CONFIRMATION OF A CHAPTER 13 PLAN - CURRENT MONTHLY INCOME OR PROJECTED DISPOSABLE INCOME

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1 CONFIRMATION OF A CHAPTER 13 PLAN - CURRENT MONTHLY INCOME OR PROJECTED DISPOSABLE INCOME Southeastern Bankruptcy Law Institute April 12-14, 2007 Hon. Robert E. Littlefield, Jr. United States Bankruptcy Judge Northern District of New York Special thanks to Cynthia A. Platt and Pilar A. Cano, law clerks, for their assistance in the preparation of these materials

2 I. INTRODUCTION: THE ENACTMENT OF BAPCPA In late April 2005, President Bush signed Public Law No , otherwise known as The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ( BAPCPA ). At the ceremony he stated: Our bankruptcy laws are an important part of the safety net of America. They give those who cannot pay their debts a fresh start. Yet bankruptcy should always be a last resort in our legal system. If someone does not pay his or her debts, the rest of society ends up paying them. In recent years, too many people have abused the bankruptcy laws. They ve walked away from debts even when they had the ability to repay them. This has made credit less affordable and less accessible, especially for lowincome workers who already face financial obstacles. The bill I sign today helps address this problem. Under the new law, Americans who have the ability to pay will be required to pay back their debts. Those who fall behind their state s median income will not be required to pay back their debts. This practical reform will help ensure that debtors make a good-faith effort to repay as much as they can afford. This new law will help make credit more affordable, because when bankruptcy is less common, credit can be extended to more people at better rates..... America is a nation of personal responsibility where people are expected to meet their obligations. We re also a nation of fairness and compassion where those who need it most are afforded a fresh start. The act of Congress I sign today will protect those who legitimately need help, stop those who try to commit fraud, and bring greater stability and fairness to our financial system. President George Bush, Remarks at signing of BAPCPA (Apr. 20, 2005). 1 Whether BAPCPA ultimately brings greater stability remains to be seem. However, without doubt, the new law has caused decisional rifts, especially in the chapter 13 confirmation arena. 1 The President s complete speech can be found at 1

3 II. PRE-BAPCPA PLAN TERM AND PAYMENT AMOUNT REQUIREMENTS Confirmation of a chapter 13 plan is controlled by the criteria set forth in 1325(a) 2 and the disposable income test contained in 1325(b). The floor amount that a debtor must commit to a chapter 13 plan to achieve confirmation has always been determined using the liquidation test found in 1325(a)(4). 3 The idea that unsecured creditors must receive under a chapter 13 plan at least as much as they would have received had the debtor filed a chapter 7 is a bedrock concept. The more complicated questions have always been the specific plan payment amount and the term of the plan necessary to lead a debtor to the promised land of confirmation. Prior to 1984, courts relied on the good faith test found in 1325(a)(3) 4 to achieve the result the court felt was proper regarding the amount to be funded into a plan for the benefit of unsecured creditors. Decisions covered the spectrum and knowledge of local custom and practice was crucial to avoid wandering aimlessly in a legal maze. Ultimately, a number of circuits pronounced multi-factor tests to determine what is and is not good faith. In re Hines, 723 F. 2 Briefly, a plan must: comply with Title 11; pay all fees due; be proposed in good faith; pay unsecured creditors the chapter 7 value of the estate; have the approval of secured creditors, or return their collateral, or pay them a definite amount based on the value of their collateral or amount due on the underlying note; and be feasible. In addition, the filing of the petition must have been in good faith, and the debtor must be current on domestic support obligations and have filed required tax returns. See 11 U.S.C. 1325(a) U.S.C. 1325(a)(4) provides: [T]he value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date U.S.C. 1325(a)(3) sets forth: the plan has been proposed in good faith and not by any means forbidden by law. 2

4 2d 333 (3 rd Cir. 1983); Flygave v. Boulden, 709 F. 2d 1344 (10 th Cir. 1983); In re Kitchens, 702 F. 2d 885 (11 th Cir. 1983); In re Estus, 695 F. 2d 311 (8 th Cir. 1982); Deans v. O Donnell, 692 F. 2d 968 (4 th Cir. 1982); Barnes v. Whelan, 689 F. 2d 193 (D.C. Cir. 1982); In re Goeb, 675 F. 2d 1386 (9 th Cir. 1982); In re Rimgale, 669 F. 2d 426 (7 th Cir. 1982). In response to the ongoing uncertainty and the growing list of balancing tests regarding the minimum payments required under a chapter 13 plan, Congress enacted the Bankruptcy Amendments and Federal Judgeship Act of 1984 ( BAFJA ). Pub. L. No BAFJA, among other things, added 1325(b) to the Code. Section 1325(b) provided that upon an objection by the trustee or the holder of an allowed unsecured claim, a plan could not be approved unless the objecting creditor s claim would be paid in full or all of the debtor s disposable income would be committed to the plan for three years. The 1984 amendment defined disposable income as income not reasonably necessary for the maintenance or support of the debtor or a dependent of the debtor and, if the debtor were engaged in business, for the payment of expenditures necessary for the continuation, preservation and operation of such business. The test was relatively uncomplicated and emphasis was placed on judicial interpretation and discretion as to what was or was not reasonably necessary. The bargain was fair and it was easy to understand. In re Davis, 348 B.R. 449, 452 (Bankr. E.D. Mich. 2006). The focus was on the debtor s schedules I (current income) and J (expenses ) to determine whether the requirements of 1325(b) were met. Lifestyle decisions on everything from tobacco usage to private school tuition became common. III. APPLICABLE COMMITMENT PERIOD UNDER BAPCPA BAPCPA complicated the relatively simple application of 1325(b) and disposable income after BAFJA. Under BAPCPA, the requirement under 1325(b)(1)(B) that projected 3

