Theresa J. Pulley Radwan, projecting the Impact Of lanning and ransom: Calculating ?projected Disposable Income? in Chapter 13 Repayment Plans

• Publication year: 2011

PROJECTING THE IMPACT OF LANNING AND RANSOM: CALCULATING “PROJECTED DISPOSABLE INCOME” IN CHAPTER 13 REPAYMENT PLANS

Theresa J. Pulley Radwan*

In 2005, Congress amended the United States Bankruptcy Code (the “Code”) through the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”).1 In part, these amendments required a formulaic calculation of the “projected disposable income” a chapter 13 debtor must pay to unsecured creditors, which is based on the debtor’s prebankruptcy income and allowed expenditures.2 In consecutive terms, the United States Supreme Court

* Associate Dean for Administration & Business Affairs and Professor of Law, Stetson University College of Law. Prof. Radwan thanks the administration and staff of Stetson University College of Law for their support and assistance in this project, and her research assistants, Christian Leger, J.D. 2012, and Juan Jose Diaz Granados, LL.M. 2012, for their research and review of this article.

1. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, 119 Stat. 23.

2. Section 102(h) of BAPCPA, entitled “Applicability of Means Test to Chapter 13,” amends § 1325(b) of the Code to define “disposable income”—but not “projected disposable income”—to include:

   
   

   current monthly income received by the debtor (other than child support payments, foster care payments, or disability payments for a dependent child made in accordance with applicable nonbankruptcy law to the extent reasonably necessary to be expended for such child) less amounts reasonably necessary to be expended—

   1. (i) for the maintenance or support of the debtor or a dependent of the debtor, or for a domestic support obligation, that first becomes payable after the date the petition is filed; and

      (ii) for charitable contributions (that meet the definition of ‘charitable contribution’ under section 548(d)(3) to a qualified religious or charitable entity or organization (as defined in section 548(d)(4)) in an amount not to exceed 15 percent of gross income of the debtor for the year in which the contributions are made; and

   2. if the debtor is engaged in business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business.

      Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, § 102(h)(1)–(2), 119 Stat. 23, 33–34. It then goes on to link expenses to the means test of § 707:

      Amounts reasonably necessary to be expended under paragraph (2) shall be determined in accordance with subparagraphs (A) and (B) of section 707(b)(2), if the debtor has current monthly income, when multiplied by 12, greater than—

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

      2. 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

         
         

         considered the effect of changes to a debtor’s income3 and then expenses4 in calculating a debtor’s projected disposable income within a chapter 13 bankruptcy case.5 While the Court answered some questions about the calculation of “projected disposable income”—a phrase only partially defined

         by the BAPCPA amendments—the Court’s decisions awakened a debate as to how a debtor may claim expenses in calculating projected disposable income when, in reality, the debtor incurs only a portion of the allowed expense. In the aftermath of the Supreme Court’s decisions, Ransom v. FIA Card Services,

         N.A.6 and Hamilton v. Lanning,7 lower courts have used the opinions to

         support conflicting solutions to this dilemma.

         
         

         The conflicting solutions vary based on how courts define expenses. To calculate disposable income, which is the funds available to repay creditors, a debtor must deduct listed expenses. Throughout the Code, phrases such as “reasonably necessary,”8 “actual,”9 and “applicable”10 modify expenses. In interpreting these modifiers, two approaches exist for dealing with a debtor

         whose actual expenses differ from the Code’s allowed expenses. The “cap” approach limits the debtor’s expense deductions to the lesser of the actual amount spent or the standard allowance (as defined by the Code); the “allowance” approach permits the debtor to take the entire standard allowance deduction regardless of whether the debtor actually incurs all of that allowance. Under either approach, if the debtor’s expenses change during the three- to five- year term of the repayment plan, courts decide whether to adopt a “step-up” approach that limits a debtor’s ability to claim expenses to only the time the debtor actually incurs such an expense. The fact that courts have used

         
         

         
         

      3. 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.

      § 102(h)(3), 119 Stat. 23, 34.

3. Hamilton v. Lanning, 130 S. Ct. 2464 (2010).

4. Ransom v. FIA Card Servs., N.A., 131 S. Ct. 716 (2011). The Court decided both Ransom and

   Lanning 8–1, with Justice Scalia dissenting. Id. at 730 (Scalia, J., dissenting); Hamilton, 130 S. Ct. at 2478 (Scalia, J., dissenting).

5. BAPCPA modified the less structured definition for “disposable income,” but retained the pre-

BAPCPA requirement that the debtor include all “projected disposable income” for payment to unsecured creditors to confirm a chapter 13 plan. Hamilton, 130 S. Ct. at 2469–70.

