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July 13, 2010

Problems with Chapter 13 Plans Post-Lanning

From the smartest lawyer I know, Peter Lively:

After Lanning, the same problems remain using PDI in 1325(b)(1).

PDI under 1325(b)(2) used in Chapter 11 and for below-median-income Chapter 13 debtor follows the preBAPCPA concept of calculating a plan payment; defining Disposable Income as reducing income by household/living expenses only.  1325(b)(2) does not reduce CMI by administrative, secured arrears and priority unsecured claims (other typical plan payment recipients).  This "Disposable Income" is a measure of what plan payment a debtor can afford.

PDI under the Chapter 7 Means Test and under 1325(b)(3) with reference to 707(b)(2) defines Disposable Income as reducing CMI by household/living expenses (albeit standardized) and also by secured arrears and priority unsecured claims. This "Disposable Income" is a measure of what [general] unsecured creditors should receive.

Unfortunately, defining Disposable Income in two entirely different ways and requiring its use in one 1325(b)(1)(B) formula doesn't work.

BAPCPA changed 1325(b)(1)(B) by inserting "to unsecured creditors" between "will be applied to make payment" and "under the plan" with the obvious intention that [general] unsecured creditors receive the PDI; Disposable Income being calculated under 1325(b)(3) and 707(b)(2).

BAPCPA neglected to change the definition of Disposable Income calculated under 1325(b)(2) to include reductions of CMI by administrative expenses, secured arrears and priority unsecured claims. The absurd result of using this PDI in 1325(b)(1)(B) being that below-median-income debtors must pay all that they can afford to [general] unsecured creditors before any PDI can be used for other plan purposes.

Alternatively, ignoring the addition of "to unsecured creditors" between "will be applied to make payment" and "under the plan" and interpreting PDI as a measure of what a debtor can afford to pay makes 1325(b)(3) superflous.

Lanning's instructions to adjust PDI by foreseeable changes in income and expenses does not resolve the problem that the statute defines Disposable Income in two incompatible ways for use in the same test.

Kagenveama (and the dissent in Lanning) got it right when focusing on 1325(b)(1)(B) using 1325(b)(3) as a calculation of what [general] unsecured creditors should get, if anything. Kagenveama is still applicable post Lanning, if 1325(b)(1)(B) PDI goes to only [general] unsecured creditors.

The courts using PDI under 1325(b)(1)(B) with Disposable Income being calculated under 1325(b)(2) as a measure of what total monthly amount debtor can afford to pay also got it right.  However, when applying this approach and using Disposable Income calculated under 1325(b)(3), these courts must ignore that BAPCPA's added the phrase "to unsecured creditors" to 1325(b)(1)(B) and must also adjust Disposable Income from a calculation of what [general] unsecured creditors should receive, to become a measure of ability to pay; this usually means ignoring Form B22C's Disposable Income and using Schedule I - J in its place.

Peter M. Lively, JD/MBA
A-Bankruptcy-Attorney.com

July 13, 2010 in Current Affairs | Permalink

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Comments

Chapter 13 Bankruptcy is a type of bankruptcy that gives the debtor the chance to work to pay down the debts without the threat of repossession or harassing creditors calling. The goal of filing Chapter 13 Bankruptcy is not to discharge debts, but to have the chance to pay the debts back with a better payment structure. In many ways, Chapter 13 Bankruptcy is more like a debt repayment plan than a way to get out of debt instantly.

Some individuals have to file Chapter 13 and do not have the option of filing Chapter 7. Under new federal laws, individuals who have a higher income than the average income of families of the same size in their state cannot file Chapter 7 Bankruptcy. Therefore, higher income individuals are forced to work to repay their debts. However, they can do so easier under Chapter 13 Bankruptcy than they could on their own.

Posted by: Domz | Jul 15, 2010 10:47:33 AM

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Posted by: Trenace Pyles | Jul 17, 2010 11:44:16 PM

All to often, we have many chapter 13 to 7 case conversions. I wonder if lawyers push for a chapter 13's instead of 7's.

Posted by: Jake Draper | Oct 22, 2010 3:25:00 PM

Bankruptcy is a type of bankruptcy that gives the debtor the chance to work to pay down the debts

Posted by: Anderson | Dec 18, 2010 4:42:23 AM

Well yes, Chapter 13 is designed to help debtors pay back their debts over a 3-5 year period.

Posted by: Spencer Hale | Aug 19, 2011 3:35:34 PM

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