5 disposable income be committed for three years to make payments under the plan was amended to mandate that the debtor s disposable income received in the applicable commitment period ( ACP ) be applied to make payments to unsecured creditors under the plan. Section 1325 (b)(4) defines ACP as: (A) subject to subparagraph (B)... (I) 3 years; or (ii) not less than 5 years, if the current monthly income of the debtor and the debtor s spouse combined, when multiplied by 12, is not less than - (I) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner; (II) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals; or (III) in the case of a debtor in a household exceeding 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals, plus $525 per month for each individual in excess of 4; and (B) may be less than 3 or 5 years, whichever is applicable under paragraph (A), but only if the plan provides for payment in full of all allowed unsecured claims over a shorter period. 11 U.S.C. 1325(b)(4)(A) and (B). One of the first issues to surface regarding the new 1325(b) is whether the ACP imposes a temporal or a monetary requirement. As explained by the court in In re Girodes, 350 B.R. 31 (Bankr. M.D.N.C. 2006): If the ACP is a monetary requirement, the debtor s disposable income must be multiplied by the ACP, which would be 36 months for a below-median income debtor and 60 months for an above-median income debtor, to determine the fixed sum that the debtor must pay during the course of his plan. Under such an approach, there would be no requirement that the debtor remain in the plan for 36 or 60 months so long as the debtor pays the fixed sum in full. Alternatively, if the ACP is a temporal requirement, the debtor must devote his projected disposable income to payment of unsecured creditors over a specific period of time and may not exit the plan before the ACP has ended unless the debtor pays all unsecured creditors in full. 4

6 Id. at The majority of courts that have considered the issue have held that ACP is more of a time concept than a monetary one. In re Cushman, 350 B.R. 207 (Bankr. D.S.C. 2006); In re Newitt, Nos and , 2006 WL (Bankr. N.D. Ill. Aug. 18, 2006); In re Crittendon, No , 2006 WL (Bankr. M.D.N.C. Sept.1, 2006); In re Gress, 344 B.R. 919 (Bankr. W.D.Mo. 2006). In discussing ACP in In re Schanuth, 342 B.R. 601 (Bankr. W.D. Mo. 2006), Judge Venters rejected the monetary theory for three reasons: First and foremost, the plain language of 1325(b)(1) and (4) supports a temporal interpretation of ACP. The term itself, applicable commitment period, uses a word with temporal meaning: period means a chronological division. The length of that chronological division is described in temporal terms - 3 years or 5 years. And, perhaps most telling of all, 1325(b)(4)(B), the provision that specifically contemplates plans shorter than 3 or 5 years, uses the same temporal terms - a debtor s ACP may be less than 3 or 5 years... but only if the plan provides for payment in full of all allowed unsecured claims over a shorter period..... Second, a monetary interpretation of ACP renders 1325(b)(4)(B) awkward, if not meaningless. To wit, if ACP is a monetary concept, then 1325(b)(4)(B) would ostensibly require a debtor to multiply his monthly disposable income times 36 or 60 unless multiplying by a lesser number results in full payment of the debtor s unsecured claims. In other words, for debtors whose disposable income times 36 equals more than the allowed unsecured claims, the ACP amount equals the amount of allowed unsecured claims. Under this interpretation of ACP, 1325(b)(4)(B) doesn t really state anything more than that a debtor does not have to pay more than 100% on his unsecured claims..... Finally, as a practical matter, a monetary interpretation of ACP represents a gross departure from pre-bapcpa practice that is not justified by the language or structure of the statute. Prior to BAPCPA s enactment, debtors could not exit chapter 13 in less than three years without paying in full the allowed unsecured claims. BAPCPA s revisions of 1325, albeit significant, has not changed this tenet of pre-bapcpa practice. Quite simply, the plain language of 1325 dealing with applicable commitment period indicates that plan duration is still determined by temporal, not monetary, requirements. And the court declines to 5

7 abandon the temporal framework for determining plan duration without clear instructions from Congress to do so. Id. at (footnotes omitted). In In re Davis, 348 B.R. 449, Judge Shefferly focused more on what the statute did not say in concluding that ACP has a temporal requirement. In short, where Congress commanded a calculation to be performed to arrive at an amount, it said so, loudly, and by using the word multiply. On the other hand, 1325(b)(1)(B) contains no reference to the word multiply, but instead uses terms that in their ordinary, everyday meaning require a debtor to do something over a period of time. It does not say that a debtor s plan must pay an amount to unsecured creditors equal to the debtor s projected disposable income to be received in the applicable commitment period. Instead, it provides that all of the debtor s projected disposable income to be received in the applicable commitment period will be applied to make payments to unsecured creditors under the plan. In re Davis, 348 B.R. at Judge Robinson agreed with this reasoning in In re Dew 344 B.R. 655 (Bankr. N.D.Ala ), stating that: Inasmuch as sections 1322(d)(2) and 1329(c) deal with extending the duration of a plan confirmed under section 1325, the only logical conclusion is that the applicable commitment period under section 1325(b)(4)(A) must be a period of time: either three or five years, depending on the median income of the debtor. It is impossible to read sections 1322(d)(2), 1325(b)(4)(A) and 1329(c) and conclude the Bankruptcy Code contemplates something other than a defined length of time for payments to be made under a chapter 13 plan, i.e. the applicable commitment period. Id. at 661 (footnote omitted). A seminal decision holding the ACP is both a temporal and monetary requirement is In re Fuger, 347 B.R. 94 (Bankr. D. Utah 2006). In Fuger, the court stated the term ACP is ambiguous when considered in the context of 1325(b)(1)(B). More specifically, the court indicated: 6

