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February 21, 2010

Comments on Lanning

I have submitted my article on Lanning to the ABA Preview magazine. It will be published I believe at the end of this month.  I knew I was in trouble when I sent a draft copy to one of the local chapter 13 trustees and her comment was that it was perfect.  My buddy, fellow debtor bankruptcy attorney, and resident bankruptcy genius, Peter Lively, had other thoughts.  Peter was the attorney for the debtor in the companion case argued with Kagenveama.  Here are his comments on my article and on Lanning:

    Jon, I think this article is a great opportunity to show how the Supreme Court hasn't been given the whole picutre.  The Ch13 T has already won the battle by limiting the issue presented only to the computation of a plan payment during a predetermined plan duration.  This is essentially an 1329 modification issue.  It's unfortunate that the Supreme Court isn't being presented with the more difficult question presented to the 9th Circuit.
 
    I.  The Real Issue:
 
    The issue is "how did the law change from requiring a 36 month plan with the court's discretion over a budget." 
 
    My argument is that the best interpretation of BAPCPA is that it essentially left unchanged the debtor's 36 month plan duration requirement coupled with the court's discretion over household expenses and ADDED a mechanical test ONLY to determine a fair amount general unsecured creditors of above-median-income creditors should receive.  Remember 1325(b)(4) [ACP determination] only exists to modify 1325(b)(1)(B) derivation of the amount to be received by the unsecured creditors [general since priority is deducted above the line in the formula; this is straight statory language and a departure from NACBA's political position].  Therefore, what we have now is a base requirement of 36 months and an objective fairness test for general unsecured creditors of above-median-income debtors to receive at least 60 x PDI (an objective test) before a judge can confirm a plan.


 
    The Ch13 T already won the battle in Lanning because he has the court missing the point entirely by presuming a 5 year duration for above-median-income debtors.  The rest is a no-brainer, go with I-J since we have 1329 anyway.
 
    If you don't interpret it this way, you get a debtor $1 above median stuck with 2 more years of duration than the debtor $1 below median.   
   
    II.   Public Policy:
 
    Remember my brief from Garcia:
 
   In addition to the argument presented above in favor of interpreting the new Code provisions as not mandating a five year plan for above-median-income debtors, such an interpretation promotes fairness in the bankruptcy system generally and promotes good public policy. The consequences of interpretation of ACP as durational would be to discourage debtors generally from earning more income for fear of becoming above-median-income debtors who would be punished for their better earnings and desire to pay creditors with two additional years of court administration before they can obtain a "Fresh Start."

    It is better public policy to provide people with an incentive to earn more income when faced with changed circumstances that result in financial difficulty and to allow debtors electing Chapter 13 over Chapter 7 to voluntarily pay some of their debts, than it is to provide people with a disincentive to earn more money under those circumstances where doing so may result in the denial of a "Fresh Start" for five years. An above-median-income debtor should not be faced with servitude for 60 months and payment of all future actual disposable income during that duration without any hope of pre-payment through subsequent diligent efforts (second or third jobs), family contributions or hoped for windfalls. 

    A plan duration requirement, independent of an opportunity to pre-pay, will obviously deter all debtors from electing Chapter 13 to voluntarily pay their debts. Contrary to the well-funded political forces arguably influencing the BAPCPA and a media blitz focusing on fraudulent debtors, it has been established historically that most debtors are not fraudulent, but suffer from a variety of life’s unanticipated and unplanned for hardships.1 Sound public policy favors a system that encourages debtors to voluntarily pay some of their debt and a reasonable expectation of fairness to above-median-income debtors who elect to do so relative to their below-median-income brothers.

    Administration of Chapter 13 cases will be significantly less burdensome on all parties where a specific dollar amount is calculated under subsection 1325(b)(1)(B) to be paid over any feasible plan length up to five years. Chapter 13 cases are likely to be more successfully completed where debtors have the certainty and the incentive to pay the specific amount derived up-front as opposed to the punishment of a virtual debtor’s prison and disincentive to get ahead. 
 
Footnote:   "The honest desire of debtors to pay debts rather than go through liquidation and wholly defeat the claims of creditors was verified by the Report of the Bankruptcy Commission 40 years later [following Judge Thomas D. Thacher’s exhaustive study of the administration of bankruptcy throughout the United States in the late 1920s and early 1930s]. The Commission noted that the overwhelming majority of debtors were not crooks or dishonest, but victims of circumstances. Report on Bankruptcy Laws, H.R. Doc. No. 137, 93rd Cong. 1st. Sess. Part I, 45-46 (1973)." Norton Bankruptcy Law and Practice 2ND, Volume 5, Chapter 113, 113-4, 5.
 
    III.  Other Points
 
    Its not a MEANS TEST in Chapter 13.  That characterization also presupposes that duraiton is fixed at 5 years and ignores the statute requirement of calculating a fair total payment to Class 5.   
 
A couple more points:
 
For a decreasing average income debtor, NACBA's brief is the right approach since this debtor didn't belong in Ch13.  Alternatively, Jim listserve point should be highlighted.  101(10A) allows the court to determine CMI using a different period if the debtor doesn't file the form B22 with the petition.  Both are planning issues requiring some knowlege of the law (CMI calculation).
 
For increasing average income debtors, their plans are subject to 1329 modification and contribution of all disposable income during the duration they propose.  I just don't believe that there is a requirement of a 5 year plan duraiton except by election.  This pulls in the constitutional arguments and those cases are all about slavery and bondage, etc.  

February 21, 2010 in Supreme Court | Permalink

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