6 131 S. Ct. 716 (2011).

7 130 S. Ct. 2464 (2010).

8 See 11 U.S.C. § 1325(b)(2)–(3) (2006).

9 See id. § 707(b)(2)(A)(ii)(I).

10 See id.

Ransom and Lanning to support a variety of these approaches highlights the inherent conflict between the two opinions and creates additional issues for the bankruptcy courts.

This Article considers two issues unresolved by Ransom and Lanning encountered in calculating projected disposable income: (1) a debtor’s actual expenses are less than the expense allowance, and (2) a debtor’s expense terminates during the bankruptcy repayment plan period. After considering the language of §§ 707(b) and 1325(b), the decisions in Lanning and Ransom, and the policies espoused by BAPCPA, the Article concludes that a debtor should only be permitted to deduct the amount of an expense actually used to determine projected disposable income devoted to repayment of creditors.

1. THE ROLE OF PROJECTED DISPOSABLE INCOME IN A CHAPTER 13 REPAYMENT PLAN

   
   

   Chapter 13 allows an individual11 debtor to repay creditors through a plan outlining the timing and amount of payment to each creditor.12 Unlike a chapter 7 bankruptcy case, in which debtors pay creditor claims from the liquidation of prepetition assets,13 chapter 13 focuses primarily on the postpetition earnings14 of the debtor to support the repayment plan. A chapter 13 debtor must propose a plan of repayment within fourteen days of filing the bankruptcy petition.15 The court then determines whether to confirm the plan.16 Upon confirmation of the plan, the debtor pays the trustee who, in turn, pays creditors according to the dictates of the repayment plan.17 While the Code provides several bases for denying plan confirmation,18 Lanning and Ransom

   
   

   11 Id. § 109(e).

   12 Id. §§ 1322, 1325.

   1. These prepetition assets become property of the estate upon entry of the order for relief, which in a voluntary bankruptcy case occurs upon the filing of the bankruptcy petition. Id. §§ 301(b), 541(a).

   2. Debtors electing to file under chapter 13 must have regular income in order to support the repayment

      plan. Id. § 109(e). In a chapter 13 case, earnings during the bankruptcy plan period are also included as property of the estate and the debtor maintains possession of these assets except as provided for in the plan. Id.

      § 1306(a)–(b).

   3. FED. R. BANKR. P. 3015(b).

   16 11 U.S.C. §§ 1324, 1325.

   17 Id. § 1322(a)(1).

   1. See, e.g., id. § 1322(a) (providing basic plan requirements, including providing sufficient resources to fund the plan, payment in full of priority claimants, and fair treatment of claims within a class.); id. § 1325(a) (allowing plan confirmation only if it meets a variety of requirements, such as: paying all fees, filing the bankruptcy petition and proposing the plan in good faith, paying unsecured claimants at least what the

      involved denial of confirmation of the plan because the debtors allegedly failed to include all “projected disposable income” for the payment of unsecured claims.19

      
      

      For debtors whose current monthly income20 equals or exceeds the state median income,21 the Code defines “disposable income” as the difference between the debtor’s current monthly income and a set of defined expenses permitted by the Code.22 These expenses fall within the “means test” of

      § 707(b);23 chapter 13 of the Code incorporates them by reference to the means test.24 A court cannot confirm the debtor’s proposed plan in a chapter 13 bankruptcy case over the objection of a trustee or unsecured creditor if the

      
      

      claimants would have received in a chapter 7 bankruptcy case, allowing secured claimants to retain the security interest, paying secured claimants in full, proposing a feasible plan, paying domestic support obligations, and filing tax returns).

   2. Ransom v. FIA Card Servs., N.A., 131 S. Ct. 716, 724–28 (2011); Hamilton v. Lanning, 130 S. Ct.

      2464, 2469 (2010). Interestingly, in Ransom, the Supreme Court never refers to “projected” disposable income. Instead, it focuses on how the term “applicable” affects the definition of “disposable income.” Ransom, 131 S. Ct. at 724–28. However, the Court’s focus on how “[i]n Chapter 13 proceedings, the means test provides a formula to calculate a debtor’s disposable income, which the debtor must devote to reimbursing creditors under a court-approved plan generally lasting from three to five years” provides the necessary reference to “projected” disposable income within a chapter 13 repayment plan. Id. at 721 (citing 11 U.S.C.

      § 1325(b)).

   3. Current monthly income equals the average of the debtor’s...