8 There are several plausible interpretations of this provision. The term could modify the same Code section s reference to projected disposable income, thereby directing that the Court look to the debtor s disposable income projected over a specific period. Or it could be read as a separate requirement that a debtor must commit to a plan for a specific length of time. Id. at 97. Attorneys Alane A. Becket and Thomas A. Lee III provide a thorough discussion of both sides of the time versus money debate in their article, Applicable Commitment Period: Time or Money? Alane A. Becket & Thomas A. Lee III, Applicable Commitment Period: Time or Money? 25-MAR AM. BANKR. INST. J. 16. In support of the monetary requirement argument they assert: A plain reading of 1325(b) does not lead to the conclusion that a plan must last for three to five years. Rather, 1325(b) merely states that a debtor must contribute to the plan all projected disposable income that he receives during the applicable time frame, either three or five years. Accordingly, as long as a debtor pays the required amount, presumably he may pre-pay or buy out his plan by tendering the full amount due in a shorter period of time. This was made possible pre-bapcpa typically when a debtor refinanced or sold appreciated property. After October 17, a debtor may have excess income over the disposable income calculated by using Form B22C in two situations. First, current monthly income (CMI) as defined by 101(10A) is not necessarily reflective of a debtor s actual monthly income. A debtor may have more income than the formula for CMI calculates. Second, the debtor may have excess income after deducting the standard expenses allowed by BAPCPA and the official form if the debtor s actual expenses are less than the allowances. In either of these circumstances, the amount required to be paid to the trustee each month under 1325 may be less than a debtor s actual excess income. By devoting the excess to plan payments, or by other means such as refinancing, a debtor may be able to complete a plan sooner. This is not dissimilar to cases pre-bapcpa that have allowed a debtor to refinance in order to pay off a plan..... We have been directed to read a statute according to its plain meaning unless doing so would result in an absurd result. While completing a plan in less than three or five years without paying 100 percent to unsecured creditors may or may not be what Congress intended, the result certainly does not rise to the level of absurd. Id. See also Keith M. Lundin, Chapter 13 Bankruptcy and (3d ed & Supp. 2006); Henry E. Hildebrand, III, Unintended Consequences: BAPCPA and the New Disposable Income Test, 25-MAR AM. BANKR..INST. J. 14 (March 2006). 7

9 IV. MINIMUM PLAN TERM UNDER BAPCPA A second issue relating to 1325(b)(4)(B) is whether a plan may be confirmed which provides for a term less than 36 or 60 months that does not propose to pay unsecured creditors in full. This question assumes that 1325(b) has been triggered by an objection from the trustee or the holder of an allowed unsecured claim. If not, then the ACP and related confirmation issues are never reached, as neither the court sua sponte nor a secured creditor has standing to raise the objection. See In re Smith, 100 B.R. 436, 439 (S.D. Ind. 1989). If the objection is properly put before the court, one of two conditions must be satisfied: (A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or (B) the plan must provide that all of the debtor s projected disposable income to be received in the [ACP] beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan. 11 U.S.C. 1325(b)(1). Unless the objecting creditor s claim may be separately classified, (see 11 U.S.C (a)(3) and (b)(1)), or the plan proposes to pay all unsecured creditors in full, a debtor will not be able to satisfy the first condition. More likely, the debtor will elect to commit projected disposable income for the ACP. The Code does not define projected disposable income. However, 1325(b)(2) defines disposable income as current monthly income 5 ( CMI ) minus sums reasonably necessary to be expended for the support of the debtor or debtor s dependents including a domestic support obligation. Certain types of income are expressly excluded from the calculation of CMI such as child support, foster care payments, and disability payments for a 5 Current monthly income ( CMI ) is a BAPCPA term of art defined in 101 (10A). It is neither current nor monthly nor income for bankruptcy purposes. It is a financial snapshot of the debtor s receipts from all sources except certain benefits and payments, e.g. social security, received in the six month period that generally ends on the last day of the month immediately preceding the filing. 8

