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February 3, 2010

Illinois Judge Rules Unemployment is not a Benefit Under Social Security and Therefore is part of CMI

Brief by my associate, Roksana Moradi 

In re Kucharz, 418 B.R. 635 (Bkrtcy C.D. Ill, Oct 2009)

Issue:  Is unemployment compensation a “benefit received under the Social Security Act” and thus excluded from a Chapter 13 debtor's current monthly income?

Holding: No.   

The Debtor, Jonathan Kucharz, received unemployment compensation totaling $1,230.00 during the six-month period preceding his bankruptcy filing.  He disclosed the unem-ployment compensation but claimed “it as a benefit under the Social Security Act that, as such, does not need to be included in the calculation of his current monthly income.” The Chapter 13 Trustee disagreed and objected.

Current monthly income (CMI) is defined in Section 101(10A) as follows:

(B) includes any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor's spouse), on a regular basis for the household expenses of the debtor or the debtor's dependents (and in a joint case the debtor's spouse if not otherwise a dependent), but excludes benefits received under the Social Security Act, payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes . . .

The Social Security Act of 1935 (hereinafter “SSA”) “incentivized the states to adopt conforming laws to pay unemployment insurance benefits to their involuntarily unem-ployed citizens.”  Congress “rejected the alternative of a uniform national unemployment insurance system, preferring instead to preserve the autonomy of the states to adopt their own systems.”  The incentive for the states to act was a financial one, provided through the Federal Unemployment Tax Act (FUTA), 26 U.S.C. §§ 3301-3311.   FUTA imposes an excise tax on wages paid by employers.  An employer, however, is allowed a credit of up to 90% of the federal tax for contributions the employer pays to a state fund established under a federally approved state unemployment compensation law.  In order to protect the employer contributions against loss, the states are required to invest the funds with the U.S. Treasury. Id. The states' funds are deposited and held in an ‘Unemployment Trust Fund.’ 42 U.S.C. § 1104.”

The court said the legislative history is “inconclusive” and that “the combination of the historical link to the SSA and the element of federal-state collaboration on behalf of un-employment compensation gives rise to the ambiguity.”  The court determined that the “inquiry is more specific than whether there is merely an historical link between the SSA and unemployment compensation.  Unemployment payments are excluded only if they are properly characterized as benefits received under the Social Security Act.  It is not sufficient that the benefits are merely ‘related to’ or ‘envisioned by’ or ‘induced by’ the SSA. More is required. They must have been received under the SSA.”

The Court found the preposition under to be both “the cause of and the key to unlock the mystery. In the context of its usage in Section 101(10A), ‘under’ means ‘required by’ or ‘in accordance with’…Neither the SSA nor FUTA requires the states to enact an unemployment insurance program.  As determined by the Supreme Court, inducement is not coercion, and the unemployment insurance programs that were adopted in all 50 states are truly state, not federal, programs.  Unemployment benefits are paid as required by state law, not by the SSA. Thus, a purely textual analysis favors the conclusion that unemployment benefits are not received under the SSA.”

The Court did not stop there, “because the language of the provision is ambiguous, it is appropriate to also consider a contextual analysis…Chapter 13 plan payments are based, in part, on the income that a debtor is expected to receive during the term of the plan. The CMI calculation uses a 6-month lookback period as an indicator of future income, in-cluding earnings from employment.  So the CMI formula serves a predictive function… Unemployment compensation is a temporary, partial substitute for wages lost due to the involuntary unemployment of one who intends to return to the workforce. The theory behind CMI is premised upon the assumption that their recent earnings history is a valid predictor of how much debtors are likely to earn in the future.  Since unemployment benefits replace lost wages, including those benefits in the CMI calculation is consistent with the predictive purpose of the provision.  Excluding those benefits would be inconsistent with the statute's policy and purpose.  The fallacy of using $0 during periods of temporary unemployment as a predictor of future earnings once the debtor is reemployed seems obvious.”   Thus the Court concluded that a “contextual analysis weighs in favor of including unemployment benefits in a debtor's CMI.”

The Court ruled that unemployment compensation, received in the six months before bankruptcy, must included in CMI.   

February 3, 2010 in Other Circuit Briefs | Permalink


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I sarcastically love rulings like this, because it just raises the transaction costs for the client and makes bankruptcy even more difficult for a pro se filer. There are a bunch of holdings like this bouncing around in various districts. If you have a lawyer and can afford to pay for the contested matter, then there's usually a way around it.

It seems like you could rebut the presumption of abuse by arguing that he may have the income now and that it's part of his CMI, but by statute he won't have the income in the immediate future. Therefore any chapter 13 plan would fall part and it doesn't serve the purpose of keeping "can pay" debtors out of chapter 7.

Posted by: David Fuller | Feb 10, 2010 5:43:51 PM

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