Thomas J. Izzo, Projecting the Past: How the Bankruptcy Abuse Prevention and Consumer Protection Act Has Befuddled Sec. 1325(b) and "projected Disposable Income"

• Publication year: 2011

PROJECTING THE PAST: HOW THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT HAS BEFUDDLED Sec. 1325(B) AND "PROJECTED DISPOSABLE INCOME"

The twin goals of the Bankruptcy Code are a fresh start for the honest debtor and an equitable distribution to creditors.¹However, some bankruptcy courts have interpreted an integral bankruptcy provision in a way that directly contradicts these goals. The result is either a denial of bankruptcy relief to honest debtors or a windfall to debtors at the creditors' expense.

Disputes over the method for properly calculating a debtor's projected disposable income have created a split of authority between circuits, districts, and even within districts.²The proper calculation method for projected disposable income is of paramount concern not only to unsecured creditors, who worry about a bankruptcy discharge wiping out future chances of recovery, but also to debtors who may be unable to confirm a feasible plan.³

The divergence between authorities has emerged because the Bankruptcy Code requires a debtor to commit all of her "projected disposable income" to her unsecured creditors, yet it does not effectively define the phrase.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005⁴("BAPCPA") substantially amended the Bankruptcy Code. These amendments included a new definition of "disposable income" in Sec. 1325(b)(2).⁵BAPCPA, however, left unaltered a provision requiring a debtor to pay all of her

"projected disposable income" to her unsecured creditors over the life of the plan.⁶The question then is whether, and to what degree, the Bankruptcy Code's definition of "disposable income" applies to the term "projected disposable income." This inconsistency in terms has resulted in a split of authority over the effect of the adjective "projected," or more accurately, the absence of the word from the definition of "disposable income."⁷

In some circumstances, the Code requires a chapter 13 debtor to pay "projected disposable income" to his unsecured creditors, but the Code only supplies a definition for the term "disposable income." The problem with this inconsistency is that the Bankruptcy Code's definition of "disposable income" mandates a calculation based on a debtor's historical, prepetition finances,⁸but the most obvious connotation of "projected disposable income" suggests that the debtor's anticipated future financial situation should be controlling.⁹Thus, insofar as the definition of the term "disposable income" requires a backward- looking calculation, and the term "projected disposable income" suggests a forward-looking calculation, the two terms must be reconciled.¹⁰

This inconsistency has generated two competing interpretations by bankruptcy courts. One line of reasoning contends that "projected disposable income" means nothing more than "disposable income" multiplied by the number of months in the plan.¹¹The second interpretation concludes that since a debtor's "projected disposable income" must be used to fund the future plan, the word "projected" was intended to signal a reexamination of the debtor's expected budget over the life of the plan.¹²The debtor's past finances can be a useful measure of his future ability to pay, but where there is a significant discrepancy between the debtor's past and predicted future income, a court may consider information beyond the debtor's mere historical finances.¹³

This Comment argues that courts must conclude that the terms "projected disposable income" and "disposable income" have distinct meanings. Courts are consequently not bound to rely solely upon the Code's definition of "disposable income" in determining what a debtor is required to pay to unsecured creditors in a chapter 13 plan, but should instead use it as a starting point for the analysis. Part I of this Comment explains the key statutory provisions used in determining "projected disposable income," the various forms and methods used to calculate such income, and the logic behind courts' divergent opinions. Part II advocates allowing courts to consider evidence other than a debtor's past finances in determining her projected disposable income in chapter 13. Part II.A argues that such a conclusion is consistent with the plain meaning of the Code's text, while Part II.B considers the absurd results of a contrary conclusion. Part II.C demonstrates that such a conclusion conforms with the legislative intent. Finally, Part III proposes a clearer method for determining a debtor's "projected disposable income."

I. SECTION 1325(b): PURPOSES, PROVISIONS, AND METHODS

Section 1325(b)(1) requires that if a party objects to a debtor's chapter 13 plan, the plan cannot be confirmed unless all the debtor's unsecured claims are paid in full, or the debtor commits all of his projected disposable income to repaying his unsecured creditors for a certain number of months.¹⁴Although

Sec. 1325(b)(2) defines the term "disposable income,"¹⁵it defines neither the phrase "projected disposable income" nor the word "projected."¹⁶Given this omission, courts are faced with either reading "projected disposable income" as being synonymous with "disposable income" or reading the two as having distinct meanings.