10 dependent child. 11 U.S.C. 1325(b)(2). The Congress further mandated that if a debtor has CMI above the state median that amounts reasonably necessary to be expended shall be determined from the so-called means test formula found in 707(b)(2)(A) and (B). As to the issue of the required length of the plan, the ACP language is crystal clear: it shall be three years or not less than five years, depending on debtor income, unless all allowed unsecured creditors are paid in full over a shorter period. 11 U.S.C. 1325(b)(4)(A) and (B). What is less clear is what happens if there is no dividend to unsecured creditors; this problem goes hand in hand with the issue of whether the ACP imposes a temporal or monetary requirement. The temporal courts theory on plan length is summarized by Judge Waites in In re Cushman, 350 B.R. 207: Debtors argue that the applicable commitment period is to be construed in terms of a multiplier yielding the amount of income Debtors must devote to their plans and not the length of time that Debtors must perform in their plans. Under Debtors argument, Debtors would use their disposable income, determined by line 58 of their Statement of Current Monthly Income, and multiply that number by 60, the number of months for Debtors applicable commitment pursuant to 1325(b)(4). This formula yields an amount that Debtors must pay to general unsecured creditors, regardless of their actual disposable income. Under Debtors approach, the proposal of a plan which pays this amount would defeat the Trustee s objections to confirmation pursuant to 1325(b)(1)(B). For example, in the Cushmans case, that formula yields a product of $3, ($57.62 x 60). In the case of Ingram, the Losleys, and the Pryors, there would be no amount owed to general unsecured creditors because each of these debtors have a budget deficit on their Statement of Current Monthly Income and thus there would be nothing owed to unsecured creditors. Debtors argue that if they propose a plan which pays whatever sum this formula yields to general unsecured creditors, then the plan is not subject to objection by the Trustee under 1325(b) and that they may pay this sum in less than 60 months, thus entitling them to a discharge in a quicker time frame..... The legislative history of Chapter 13 and of 1325(b) also supports this interpretation of 1325(b)(1)(B). The purpose of Chapter 13 has always been to enable debtors to develop and perform under a plan for the repayment of his debts over an extended period. H.R. Rep. No , at 118 (1977) (emphasis added). It appears that the 9

11 sense of Congress, in amending the Bankruptcy Code, was that debtors were abusing the system and paying creditors less than what they were able to pay. Congress amended the Bankruptcy Code by reducing the availability of Chapter 7 and requiring a mandatory repayment period in a Chapter 13. See H.R.Rep. No (I), at 5 (2005). Section 1325(b) was amended by 318 of the Bankruptcy Abuse Prevention and Consumer Protection Act of That specific section is captioned as Chapter 13 Plans To Have a 5-Year duration in Certain Cases and the House Report regarding this section speaks in terms of the duration of a Chapter 13 plan, not in terms of a formula for the amount of a plan repayment. See S. 256, 109 th Cong. 318 (2005); H.R.Rep. No (I), at 79 (2005). Therefore the Court finds that both the intent of Congress and the plain language of 1325(b) mandate a five year duration of Debtors Chapter 13 case, when faced with an objection by the Trustee or a creditor with an allowed unsecured claim. Id. at Other courts have agreed that 1325(b) mandates a definitive plan length. See In re Girodes, 350 B.R. 31; In re Nevitt, 2006 WL ; In re Davis, 348 B.R. 449; In re Crittendon, 2006 WL ; In re McGuire, 342 B.R. 608 (Bankr. W.D. Mo. 2006). The court in In re Alexander, 344 B.R. 742 (Bankr. E.D.N.C. 2006), took a different path. In a decision consolidating 25 cases, the proposed plans each contained the following provision: Id. at 745. This Chapter 13 plan will be deemed complete and shall terminate and a discharge shall be entered, at the earlier of, the expiration of said duration [the estimated proposed duration of the plan] or the payment in full of: (1) The following claims, proposed to be paid inside the plan, to the extent allowed: (1) Arrearage claims on secured debts, (ii) Secured claims (not including those to be paid outside the plan), (iii) Unsecured priority claims, (iv) Cosign protect claims (only where the Debtor proposes such treatment), plus (2) The required dividend to unsecured, non-priority creditors, if any is required by 11 U.S.C. 1325(b). (For purposes of 11 U.S.C. 1325(b)(1)(B), unsecured creditor shall be deemed to mean all unsecured creditors, including both priority and non-priority unsecured creditors.) The trustee did not include the above language in his proposed confirmation orders, and the debtors objected. While the court concluded that ACP is a temporal requirement, id. at 751, it also stated that ACP is only relevant in regards to projected disposable income. Id. It further reasoned that ACP simply does not come into play where no projected disposable income must be taken into account. Id. The court concluded that: 10

12 This is consistent with a plain reading of the Code. Applicable commitment period appears in subsection (b) of First, in (b)(1)(b), it states that projected disposable income to be received in the applicable commitment period is to be applied to unsecured creditors. Then, in (b)(4), it states, For purposes of this subsection, the applicable commitment... is three or five years. The applicable commitment period appears to be exclusively linked to subsection (b) of This conclusion is bolstered by 1329(c), which references applicable commitment period in connection with 1325(b)(1)(B). 11 U.S.C. 1329(c). Moreover, 1322(d), which discusses Chapter 13 plan length, does not mention the term applicable commitment period. Section 1322(d)(1) states that, for debtors with median income or above, the plan may not provide for payments over a period that is longer than 5 years. 11 U.S.C. 1322(d)(1). Section 1322(d)(2) states that, for debtors with below median income, the plan may not provide for payments over a period that is longer than 3 years, unless the court, for cause, approves a longer period, but the court may not approve a period that is longer than 5 years. These provisions establish a maximum plan length, but they do not require a minimum commitment period. Accordingly, a debtor with no projected disposable income is free to meet the other confirmation requirements of 1322 and 1325 in whatever period of time he may feasibly do so. Obviously, secured and priority creditors entitled to payment in full under the plan would rather be paid sooner than later and there is no reason to extend plans artificially if there is no requirement of a dividend to be paid to unsecured creditors over time. Id. In other words, [i]f the debtors have no projected disposable income, then there is no applicable commitment period. Id. at 752. Thus, those plans showing no disposable income using the calculations articulated under BAPCPA were confirmed as originally proposed and could terminate when sufficient monies were received. Similarly, in Fuger, 347 B.R. 94, the court stated that it believes that the manifest intent of Congress underlying 1325(b)(1)(B) is as it was before the BAPCPA - to require debtors to commit a specific return to unsecured creditors.... [I]t makes little sense to hold the debtor hostage for 60 months where the debtor can satisfy the requirements of 1325(b)(1)(B) in a shorter period. In re Fuger, 347 B.R. at 101. V. DISPOSABLE INCOME VS. PROJECTED DISPOSABLE INCOME According to Alexander, 344 B.R. 742, and Fuger, 347 B.R. 94, the plan term issue comes down to whether the debtor shows projected disposable income and the method of 11

