Document Type
Research Memorandum
Publication Date
2014
Abstract
(Excerpt)
Chapter 13 of the Bankruptcy Code provides individuals the opportunity to reorganize their debt obligations. This adjustment chapter permits an individual debtor to keep his nonexempt assets but requires that he make payments for three to five years through a repayment plan. During this repayment period, the individual debtor uses his disposable income to fulfill his debts. After all of the payments are made to creditors, the debtor receives a discharge.
If the trustee or an unsecured creditor objects to the plan, a court must determine if the plan can fulfill the unsecured claim and allow the debtor’s “projected disposable income” during the commitment period to make payments toward those claims. Calculation of “projected disposable income” is also involved in the “means test” - a new threshold test determining if an individual consumer debtor can file for chapter 7. Additionally, a court must confirm a repayment plan. One of the elements required for court confirmation is that a plan is “feasible.” In order to be considered feasible, “a debtor's plan must have a reasonable likelihood of success, i.e., that it is likely that the debtor will have the necessary resources to make all payments as directed by the plan.” Therefore, a debtor’s personal income and expenses are important factors in chapter 13 petitions.
There are many issues that arise in the context of plan confirmation but there are two that are particularly important and usually highly contested. First, plans must determine what income should be included within “projected disposable income” - this value is necessary to calculate the repayment plan. Second, if Social Security funds are excluded, may a bankruptcy court consider this excluded income when determining whether the chapter 13 plan is feasible. Both issues must be considered in light of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005’s (“BAPCPA”) purposes to “to correct perceived abuses of the bankruptcy system” of underreporting disposable income while allowing debtors to repay creditors to their upmost abilities.
This Article discusses the relevant case law regarding both issues. Part I explains why Social Security income is excluded from “projected disposable income.” Part II examines the circuit split as to why a court should confirm a chapter 13 plan that provides for a debtor to use funds that are excluded the projected disposable income test to fund the payments under the plan. Finally, Part III summarizes the implications of allowing excluded Social Security income to fund such plans.