§ 13.1     Debtor Must Be Able to Make Payments under a Plan
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 13.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

To be eligible for Chapter 13, 11 U.S.C. §§ 109(e) and 101(30) require the debtor to have income that is “sufficiently stable and regular1 . . . to make payments under a plan.”2 This requirement has been interpreted to mean (1) that the plan must propose some payment to creditors and (2) that the debtor must have income in excess of expenses.3 It has been held that a debtor is ineligible when income is insufficient to pay ordinary living expenses and thus the debtor could not pay any amount to fund a plan.4

[2]

The eligibility requirement that the debtor be able to “make payments under a plan” is importantly different than the confirmation requirement that the debtor “be able to make all payments under the plan.”5 The focus of the statute at the eligibility stage is more general: Does the debtor have income sufficiently regular and stable to fund any (reasonable?) Chapter 13 plan? At confirmation, the question addresses the feasibility of the particular plan proposed by the debtor.6 In the context of a challenge to eligibility at conversion from Chapter 7 to Chapter 13, the district court in Santiago-Monteverde v. Pereira (In re Santiago-Monteverde),7 well articulated this distinction:

[A] distinction should be drawn between determining eligibility to be debtor under the chapter to which conversion is sought and the feasibility of the eventual confirmation of a plan under the same chapter. The former is a basic gatekeeping inquiry: so long [as] a prospective debtor satisfies the few requirements of section 109(e), eligibility is established. In contrast, the feasibility determination is conducted pursuant to the extensive and detailed requirements set forth in section 1325 of the Bankruptcy Code, and only after a plan has been filed. . . . Because a Chapter 13 plan need not be filed until 14 days after the petition for relief, it is premature to consider the feasibility of such a plan prior to conversion. . . . If a debtor seeking conversion to Chapter 13 has income that is sufficiently regular and stable to enable him or her to make payments under some hypothetical Chapter 13 plan, the gatekeeping definitional requirement of 101(30) is satisfied. . . . Once it is determined that the debtor has “sufficiently regular and stable” income to make payments under a hypothetical Chapter 13 plan, the definitional requirement of section 101(30) incorporated in the eligibility requirements of section 109(e) is satisfied. The adequacy of the debtor’s income to fully support a specific plan is not part of the analysis.8
[3]

That § 101(30) has been interpreted to require income in excess of expenses should not be confused with the confirmation requirement in § 1325(b) that, upon proper objection, the debtor must commit all projected disposable income to fund the plan for three to five years.9 The concept of disposable income applies only at confirmation and has involved the courts extensively in assessing the reasonableness of the debtor’s expenses.10 At the eligibility threshold, income in excess of expenses has been more liberally found when the debtor’s budget shows surplus for payments. The reported eligibility cases do not routinely engage in detailed analysis of the reasonableness of expenses. In fact, it has been held that evidence that the debtor has actually made payments to the trustee required by the proposed plan is sufficient proof of ability to make payments for eligibility purposes.11 On the other hand, even a superficial inquiry into ability to make payments is failed when the debtor presents no evidence of income in excess of expenses.12

[4]

The requirement of payments under a plan in § 101(30) becomes either troublesome or a game of words in the context of a Chapter 13 plan that proposes no payment to claim holders and in which there is no disposable income at confirmation under 11 U.S.C. § 1325(b). It is rare but possible to propose a Chapter 13 plan in which there will be no payments. Such a plan may fail the good-faith test for confirmation13 or some other test; yet the debtor may meet the technical requirement for eligibility by having (no) income in excess of expenses, sufficient to fund a (no payment) plan. Eligibility under such circumstances may be of little meaning because the likelihood of confirmation is low for a Chapter 13 plan that proposes no payments to any creditor.

[5]

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)14 threatens to complicate the eligibility requirement that the debtor must be able to make payments under a plan. Detailed elsewhere,15 the new world of BAPCPA includes that the entitlement of unsecured creditors in a Chapter 13 case is based in whole or in part on a mathematical formula that is disconnected from the reality of the debtor’s budget at confirmation. This means that some Chapter 13 debtors in cases filed after October 17, 2005, can propose confirmable plans offering little or no “projected disposable income” for distribution to unsecured creditors when an actual budget reveals substantial net income available to fund a plan. Unfortunately, the same mathematical disconnect introduced by BAPCPA produces a fair number of debtors who cannot confirm plans that satisfy the projected disposable income test because they have actual net income less than the payments required by § 1325(b).