13 calculating it. If it is future oriented, the debtor s actual income and expenses during the course of the plan would be relevant. If it is historically based, CMI and related expenses would be relevant. The court in In re Hardacre, 338 B.R. 718 (Bankr. N.D. Tex. 2006), analyzes the new statute and comes to the conclusion that projected disposable income must be based upon the debtor s anticipated income during the term of the plan, not merely an average of her prepetition income. Id. at 722. Id. at 723. Congress must have intended projected disposable income to be different than disposable income. Next, section 1325(b)(1)(B) refers to the projected disposable income to be received in the applicable commitment period. If Congress had intended that projected disposable income for plan purposes be based solely on prepetition average income, this language would be superfluous. This suggests that Congress intended to refer to the income actually to be received by the debtor during the commitment period, rather than prepetition average income. Finally, section 1325(b)(1) requires the court to determine whether a debtor is committing all his projected disposable income as of the effective date of the plan. 11 U.S.C. 1325(b)(1). This language suggests that the debtors income as of the effective date of the plan is the one that is relevant to the calculation of projected disposable income, not her income prior to filing. The court in In re Jass, 340 B.R. 411 (Bankr. D. Utah 2006), also scrutinized the new law and concluded that the definition of disposable income contained in 1325(b)(2) is not the same as the requirement that projected disposable income be committed to the plan set forth in 1325(b)(1)(B). Thus, the debtor s Statement of Current Monthly Income or Form B22C is only a starting point in determining whether a debtor is committing all projected disposable income. Id. at 417. The court went on to say that it will presume that the number resulting from Form B22C is the debtor s projected disposable income unless the debtor can show that there has been a substantial change in circumstances such that the numbers contained in Form 12

14 B22C are not commensurate with a fair projection of the debtor s budget in the future. Id. at 418. The court in In re Grady, 343 B.R. 747 (Bankr. N.D.Ga. 2006), phrased its conclusion a little differently by stating, [u]pon a complete review of section 1325(b), this Court believes that Congress intended the Debtors to propose a monthly payment to unsecured creditors based on their financial situation as of the date when the first payment is due. Id. at 753. See also In re Lasota, 351 B.R. 56 (Bankr. W.D.N.Y. 2006); In re Fuller, 346 B.R. 472 (Bankr. S.D. Ill. 2006); In re Risher, 344 B.R. 833 (Bankr. W.D.Ky. 2006); In re Kibbe 342 B.R. 411 (Bankr. D.N.H. 2006). Other courts are much more rigid in their interpretation of disposable income. The chapter 13 trustee in In re Barr, 341 B.R. 181 (Bankr. M.D.N.C. 2006), objected to a plan proposing a monthly payment of $1, per month which represented a 0% return for unsecured creditors. While the debtor had a yearly income of $78,372.00, the CMI computation was negative $ However, the debtor s schedules I and J showed disposable income of $2, per month and, after the proposed plan payment, net disposable income of $ per month. The court, in taking a strict statutory posture, overruled the objection stating: Id. at While many sources question whether sections 707(b)(2) and 1325(b) represent a fair and effective approach to catching the abusers of the bankruptcy system or to insuring that debtors who can pay do pay, the court does not believe that the result in this case of applying section 1325(b)(3) as written can be rejected as being absurd..... To do so, the court believes, would impermissibly undermine policy choices made by Congress.... While there may be sound reasons to rewrite section 1325(b), it is not the role of this court to do so. 13

15 Judge Leonard reached a similar conclusion in Alexander, 344 B.R In overruling the trustee s objections under BAPCPA, that would have been sustained prior to the enactments of BAPCPA, he stated: Id. at 747. Despite criticisms that the old law was better, in discerning congressional intent, the starting point is the existing statutory test and not the predecessor statutes. Lamie v. U.S. Trustee, 540 U.S. 526, 533, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004). When the statute s language is plain, the sole function of the court - at least where the disposition required by the text is not absurd - is to enforce it according to its terms. Id. The court finds that 1325(b)(2)-(3) plainly sets forth a new definition and method for calculating disposable income, and Form B22C is the tool for arriving at that disposable income figure under the new law. One of the Chapter 13 trustees as well as a creditor s attorney appearing at the hearing argued that calculating disposable income under BAPCPA fails to curtail abuse as intended and leads to such absurd results that the new formula should be disregarded and supplanted by the old I and J comparison for all debtors. The concept of disposable income as the bankruptcy system knew it has changed. However, this court will not override the definition and process for calculating the disposable income under 1325(b)(2)-(3) as being absurd simply because it leads to results that are not aligned with the old law. In In re Rotunda, 349 B.R. 324 (Bankr. N.D.N.Y. 2006), Chief Judge Gerling agreed with the Alexander and Barr courts and expanded on the disposable income problem stating: The argument that Congress intended something more when it referred to projected in Code 1325(b)(1)(B) fails to address the fact that Congress defined disposable income after that provision, in Code 1325(b)(2). The first subsection, Code 1325(b)(1)(B) first makes reference to projected disposable income and then the next subsection, specifically Code 1325(b)(2), goes on to explain what was being projected, namely, CMI received by the debtor... to the extent reasonably necessary to be expended.... It is understandable that courts would attempt to interpret the word projected in such a way that supports the overwhelming sense that debtors seeking a fresh start must make every effort to pay their unsecured creditors as much as possible during the applicable commitment period. However, to conclude that projected as referenced in Code 1325(b)(1)(B) must refer to whatever income is left after the payment of actual expenses as set forth in Schedules I and J is no more exact than using six month average of income in the calculations on Form B22C. After all, the expenses listed in Schedule J are only estimates or averages as it were. One s telephone bill is never the same from month to month; nor is one s utility bill. Insurance premiums may increase, as may real property taxes. Indeed, the court is confronted on a regular basis with debtors who have defaulted on their plan payments because of unexpected changes in their financial 14

