CHAPTER 4, G. The Interplay Between SSDI and the Good-Faith Requirement in the Chapter 13 Plan-Confirmation Standard

• Jurisdiction: United States

G. The Interplay Between SSDI and the Good-Faith Requirement in the Chapter 13 Plan-Confirmation Standard

ABI Journal

April 2019

Haseeb Fatmi

U.S. Bankruptcy Court (N.D.N.Y.)

Syracuse, N.Y.

Raphael Stern

U.S. Bankruptcy Court (N.D.N.Y.)

Syracuse, N.Y.

Social Security benefits are afforded unique protections. For example, the Social Security Act expressly protects Social Security recipients from the assignment or transfer of future benefits, meaning that Social Security benefits cannot be subject to any sort of levy, attachment, garnishment or other legal process, with certain exceptions.¹ Federal regulations even place a special burden on banks to ensure that Social Security income does not get mixed in with frozen or garnished wages.²

Bankruptcy is no exception. Congress expressly stated that even the Bankruptcy Code cannot be used to undermine Social Security protections.³ For example, the Code is explicit that future Social Security income can be exempted with no limit on the exempted amount.⁴ The Code goes even further: whereas debts owed to the federal government (e.g., taxes) are generally given priority over other types of debt, overpayments owed to the Social Security Administration receive no special treatment.⁵ This omission has the effect of reducing the priority of Social Security debt to that of general unsecured claims, which can more easily get discharged.⁶ This effectively means that when the agency inadvertently pays someone "extra" Social Security benefits, those payments are still protected.

These safeguards are significant, and rightfully so. The spirit of the Bankruptcy Code — to provide individuals in need with a financial fresh start — is perfectly in line with the mission of the Social Security Act: "to promote the economic security of the nation's people."⁷ This interplay becomes more apparent and crucial when considering why people file for bankruptcy.

A recent study released in the American Journal of Public Health found that more than half of all Americans who file for bankruptcy do so because of medical bills and more than two-thirds of Americans who file for bankruptcy experience medical costs that add to their debt.⁸ Similarly, Social Security disability income is designed to help mitigate medical expenses and the day-to-day cost of living for the millions of Americans receiving disability benefits. Needless to say, the Bankruptcy Code and Social Security Act go hand-in-hand in protecting Americans in need.

However, as with many areas of the law and relationships alike, this marriage is not without its conflicts. In recent years, courts have struggled to reconcile the Code's "good-faith requirement" when applied to Social Security payments. It is unclear how, if at all, Social Security income should influence the good-faith analysis.

When debtors file for chapter 13, they must propose a repayment plan "in good faith."⁹ This requirement presents an inherent ambiguity: The Bankruptcy Code does not define "good faith," and the legislative history sheds no light on how to determine whether a plan has been proposed in good faith, nor do the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) provide much clarity.¹⁰ Courts have been hesitant to read any per se rules into the good-faith requirement.¹¹

In general, courts might consider: (1) the amount of the proposed payments and the amount of the debtor's surplus; (2) the debtor's employment history, ability to earn and likelihood of future increases in income; (3) the duration of the plan; (4) the accuracy of the plan's statement of the debts, expenses and percentage repayment of unsecured debt and whether any inaccuracies are an attempt to mislead the court; (5) the extent of preferential treatment of creditors; (6) the extent to which secured claims are modified; (7) the type of debt sought to be discharged and whether any such debt is potentially nondischargeable in chapter 7; (8) the existence of special circumstances such as inordinate medical expenses; (9) the frequency with which the debtor has sought relief under the Bankruptcy Code; (10) the motivation and sincerity of the debtor in seeking chapter 13 relief; and (11) the burden that the plan's administration would place on the chapter 13 trustee. No particular factor is determinative.¹²

The common thread is to ensure that a debtor does not receive a windfall through the bankruptcy process by withholding available funds and disposable income that could be paid to creditors and to provide at least a nominal benefit to creditors, many of whom receive mere pennies on the dollar.¹³ A debtor should not improve his/her position by falling into debt and such a manipulation of the Code would be an abuse of the system.¹⁴ In so doing, courts will look at an...