In Sec. 1325(b)(2), the Code states that "disposable income" means "current monthly income" ("CMI"). CMI is defined in Sec. 101(10A) as the debtor's average monthly income for the six months preceding the filing.¹⁷The term "current monthly income" is actually a misnomer since it is based on historical income, as opposed to current income.¹⁸The result is that the Code's definition for "disposable income" is a historical average of the debtor's past income, which does not fit the most apparent implication of the term

"projected disposable income" as a forward-looking analysis of the debtor's future income.¹⁹Consequently, either a court is bound to use the debtor's past average income, or a court is free to consider other evidence to arrive at a figure that accurately represents the debtor's estimated future financial situation.

To illustrate the repercussions of this dilemma, consider the different results from In re Pak and In re Lanning. In In re Pak, the debtor was unemployed for most of the six months preceding his chapter 13 filing and accordingly had hardly any income during that time.²⁰Just before he filed, however, he took a job which paid over $100,000 per year.²¹If the Code required that he determine his projected disposable income solely by reference to his prepetition income, then he would have only been required to pay back a minimal portion of the $172,931 in debt he owed to his unsecured creditors.²²

If, however, the court could take into account the increased income from his new job, then he would have been required to pay back nearly all such debt.²³

Whether the court in In re Pak used the debtor's prepetition average income or expected future income determined if the debtor paid his unsecured creditors almost nothing or close to everything.

Alternatively, in In re Lanning, the debtor's prepetition average income was significantly more than her expected future income because she lost her job on the eve of filing.²⁴Consequently, a plan based upon prepetition average income required payments nearly ten times that of a plan based upon actual expected income.²⁵The debtor could not feasibly pay such a high return into her plan and would have been precluded from chapter 13 relief if the court was not able to consider her changed circumstances.²⁶

These two examples illustrate the importance of how a court reads the word "projected." On the one hand, if a court reads the term to multiply "disposable income," then this results in either a blatant windfall to a debtor at the expense of his creditors, or a preclusion from chapter 13 relief for the honest, yet unfortunate, debtor. If, on the other hand, a court reads the term to mean an estimation or prediction of actual disposable income over the life of the plan, then the result provides a fresh start for the debtor and a fair distribution to creditors.

A. From the Petition to the Problem

A chapter 13 debtor must provide for one of two results when filing a plan; the plan must provide for repayment of all unsecured claims in full or all of the debtor's disposable income must be paid to her unsecured creditors for the number of years the plan is in force.²⁷Whether all unsecured claims will be repaid is a straightforward determination-either all unsecured claims will be repaid, or they will not. Alternatively, determining whether the debtor is paying all of his disposable income can be a contentious issue, as the debtor and creditors will likely disagree on the amount the debtor could reasonably afford to pay each month.

The question of whether a debtor's projected disposable income was properly determined comes before a court if the trustee or an unsecured claim holder objects to the proposed plan.²⁸A bankruptcy court cannot sua sponte consider the matter.²⁹If an objection is made, the court will have to decide whether the debtor's ability to pay should be based on a rigid, mathematical analysis, which may ignore the specific facts of the debtor's situation, or on a more versatile, practical approach, in which it is free to consider specific facts.

B. The Statutory Web

This subpart briefly presents the five Code provisions most relevant to this discussion: Sec. 1325(b)(1), 1325(b)(2), 101(10A), 1325(b)(3), and 707(b)(2). In Sec. 1325(b)(1), the Code mandates that, in some circumstances, the debtor must dedicate all her "projected disposable income" to her unsecured creditors.³⁰Section 1325(b)(2) provides that "disposable income" is income minus expenses or, more precisely, "current monthly income" less "amounts reasonably necessary to be expended."³¹"Current monthly income" is defined in Sec. 101(10A),³²and Sec. 1325(b)(3) describes how "amounts reasonably necessary to be expended" must be determined.³³Finally, Sec. 707(b)(2)...