§ 91.2     Projected (Disposable) Income
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 91.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Section 1325(b)(2) defines “disposable income” as

income which is received by the debtor and which is not reasonably necessary to be expended—(A) for the maintenance or support of the debtor or a dependent of the debtor; and (B) if the debtor is engaged in business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business.1
[2]

To satisfy an objecting trustee or allowed unsecured claim holder, the debtor must commit to the plan all “projected disposable income” for at least three years.2 The Code does not define the word “projected.” A dictionary definition would be “extended beyond something else” or “sen[t] forth in one’s thoughts or imagination.”3

[3]

Most courts focus on the debtor’s current income and extend current income (and expenditures) over the life of the plan to calculate projected disposable income.4 When a self-employed real estate agent earned between $15,421.62 and $32,123.54 during the three years prior to the Chapter 13 case, projected disposable income of $25,000 per year was reasonable for § 1325(b) purposes.5 Projected disposable income for an attorney is not potential billable hours multiplied by billing rate but is past actual income projected into the future: “the standard . . . is to multiply Debtor’s current monthly income by 36.”6 One debtor failed to accurately project disposable income by averaging earnings for 1996 through 1998 in a Chapter 13 case filed on October 8, 1999—when 1999 was included, average net annual income increased from $157,052 to $184,497.7

[4]

The budget in Schedules I and J to Official Bankruptcy Form 68 is the principal source of evidence of the debtor’s present monthly income and expenses. Debtors quickly get into disposable-income test trouble when the budget is inaccurate with regard to the debtor’s income.9

[5]

The term “income” is also not defined by the Code. Income is an important term of art several places in Chapter 13,10 and its lack of simple meaning creates problems for § 1325(b) purposes. For eligibility purposes, income has been broadly interpreted to include wages, salary, commissions, assistance payments, benefits programs, entitlements programs, pensions, receipts from the sale of crops and other traditional and not-so-traditional sources of money.11 Postpetition earnings from the debtor’s personal services are included in income and receive special protection in a Chapter 13 case.12

[6]

Income also includes money the debtor receives from the use, sale or lease of property. For example, if the debtor owns rental property, the rents are income to the debtor. Although there is some controversy whether a Chapter 13 debtor can fund a plan solely from the liquidation of property of the estate,13 for purposes of the disposable income test, the money a debtor receives from selling a crop, selling inventory or selling real property certainly fits ordinary notions of income. This would be true even if the debtor is not engaged in business for Chapter 13 purposes.14 Child support, alimony or maintenance payments are considered income for eligibility purposes15 and should be income for purposes of § 1325(b).

[7]

The Code does not require that income be regular or periodic for § 1325(b) purposes. Compare the “regular income” requirement for eligibility in 11 U.S.C. §§ 109(e) and 101(30).16 The courts have recognized that the disposable income test in § 1325(b) contains no language requiring the source of income to be property of the estate.17

[8]

Does the conversion of property of the estate into cash after the petition always generate income for § 1325(b) purposes? Some courts have refused to find regular income for eligibility purposes when the only source of income is the liquidation of estate property.18 But there will be Chapter 13 cases in which the only source of funding is cash generated from the sale of estate property: a used shoe salesman surely generates income from the sale of estate property, even though the shoe inventory is a noncash asset at the petition.

[9]

It is less clear that liquidation of estate property always produces income for § 1325(b) purposes. For example, if the debtor sells a house and nets $10,000 from the sale, is that $10,000 considered income that must be committed to the plan to satisfy § 1325(b)? Would the $10,000 be “necessary” to acquire another home for the debtor?19 What if the sale of the house was not anticipated at the time of confirmation? What if the equity did not exist at confirmation but accumulated through appreciation in property values? Is the appreciation a “projected” portion of the income from the sale of the property? Can the plan be modified to require the debtor to pay the (appreciated) proceeds of the sale to unsecured claim holders?20 Does it make a difference if the property revested in the debtor at confirmation under § 1327(b)?21 One court, in the context of a motion to modify a plan after confirmation to pay insurance proceeds to creditors, adopted this comprehensive definition of income for disposable-income test purposes: “assets (monetary or otherwise) received by the debtor which are not attributable to the appreciation, sale or conversion of the debtors’ pre-confirmation assets.”22 Another court held that income for § 1325(b) purposes depends on whether the debtor receives a “stream of payments” or just the proceeds from liquidation of an asset.23

