Cite as: Keith M. Lundin, Lundin On Chapter 13, § 12.7, at ¶ ____, LundinOnChapter13.com (last visited __________).
Welfare benefits, Temporary Assistance for Needy Families (formerly, AFDC), and other entitlements programs can constitute regular income for eligibility purposes in a Chapter 13 case.1 Government-funded benefits are no less regular or stable than, say, employment at will—that benefits are given (or taken away) by statute or regulation does not require different treatment than that given other sources of income.
As discussed above in connection with Social Security benefits and pensions,2 there may be problems of cooperation and enforcement of income deduction orders to state and federal agencies administering entitlements programs. Such problems should not render the benefits any less regular income for eligibility purposes.
The benefits payable by some entitlements programs are not in cash. For example, the debtor may be eligible for rent subsidies that reduce or eliminate the cost of housing.3 Food stamps would substitute for income. A subsidy might be considered a direct component of income—in the nature of a benefit in kind4—or it may reduce the debtor’s living expenses in Schedule J, Official Form 106J,5 to a point where sufficient income in excess of expenses can be shown to enable the debtor to fund a Chapter 13 plan. Debtors are instructed by Schedule I, Official Form 106I, to include in scheduled income “government assistance that you regularly receive. Include cash assistance and the value (if known) of any non-cash assistance . . . such as food stamps . . . or housing subsidies.”
Entitlements are another area where exemptions and cases interpreting the disposable income test in § 1325(b) may distort eligibility analysis. Payments to debtors pursuant to most entitlements programs are exempt property under state or federal law. Some courts have held that money received by the debtor that is exempt is not liable for prepetition debts under § 522(c) and is excluded from projected disposable income at confirmation.6 The same logic might dictate that exempt income from an entitlements program is excluded from income for eligibility purposes under § 109(e). On the other hand, that the trustee or an allowed unsecured claim holder could not force the debtor to include exempt income in projected disposable income for purposes of the confirmation test in § 1325(b) does not tell us whether a debtor could voluntarily include exempt income in regular income for purposes of the eligibility test in § 109(e). If the debtor is willing to commit exempt income to funding a plan, that exempt income should be included in regular income for eligibility purposes.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)7 reconfigured the projected disposable income test in § 1325(b) in ways that may (but shouldn’t) affect accounting for entitlements benefits for eligibility purposes. As mentioned above,8 and detailed elsewhere,9 BAPCPA redefined the income side of the projected disposable income test at confirmation with a new term of art, “current monthly income” (CMI), in § 101(10A). Social Security benefits are excluded from CMI in the calculation of projected disposable income in all Chapter 13 cases filed after October 17, 2005.10
Many entitlements programs administered at the state and federal levels are creatures of the Social Security system.11 For example, Aid to Dependent Children—formerly Aid to Families with Dependent Children, now Temporary Assistance for Needy Families—was created by the Social Security Act of 1935. The exclusion of Social Security benefits from projected disposable income raises again the issue whether Social Security benefits in any form can be “income” for purposes of the regular income requirement for Chapter 13 eligibility. It deserves repeating that there is no exclusion from regular income for eligibility purposes for Social Security benefits in any form. Entitlements that might be classified as Social Security benefits and excluded from the disposable income calculation at confirmation by § 101(10A)(B) are not statutorily excluded from regular income for eligibility purposes.
1 See 11 U.S.C. §§ 109(e) and 101(30), discussed in § 11.1 What Is Regular Income?. See, e.g., Bibb Cnty. Dep’t of Family & Children Servs. v. Hope (In re Hammonds), 729 F.2d 1391 (11th Cir. Apr. 16, 1984) (Hatchett, Anderson, Clark) (AFDC benefits are regular income.). Accord In re Iacovoni, 2 B.R. 256 (Bankr. D. Utah Jan. 21, 1980) (Mabey). But see In re Smith, 234 B.R. 852, 854 (Bankr. M.D. Ga. June 2, 1999) (Walker) (Debtor’s attorney sanctioned for filing Chapter 13 case for unemployed debtor who was receiving public assistance. “The fact that Debtor in this case had a nominal ‘regular income’ in the form of public assistance did not render this individual eligible to be a debtor under Chapter 13 of the Code where that income was insufficient to support Debtor’s living expenses without regard to the amount of the plan payment.” That the debtor anticipated being fully employed within a reasonable time was “unrealistic because debtor had not been so employed in the two year period prior to the filing of the case.”).
3 See, e.g., In re Talley, 69 B.R. 219 (Bankr. M.D. Tenn. Dec. 16, 1986) (Lundin) (discussing the Title VIII subsidized housing program).
6 See § 91.2 Projected (Disposable) Income. See, e.g., In re Kerr, 199 B.R. 370 (Bankr. N.D. Ill. Apr. 22, 1996) (DeGunther) (Proceeds from the sale of debtor’s homestead are not projected disposable income because equity was exempt and § 522(c) prohibits reaching exempt income through § 1325(b).); In re Lush, 213 B.R. 152 (Bankr. C.D. Ill. Apr. 21, 1997) (Lessen) (workers’ compensation); In re Ferretti, 203 B.R. 796 (Bankr. S.D. Fla. Sept. 10, 1996) (Cristol) (exempt proceeds from accident settlement). But see Stuart v. Koch (In re Koch), 109 F.3d 1285 (8th Cir. Mar. 28, 1997) (Beam, Lay, Loken) (For § 707(b) purposes, workers’ compensation benefits though exempt under state law are projected disposable income notwithstanding § 522(c).); In re Pendleton, 225 B.R. 425 (Bankr. E.D. Ark. Sept. 29, 1998) (Mixon) (Exempt proceeds from lawsuit are projected disposable income.); In re Turpen, 218 B.R. 908 (Bankr. N.D. Iowa Jan. 21, 1998) (Edmonds) (Income from liquidating exempt assets is included as disposable income.); In re Claude, 206 B.R. 374 (Bankr. W.D. Pa. Mar. 27, 1997) (Bentz) (“[Section] 1325(b) does not qualify income with reference to its exempt status.”).
7 Pub. L. No. 109-8, 119 Stat. 23 (2005).
10 See 11 U.S.C. § 101(10A)(B), discussed in § 92.3 Current Monthly Income: The Baseline.