16 situation whether it be a loss of job, divorce, medical emergency, unanticipated repairs to one s home or car, or simply an increase in gas or home heating costs. The expenses listed in Schedule J and the income in Schedule I are no more accurate than the estimates of disposable income on Form B22C. Thus, projecting disposable income based on an average of six months income after certain standard deductions and payment on secured and priority debt is no less realistic than the figures used in Schedules I and J for purposes of proposing a feasible plan. Id. at 331. Other cases strictly interpreting disposable income include In re Guzman, 345 B.R. 640 (Bankr. E.D. Wis. 2006), and In re Farrar-Johnson, 353 B.R. 224 (Bankr. N.D.Ill. 2006). VI. GOOD FAITH UNDER BAPCPA Another issue involving 1325(b) is the relevance of the good faith requirement of 1325(a)(3) to the problem of projected versus actual disposable income. Some courts have now come full circle to a pre-bapcpa view of good faith. In Barr, 341 B.R. 181, the court analyzed the trustee s good faith objection that the debtor had actual disposable income left on the table and overruled it. After reviewing section 1325(a)(3) and its legal impact after the passage of BAPCPA, the court concluded: While BAPCPA made significant changes to section 1325(b), nothing in those changes or elsewhere in BAPCPA suggests any legislative intent that any section of the Bankruptcy Code other than section 1325(b) should be controlling in dealing with a Chapter 13 debtor s ability to pay. To the contrary, as observed in COLLIER, the 2005 amendments to section 1325(b) indicate even stronger that section 1325(b), rather than section 1325(a)(3), is controlling in determining whether a debtor is committing sufficient income to a Chapter 13 plan: Instead of simply looking at the debtor s actual income and expenses, these [2005] amendments in many cases attempt to create a bright line test to determine whether a debtor s plan is committing all disposable income. By creating a bright line test, Congress even more clearly indicated that it intended that section 1325(b), rather than the good faith test, to be the measure of whether the debtor was committing sufficient income to the plan. 8 COLLIER ON BANKRUPTCY [1] (15 th ed. rev. 2005)

17 The result is that Congress has created a set of rules under which - as here - a debtor may be left with uncommitted income that the debtor is not required to commit to the debtor s plan under the new section 1325(b) analysis..... Id. at [T]he court concludes that with an above-median-income Chapter 13 debtor, the debtor s ability to pay and whether the proposed plan commits all of the debtor s disposable income must be determined under section 1325(b) rather than as an element of good faith under section 1325(a)(3). In re Farrar-Johnson, 353 B.R. 224 (Bankr. N.D. Ill. 2006) involved above median income debtors with positive disposable income. The trustee objected to certain of the expenses claimed by the debtor concluding that the debtor s actions were not in good faith. The court disagreed and held that the disposable income a debtor decides to commit to his plan is not the measure of his good faith in proposing the plan. Id. at 232. A passionate opposing viewpoint was voiced by Judge Kaplan in LaSota, 351 B.R. 56. The debtors had negative disposable income on Form B22C but positive disposable income on schedule J of $1, The debtors wanted to put that excess in a bank account for future security while paying less than 100% to their unsecured creditors. The trustee objected to confirmation on good faith and/or projected disposable income grounds which the court sustained while stating: Again, to sit as a Chapter 13 Judge against the background of the panoply of the forces that shape debtors choices does not permit the Judge to substitute his or her value judgments for those of the debtor. Instead, such judges do rough justice, and need every statutory tool at their disposal to achieve it on a program-wide basis, though they might not achieve justice in every case. Congress retention of the good faith test, and the presence of the word projected, modifying the phase disposable income, are the key tools. BAPCPA did not take those away