[10]

The Bankruptcy Appellate Panel for the Ninth Circuit has taken the extreme position that the disposition of a “capital asset” does not produce income in a Chapter 13 case. In McDonald v. Burgie (In re Burgie),24 the confirmed plan provided a 34 percent dividend to unsecured creditors. Five days after confirmation, the debtors moved for and received court approval to sell their homestead. After exemptions, the net proceeds from that sale were approximately $20,000. The Chapter 13 trustee moved to modify the plan to require the debtors to use a portion of the net sale proceeds to increase the dividend to unsecured creditors under the plan.25 Assuming without deciding that the disposable income test in § 1325(b) applies at modification after confirmation,26 the BAP rejected the notion that liquidation of an estate asset could be disposable income in a Chapter 13 case:

The proceeds of the sale of a debtor’s real estate in a chapter 13 case never become disposable income for the purposes of chapter 13. This result applies in a chapter 13 case whether or not the property is exempt from execution. While a debtor may voluntarily use such proceeds to make payments to creditors under a chapter 13 plan, a debtor cannot be compelled to use the proceeds for this purpose. . . . Postpetition disposable income does not include prepetition property or its proceeds. This is the chapter 13 debtor’s bargain. Creditors of a chapter 13 debtor have no claim to any of these assets. . . . The sale of a capital asset does not create “disposable income” pursuant to § 1325. . . . A debtor’s prepetition homestead is a capital asset, not postpetition income. . . . The test is whether the asset in question is an anticipated stream of payments. If it is a stream of payments, the payments must be included in projected income. If the asset is not a stream of payments, it is not included. . . . [T]he question is whether the sale proceeds constitute “future earnings or other future income of the debtor.” See § 1322(a)(1). Clearly, the proceeds from the sale of a prepetition asset (whether exempt or not) are not future earnings or income.27
[11]

For courts not willing to go quite as far as the Ninth Circuit BAP, exemptions may be important to the disposable-income test calculation. In the example above, what if the $10,000 would be exempt under applicable law? There is no mention of exemptions from projected disposable income in § 1325(b)(2). If the equity would be exempt and not available to unsecured claim holders through the best-interests-of-creditors test,28 is the exemption overcome by considering the proceeds of sale to be income for § 1325(b) purposes? In other words, does the liquidation of exempt property produce income that is captured for creditors by the disposable income test? This would certainly be a bad outcome for debtors, but there is nothing in § 1325(b) to avoid this result unless the liquidation of exempt property does not produce income.

[12]

Several reported decisions hold that the liquidation of a debtor’s personal injury action after the filing of a Chapter 13 petition produces projected disposable income. In In re Tomasso, 29 the bankruptcy court held that only the “nonexempt portion” of a postpetition personal injury settlement was projected disposable income. In contrast, the district court in Watters v. McRoberts (In re Watters)30 concluded that all of a personal injury recovery was included in projected disposable income without regard to exemptions. The Watters court explained:

As the [In re Schnabel, 153 B.R. 809 (Bankr. N.D. Ill. 1993)] Court observed, “. . . § 1325(b) does not qualify income by reference to its exempt status.” . . . This court agrees that since there is no such limitation on income in § 1325(b), one should not be imposed. Thus, the entire personal injury recovery, because it is not necessary for the reasonable support of the debtor or his dependents, should be included within the payments to be disbursed to the creditors. . . . Congress did not qualify or limit “disposable income.” No reference to what the creditors would receive in a liquidation proceeding is included in the definition of disposable income, and therefore, this court will not add any such reference.31
[13]

The Watters court is correct that there is no exemption exception to income in § 1325(b). That an item of income-producing property would be excluded from the estate (for example by exemption) in a Chapter 7 case is relevant to the best-interests-of-creditors test in § 1325(a)(4)32 but irrelevant to whether disposition or use of that property produces projected disposable income for purposes of § 1325(b).

