22C’s six-month average CMI, that future income level must be used to determine the size of plan payments.
It remains to be seen how the holding in Lanning will ultimately be applied. However, in practical terms if the I, J difference is significantly higher than the Form 22C DMI, a Court will probably refuse to confirm a plan unless the I, J difference is chosen over the Form 22C DMI.
VI. Differences Between Forms 22A And 22C
In spite of the apparent diminution under Hamilton v. Lanning of Form 22C’s importance in Chapter 13, it still must be filed as part of a complete Chapter 13 filing. Moreover, if the debtor’s income will probably remain static for the foreseeable future, and if the debtor’s expenses are close to the IRS standard expenses, then Form 22C’s DMI might still be a reasonable candidate for determining plan payments. It is therefore, worth looking at the differences between Chapter 7’s Form 22A and Chapter 13’s Form 22C.
Three important differences between Form 22A and Form 22C are:
(a) In Form 22C, line 31 or 55, the Chapter 13 debtor can deduct monthly repayments of a loan taken against a qualified retirement plan like a 401(k) (see See 11 U.S.C. § 1322(f); cp. 11 U.S.C. § 362(b)(19), whereas a Chapter 7 debtor may not deduct them in Form 22A (see In re Egebjerg, 574 F. 3d 1045 (9th Cir. 2009));
(b) In Form 22C, line 54, any income the debtor receives from child support is excluded from DMI (See 11 U.S.C. § 1325(b)(2)) – there is no Chapter 7 analogue; and
(c) In Form 22C, line 55, regular contributions to a qualified retirement plan are excluded from DMI (See 11 U.S.C. § 541(b)(7)): “. . . such amount under this subparagraph [i.e., contributions to qualified retirement plans] shall not constitute disposable income, as defined in section 1325(b)(2) . . . ” This language also appears at the end of §§ 541(b)(7)(A)(i)(III) and (B)(i)(III)) – again, there is no Chapter 7 analogue.
The oddity here is that one could have a Form 22A DMI that is too high for Chapter 7 eligibility, but a negative Form 22C DMI. This oddity stems from the congressional desire to force debtors into Chapter 13 whenever possible. Thus, Congress (is Progress its antonym?) gives Chapter 13 debtors retirement benefits that are unavailable to Chapter 7 debtors, and allows Chapter 13 debtors to keep any child support they receive out of Chapter 13 plan payment consideration.
However, and it’s a new and awful however, there is a recent case, In re Parks, BAP No. MT-11-1366-JuMkH, Bk. No. 11-60050 holding that my very natural reading of 11 U.S.C. § 541(b)(7) is incorrect. Read it with horror, but also with the glimmer of hope that the general consensus is that BAP decisions are not binding on any bankruptcy judge other than the one from whom the appeal was taken.
Of course, as with any bankruptcy question, you should always consult a highly skilled bankruptcy attorney before making any decisions about filing.