[6]

The magnitude of this disconnect at confirmation after BAPCPA is great and complicates the different determination whether the debtor is able to make payments under a plan for eligibility purposes. When actual income and expenses demonstrate that the debtor has more money available to pay creditors than is required by the projected disposable income test, then eligibility is enhanced. When the mathematical test in § 1325(b) demands distributions to unsecured creditors that the real budget will not support, then ability to make payments under a plan drifts out of reach and eligibility is threatened. In the post-BAPCPA world, courts should resist the temptation to analyze whether the debtor is able to make payments under a plan for eligibility purposes by engaging in the distorted mathematics of confirmation under an illogically reconstituted projected disposable income test.16


 

1  “Regular income” is discussed in § 11.1  What Is Regular Income?, § 11.2  When Must Debtor Have Regular Income?, § 12.1  Self-Employment, § 12.2  Multiple, Irregular and Seasonal Employment, § 12.3  Farming, Crop and Land Set-Aside or Payment in Kind, § 12.4  Retirement Income, § 12.5  Social Security, § 12.6  Disability Benefits; Workers’ Compensation, § 12.7  Family Assistance, Welfare and Other Entitlements, § 12.8  Unemployment Benefits, Strike Benefits and the Like, § 12.9  Alimony, Maintenance and Child Support, § 12.10  Contributions from Family, Friends, Nonfiling Spouses and Former Spouses; Grants and Awards and § 12.11  Income from Leasing, Selling or Liquidating Assets.

 

2  11 U.S.C. § 101(30).

 

3  See Tenney v. Terry (In re Terry), 630 F.2d 634 (7th Cir. Sept. 22, 1980) (Ross, Henley, McMillian); Georgia Fed. Sav. & Loan Ass’n v. Anderson, 21 B.R. 443 (Bankr. N.D. Ga. Nov. 2, 1981) (Norton); In re Dant, 9 B.R. 117 (Bankr. E.D. Va. Feb. 10, 1981) (Shelly); In re Wiggles, 7 B.R. 373 (Bankr. N.D. Ga. Nov. 22, 1980) (Norton); In re Burns, 6 B.R. 286 (Bankr. D. Colo. Sept. 30, 1980) (Moore); In re Seman, 4 B.R. 568 (Bankr. S.D.N.Y. June 6, 1980) (Schwartzberg).

 

4  In re Heck, 355 B.R. 813 (Bankr. D. Kan. Oct. 24, 2006) (Somers) (Debtor dependent for living expenses on contributions from boyfriend was not able to make payments and thus was not an individual with regular income for purposes of § 101(30).); In re Lindholm, No. 04-90452, 2005 WL 2218990 (W.D. Mich. Sept. 13, 2005) (unpublished) (Bell) (Debtor with budget deficit and plan paying nothing to unsecured creditors offered no evidence of regular income.); In re Smith, 234 B.R. 852, 854 (Bankr. M.D. Ga. June 2, 1999) (Walker) (“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.”).

 

5  11 U.S.C. § 1325(a)(6) (emphasis added), discussed in § 111.1  Able to Make Payments and Comply with Plan and § 111.2  Feasibility Turned on Its Head after BAPCPA.

 

6  See § 111.1  Able to Make Payments and Comply with Plan and § 111.2  Feasibility Turned on Its Head after BAPCPA.

 

7  512 B.R. 432 (S.D.N.Y. June 27, 2014) (Castel).

 

8  In re Santiago-Monteverde, 512 B.R. at 443.

 

9  The disposable income test in 11 U.S.C. § 1325(b) is discussed in § 91.1  In General, § 91.2  Projected (Disposable) Income, § 91.3  Reasonably Necessary for Maintenance or Support, § 91.4  Debtor or Dependent, § 91.5  Counting the Three-Year Period, § 91.6  Debtor Engaged in Business, § 91.7  Payment-in-Full Option, § 92.1  In General, § 92.2  Projected Disposable Income: All Debtors, § 92.3  Current Monthly Income: The Baseline, § 92.4  Household Size and Comparison of CMI to Median Family Income: § 1325(b)(3), § 93.1  Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income, § 94.1  Big Picture: Too Many Issues, § 94.2  Netting Issues, Including Exclusion of Payments for Debts, § 94.3  Accounting for Spouses, § 95.1  In General, § 95.2  National Standards, § 95.3  Local Standards: Housing and Transportation, § 95.4  Other [Necessary] Expenses—In General; All Categories, § 95.4  Other [Necessary] Expenses—In General; All Categories, § 95.6  Other [Necessary] Expenses—Charitable Contributions, § 95.7  Other [Necessary] Expenses—Child Care, § 95.8  Other [Necessary] Expenses—Court-Ordered Payments, § 95.9  Other [Necessary] Expenses—Dependent Care, § 95.10  Other [Necessary] Expenses—Education, § 95.11  Other [Necessary] Expenses—Health Care, § 95.12  Other [Necessary] Expenses—Involuntary Deductions, § 95.13  Other [Necessary] Expenses—Life Insurance, § 95.14  Other [Necessary] Expenses—Secured or Legally Perfected Debts, § 95.15  Other [Necessary] Expenses—Unsecured Debts, § 95.16  Other [Necessary] Expenses—Taxes, § 95.17  Other [Necessary] Expenses—Optional Telephones and Services, § 95.18  Other [Necessary] Expenses—Student Loans, § 95.19  Other [Necessary] Expenses—Internet Provider/E-mail, § 95.20  Other [Necessary] Expenses—Repayment of Loans to Pay Federal Taxes, § 95.21  Health and Disability Insurance, § 95.22  Family Violence Expenses, § 95.23  Five Percent More Food and Clothing, § 95.24  Elderly, Ill or Disabled, § 95.25  Administrative Expenses, Sorta, § 95.26  Education Expenses, § 95.27  Home Energy Costs, § 95.28  ABLE Program Contributions, § 96.1  Average Monthly Payments on Account of Secured Debts, § 97.1  Total Priority Debts and Divide by 60, § 98.1  Additional Expenses or Adjustments to CMI, § 99.1  In General, § 99.2  Amounts Paid by Others under § 101(10A)(B), § 99.3  Child Support, Foster Care and Disability Payments, § 99.4  Pension Loan Repayments, § 99.5  Employee Benefit Plan Contributions, § 99.6  § 1325(b)(2)(A)(ii): Charitable Contributions (Again?) and § 100.1  Applicable Commitment Period Calculation.