18 This writer will continue to examine each case on its own merits, using the good faith test and the flexibility of the term projected disposable income to inform the Court s evaluation of the Form 22C calculation of CMI, at the time of confirmation. Id. at 61, 63. See also In re Edmunds, 350 B.R. 636 (Bankr. D.S.C. 2006). VII. ALLOWED EXPENSES UNDER BAPCPA An integral part of any section 1325(b) analysis is the proper method for calculating expenses. All debtors are under the same statutory constraint for determining income. The expense part of the equation is radically different. Below median debtors calculate reasonably necessary expenses as they did pre-bapcpa with creditor, trustee and judicial scrutiny of schedules I and J. In re Kibbe, 342 B.R. 411, (Bankr. D.N.H. 2006). Above median debtors, however, must wade through the so called means test found in 707(b)(2) to determine the expense side of the ledger. Section 707(b)(2)(A)(ii)(I) states in part: The debtor s monthly expenses shall be the debtor s applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor s actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides, as in effect on the date of the order for relief, for the debtor, the dependents of the debtor, and the spouse of the debtor in a joint case, if the spouse is not otherwise a dependent. 11 U.S.C. 707(b)(2)(A)(ii)(I). As further explained in In re McGuire, 342 B.R. 608: In other words, for the above-median debtors, the statute breaks down allowable expenses into five general categories: (1) those that fit into the IRS National Standards, which include food, clothing, household supplies, personal care, and miscellaneous expenses; (2) those that fit into the IRS Local Standards, which include housing and transportation; (3) actual expenses for items categorized by the IRS as Other Necessary Expenses, including such items as taxes, mandatory payroll deductions, health care, and telecommunication services; (4) actual expenses, with limitations, for certain other expenses specified by the Bankruptcy Code, such as care for disabled family members and tuition: and (5) payments on secured and priority debts. Because 707(b)(2)(A)(ii)(I) provides that monthly expenses pursuant to the IRS standards shall not include any payments for debts, and debtors are permitted to deduct actual mortgage and car payment amounts, separately, debtors must deduct from the IRS standard expenses their monthly mortgage and car payments to avoid double-dipping. 17

19 Id. at 612 (footnote omitted). In the case of In re Wiggs, No.06 B 70203, 2006 WL (Bankr. N.D.Ill. Aug. 4, 2006), the debtors listed an expense for transportation ownership even though they had no car payment. Judge Barbosa sustained the trustee s objection to confirmation by stating: This Court finds that the language of the statute is clear and unambiguous. This Court finds that the term applicable modifies the amounts specified to limit the expenses to only those that apply.... If the language were interpreted to allow every debtor the full National and Local Standard amount the term applicable would be superfluous. Id. at * 2 (citation omitted). The court concluded that debtors can only deduct the means test expenses when they are applicable, i.e. the debtors actually incur the expenses scheduled. Id. at * 3. See also In re Carlin 348 B.R. 795 (Bankr. D. Or. 2006); In re Hardaccre, 338 B.R Judge Goldgar, however, allowed debtors to claim a housing expense when they had no mortgage debt in Farrar-Johnson, 353 B.R. 224: The debtors were entitled to claim that expense whether they had it or not. Section 707(b)(2)(A)(ii)(I) permits a debtor to claim the applicable monthly expense amount under the Local Standards. Read in isolation, applicable is ambiguous, meaning simply: That can be applied; appropriate.... An expense could be appropriate for a debtor to claim because he actually incurs that expense. It could also be appropriate to claim because he lives in a certain state and county and has a household of a certain size, putting him in the right box on the Local Standards chart. Statutory terms, though, are never read in isolation; they are read in the context in which they appear. Section 707(b)(2)(A)(ii)(I) defines monthly expenses not only as a debtor s applicable monthly expense amounts under the National and Local Standards but also as the debtor s actual monthly expenses for the categories the IRS specifies as Other Necessary Expenses. 11 U.S.C. 707(b)(2)(A)(ii)(I). Congress drew a distinction in the statute between applicable expenses on the one hand and 6 For an opposing viewpoint see Means Testing in the New 707(b), wherein Judge Wedoff argues that because the means test treats the IRS Local Standards as fixed allowances, it is more reasonable to allow debtors to claim ownership expense based on the number of vehicles owned rather than the number for which the debtors make a car payment. Eugene R. Wedoff, Means Testing in the New 707(b), 79 AM. BANKR. L.J. 231 (2005). 18

20 actual expenses on the other. Other Necessary Expenses must be the debtor s actual expenses. Expenses under the Local Standards, in contrast, need only be those applicable to the debtor - because of where he lives and low large his household is. It makes no difference whether he actually has them. Id. at (citations omitted). Judge Goldgar goes on to specifically disagree with the reasoning of McGuire, Wiggs, Carlin, and Hardacre stating: The problem with these decisions is twofold. First, some of the decisions interpret the word applicable in section 707(b)(2)(A)(ii)(I) to mean actual. In doing so, though, they never consider the presence of the word actual later in the same sentence. Second, some of the decisions look for guidance to internal IRS manuals stating that the expenses in question cannot be claimed if a taxpayer has not incurred them.... Sections 707(b)(2)(A)(ii)(I), however, deems the debtor s expenses to be the amount specified in the Local Standards. 11 U.S.C. 707(b)(2)(A)(ii)(I). It nowhere incorporates wholesale all IRS criteria for tax collection matters. Id. at 231 (citations omitted). A different twist on this issue is whether an above median debtor may include a secured debt payment as an expense if the plan proposes to surrender the collateral or modify the payments on the debt. Judge Dunn in In re Oliver, No , 2006 WL (Bankr. D. Or. June 29, 2006), concluded that surrender or modification does not negate the legitimacy of the expenses by stating: Id. at * 3. Section 707(a)(2)(A)(iii) addresses secured debt payments, specifically, rather than expenses generally. In interpreting that provision, I am guided by its specific language and cannot incorporate concepts or language from section 707(b)(2)(A) or elsewhere where Congress itself did not incorporate those concepts or language. If Congress intended to limit secured debt payments contractually due from debtors on the petition date to those where actual future payments will be made in Form B22C calculations, it knew how to do so, as reflected, for example, by the inclusion of the terms actual monthly expenses and actual expenses elsewhere within section 707(b)(2)(A)(ii)(I) and (II). 19

