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November 18, 2008

10h Circuit Chimes in on "Projected Disposable Income" Rejecting a Mechanical Test: In re Lanning

In re Lanning,  --- B.R.  ---, 2008 WL 4879134 (10th Cir. November, 2008)

Issue:   In determining “projected disposable income” for purposes of chapter 13 plan confirmation, should the court use the mechanical test set forth in the code or a “forward looking approach”?                     

Holding:    The mechanical approach “subject to a showing of substantial change in circumstances,” in other words the forward-looking approach. 

This is an above-median chapter 13 debtor.  Her I and J net income was $149.  Her B22C net disposable income was $1,114.  The reason for the difference was termination pay she received in the previous 6 months when she left her job at Payless.  She proposed a 36 month plan of $144 per month.  The trustee objected and proposed a 60 month plan of $756 “despite acknowledging that Ms. Lanning did not have the means to fund such a plan.”  The bankruptcy court rejected both positions saying “monthly disposable income’ reflected on Form B22C constituted ‘projected disposable income’ under § 1325(b)(1)(B), subject to a showing ‘that there has been a substantial change in circumstances such that the numbers contained in Form B22C are not commensurate with a fair projection of the debtor's budget in the future.’”  “The court also noted that the prefatory portion of § 1325(b)(1) requires the determination of ‘projected disposable income’ to be made ‘as of the effective date of the plan.’”  The bankruptcy court said the “mechanical approach” leads to an absurd result.  For one reason, if the debtor’s income has gone down, the debtor, who clearly would need bankruptcy help, could not get a plan confirmed.   The bankruptcy court reasoned that the schedule I income less the B22C deductions resulted in a negative numberin this case.   He said, “[n]othing prevents debtors from electing to pay more than the statutory means test requires, in order to meet the requirement that a plan must be feasible.”  He then confirmed the plan at $145 per month for 60 months.   The trustee appealed. 

The BAP affirmed.  “The BAP adopted a rebuttable presumption that the Form B22C figures were correct subject to a showing of ‘a substantial change in circumstances’ by way of documentation similar to that required by Chapter 7 debtors under the means test.”

The 10th Circuit also affirmed.  It said, “Congress left § 1325(b)(1)(B) substantially unchanged (for present purposes).”  “[T]he Bankruptcy Code should not be read ‘to erode past bankruptcy practice absent a clear indication that Congress intended such a departure.”  It went through an analysis of the cases so far dealing with the issue.  It concluded the “forward looking approach” was closest to what Congress intended.  “[T]he mechanical approach advocated by the Trustee would effectively foreclose bankruptcy protection to debtors like Ms. Lanning, who lack adequate income going into the commitment period to pay the amount of disposable income on Form B22C, while at the same time permitting above-median debtors who have greater income at the time of plan confirmation to pay less to unsecured creditors than they are able to.”    

November 18, 2008 in Other Circuit Briefs | Permalink

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