 

10  See § 91.3  Reasonably Necessary for Maintenance or Support, § 93.1  Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income, § 94.1  Big Picture: Too Many Issues, § 94.2  Netting Issues, Including Exclusion of Payments for Debts, § 94.3  Accounting for Spouses, § 95.1  In General, § 95.2  National Standards, § 95.3  Local Standards: Housing and Transportation, § 95.4  Other [Necessary] Expenses—In General; All Categories, § 95.4  Other [Necessary] Expenses—In General; All Categories, § 95.6  Other [Necessary] Expenses—Charitable Contributions, § 95.7  Other [Necessary] Expenses—Child Care, § 95.8  Other [Necessary] Expenses—Court-Ordered Payments, § 95.9  Other [Necessary] Expenses—Dependent Care, § 95.10  Other [Necessary] Expenses—Education, § 95.11  Other [Necessary] Expenses—Health Care, § 95.12  Other [Necessary] Expenses—Involuntary Deductions, § 95.13  Other [Necessary] Expenses—Life Insurance, § 95.14  Other [Necessary] Expenses—Secured or Legally Perfected Debts, § 95.15  Other [Necessary] Expenses—Unsecured Debts, § 95.16  Other [Necessary] Expenses—Taxes, § 95.17  Other [Necessary] Expenses—Optional Telephones and Services, § 95.18  Other [Necessary] Expenses—Student Loans, § 95.19  Other [Necessary] Expenses—Internet Provider/E-mail, § 95.20  Other [Necessary] Expenses—Repayment of Loans to Pay Federal Taxes, § 95.21  Health and Disability Insurance, § 95.22  Family Violence Expenses, § 95.23  Five Percent More Food and Clothing, § 95.24  Elderly, Ill or Disabled, § 95.25  Administrative Expenses, Sorta, § 95.26  Education Expenses, § 95.27  Home Energy Costs, § 95.28  ABLE Program Contributions, § 96.1  Average Monthly Payments on Account of Secured Debts, § 97.1  Total Priority Debts and Divide by 60, § 98.1  Additional Expenses or Adjustments to CMI, § 99.1  In General, § 99.2  Amounts Paid by Others under § 101(10A)(B), § 99.3  Child Support, Foster Care and Disability Payments, § 99.4  Pension Loan Repayments and § 99.5  Employee Benefit Plan Contributions.

 

11  In re Mercado, 376 B.R. 340 (Bankr. M.D. Fla. Sept. 24, 2007) (Proctor) (Debtors have regular income and demonstrated ability to make payments by making payments under proposed plan.); In re Baird, 228 B.R. 324, 329 (Bankr. M.D. Fla. Jan. 7, 1999) (Proctor) (Debtor earning $50,000 a year who lost his job, had a stroke and has been hospitalized for five months has income sufficiently regular and stable to fund a plan because the debtor’s son has made all payments required by the plan. “The real test is whether the Debtor has the ability to make the requisite payments under the plan. The evidence shows that the Debtor has made all plan payments, and therefore, the Court finds the Debtor has such ability.”). Accord In re Goodrich, 257 B.R. 101, 103–04 (Bankr. M.D. Fla. Dec. 13, 2000) (Proctor) (“The real test is whether Debtor is able to make the required payments under the plan. . . . At the confirmation hearing Debtor was substantially current with his plan payments. The Court therefore finds that Debtor has the ability to make the payments under the plan.”).

 

12  See In re Nosker, 267 B.R. 555, 560 (Bankr. S.D. Ohio June 18, 2001) (Hoffman) (Court cannot determine whether income is sufficiently stable and regular to make payments under the proposed plan because of “Debtor’s total failure to provide credible information.”).

 

13  See § 108.1  Economic Components of Good Faith—In General, § 108.2  Duration of Plan, § 108.3  Percentage of Payment, § 108.4  Income, Expenses, Lifestyle and Luxuries, § 110.1  Good-Faith Filing Requirement after BAPCPA and § 110.2  Good-Faith Plans after BAPCPA.

 

14  Pub. L. No. 109-8, 119 Stat. 23 (2005).

 

15  See § 3.8  Seven: Unsecured Creditors Don’t Count, § 92.1  In General, § 92.2  Projected Disposable Income: All Debtors, § 101.1  What Do Unsecured Creditors Get? and § 111.2  Feasibility Turned on Its Head after BAPCPA.

 

16  See § 11.1  What Is Regular Income?.