21 The opposite conclusion was endorsed in In re McPherson, 350 B.R. 38 (Bankr. W.D. Va. 2006). The court dissected 1325(b) and focused on the definition of disposable income contained in 1325(b)(2) and stated: [I]t is future driven because of the use of the adjective projected, the adjective phrase reasonably necessary for... support, and the infinitive phrase to be expended. Id. at 44. The court concluded that contractually due secured debt payments are only relevant if they are to be paid. If they are to be modified or surrendered, they may not be used in the disposable income calculation. See also In re Love, 350 B.R. 611 (Bankr. M.D. Ala. 2006); In re Crittendon, 2006 WL Another expense generating much interest is charitable contributions for above median income debtors. Three courts have held above median income debtors may not deduct charitable contributions as an expense relying on a strict interpretation of 1325(b)(3): In re Meyer, No , 2006 WL (Bankr. D.N.M. Dec. 5, 2006); In re Tranmer, No , 2006 WL (Bankr. D. Mont. Nov. 16, 2006); and In re Diagostino, 347 B.R. 116 (Bankr. N.D.N.Y. 2006). 7 VII. SEPARATE CLASSIFICATION OF STUDENT LOANS 8 AND PAYMENT OF INTEREST A. Classification Prior to 1990, student loans were dischargeable in a chapter 13. The confirmability of cases involving student loans, however, was far from uniform. Some courts denied confirmation if the plan separately classified student loans, see In re Lawson, 93 B.R. 979 (Bankr. N.D.Ill. 7 Congress has since passed remedial legislation to permit tithing by above median debtors, however, as of mid-december 2006, it has yet to be signed by the President. 8 For a more detailed background see Stephen L. Sepinak, Rethinking Unfair Discrimination in Chapter 13, 74 AM. BANKR. L.J. 341 (2000). 20

22 1988), and In re Cronk, 131 B.R. 710 (Bankr. S.D. Iowa 1990), while other courts denied confirmation where a student loan claim was to receive a pro rata distribution, see In re Castonguay, 119 B.R. 256 (Bankr. D. Kan. 1990), and In re Carpico, 117 B.R. 335 (Bankr. S.D. Ohio 1990). In theory, as a dischargeable debt, there was no basis, depending on the philosophy of the local bankruptcy judge, to do anything other than treat a student loan as an ordinary unsecured obligation. In 1990, legislation was enacted 9 amending 1328(a) to squeeze out student loans from the so-called chapter 13 super discharge. Overnight, the character of these loans changed and, suddenly, a 1328(a) discharge did not solve a debtor s student loan problem. Nondischargeable interest on a nondischargeable student loan also had to be dealt with. See In re Shelbayah, 165 B.R. 332 (Bankr. N.D.Ga. 1994). Assuming the debtor did not challenge a student loan directly via an adversary proceeding seeking a judicial declaration of undue hardship, 10 the new strategy would be to separately classify a the student loan claim pursuant to 1322 (a)(3) 11 and 1322(b)(1). 9 The Omnibus Budget Reconciliation Act of 1990, Pub. L. No , 104 Stat (Nov. 5, 1990). 10 See 11 U.S.C. 523(a)(8). 11 Section 1322 provides, in relevant part: (a) The plan shall (3) if the plan classifies claims, provide the same treatment for each claim within a particular class;.... (b)... the plan may - (1) designate a class or classes of unsecured claims, as provided in section 1122 of this title, but may not discriminate unfairly against any class so designated. 11 U.S.C. 1325(a)(3), (b)(1). 21

23 Separate classification could involve paying a different percentage to the student loan vis a vis the other unsecured creditors. Thus payment could be accomplished by seeking payment to the student loan creditor prior to, pro rata with, or subsequent to funding general unsecured claims. 12 Alternatively, a debtor could invoke the cure and maintenance option of 1322(b)(5). 13 To separately classify a claim pursuant to 1322(b)(1), the debtor must vocalize a reasonable basis for the discriminating treatment. The debtor bears the burden of showing that a plan does not discriminate unfairly. In re Groves, 39 F.3d 212 (8 th Cir. 1994) (citation omitted). In Groves, which consisted of three individual cases consolidated for a decision on the student loan classification question, the debtors proposed to pay student loans in full but only repay other unsecured creditors from 10 to 40%. Id. The trustee objected and the bankruptcy court denied confirmation finding that the nondischargeability of student loans is an insufficient basis for 1322(b)(1) treatment. Id. The district court, in affirming, stated [t]he proposed plans considerably preferential treatment of non-dischargeable student loans over other unsecured claims... more than over balances the debtors desire for a clean slate as against fairness to their general unsecured creditors. Id. at 215 (citation omitted). In affirming the district court, the Eighth Circuit stated [a]bsent a showing that discriminatory treatment is necessary for the debtor to complete his chapter 13 plan, separate classification of student loans 12 Alternatively, the plan could provide pro rata treatment for the first 36 months of the plan, followed by a 24 month period exclusively dedicated to the student loan. This is also known as terraced payment. See In re Strickland, 181 B.R. 598 (Bankr. N.D. Ala. 1995). 13 Section 1322(b)(5) provides that a plan may: (5)... provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim... on which the last payment is due after the date on which the final payment under the plan is due. 11 U.S.C. 1322(b)(5). 22