[14]

The Tomasso court does not explain why only the nonexempt portion of the personal injury settlement was considered projected disposable income. To the extent applicable law allows an exemption in a personal injury award to compensate a hurt person other than for loss of earning capacity, it might be argued that the proceeds are not a substitute for income and should be excluded from the test in § 1325(b). On the other hand, that many state exemption laws are worded to protect injury awards as compensation for lost earning capacity argues for inclusion of injury proceeds in the concept of income for § 1325(b) purposes. The debtor could, of course, still prove that some or all of the proceeds are “reasonably necessary . . . for the maintenance or support of the debtor or a dependent” and thus deducted from income to determine the amount that must be paid to creditors under the plan.33

[15]

The exemption provisions of the Bankruptcy Code could be interpreted to interrupt the capture of income by § 1325(b). Section 522(c) provides that “property exempted under this section is not liable during or after the case for any debt . . . that arose . . . before the commencement of the case.”34 In In re Kerr,35 the debtors sold their homestead after confirmation, and the Chapter 13 trustee moved to modify the plan to pay the proceeds to creditors on the theory that the sale produced disposable income for purposes of § 1325(b).36 The court held that the sale proceeds were not projected disposable income because the equity was exempt under § 522(c):

[T]he clear language of Section 522(c) protects exempt property, regardless of form, from prepetition debts. The Court cannot ignore this express limitation for purposes of defining disposable income under Section 1325(b)(2). To include exempt property within the confines of Section 1325(b)(2) directly conflicts with Section 522(c).37
[16]

This view of the interaction of §§ 1325(b) and 522(c) has been rejected by other courts, including the U.S. Court of Appeals for the Eighth Circuit.38Across-the-board application of § 522(c) to exclude exempt income from income probably proves too much. One result might be that all forms of income to a Chapter 13 debtor that are exempt under state or federal law would be excluded from both projected disposable income at confirmation under § 1325(b) and from regular income for eligibility purposes under § 109(e).39 This would be a bad outcome for debtors whose eligibility for Chapter 13 is dependent upon exempt income such as social security, pension benefits or workers’ compensation.40 Even in states that permit the garnishment of wages, typically there are exemption laws that prohibit garnishment of more than a certain percentage of a debtor’s wages. A general rule that the exempt portion of a debtor’s wages is not income for Chapter 13 purposes appears nowhere in any reported opinion, would be an accounting nightmare and would substantially change Chapter 13 practice.

[17]

Also, most of the cases allowing an exclusion from disposable income for exempt income don’t go on and explain how to account for the exempt income in the broader picture of the Chapter 13 case. If an item of income is exempt and not “projected” for § 1325(b) purposes, then presumably it should be excluded altogether from the debtor’s budget. Put another way, that the debtor uses exempt income to buy groceries or to buy lottery tickets should be irrelevant—if it isn’t income for one part of the equation, then it is not available to pay expenses on the other side. This would render some Chapter 13 debtors mathematically unable to demonstrate feasibility because expenses will exceed income net of the exempt income items.41 To solve the feasibility problem, most debtors would have to “voluntarily” contribute some portion of the exempt income to balance the budget and to make the Chapter 13 plan feasible.

[18]

Exemption and disposable income questions converge in cases discussing whether social security, pension benefits and workers’ compensation awards are projected disposable income. In In re Schnabel,42 the debtor was entitled to social security benefits and pension benefits. The debtor argued that neither was included in projected disposable income because both were exempt under state or federal law. The court included both kinds of benefits in projected disposable income, reasoning as follows:

Section 1325(b)(2) defines disposable income. . . . [Section] 1325(b) does not qualify income by reference to its exempt status. . . . [W]ithout an express or even implicit limitation in § 1325(b)(2) on “income” relating to its exempt status, this Court will not impose one. The Debtor’s social security and pension payments are “income [ ] received by the debtor,” and, to the extent not reasonably necessary for support, must be devoted to the repayment of unsecured creditors.43
[19]

In re Solomon44 involved a Chapter 13 debtor who was eligible to receive distributions from an exempt retirement account but not required to do so. The debtor in Solomon was the beneficiary of a state pension and of several individual retirement accounts (totaling more than $1.4 million) that qualified as exempt property. The debtor was eligible to draw regular payments from the IRAs without penalties; however, the debtor had not done so at the petition. The debtor testified he was willing to draw from other exempt assets, “as needed to meet living expenses and his plan payments,”45 but not willing to use the IRAs.

[20]

The issue was: what portion of the pension and IRAs was the debtor required to draw to satisfy the disposable income test in § 1325(b)? The bankruptcy court held that a “reasonable income expectation” from the exempt retirement accounts must be included in projected disposable income for purposes of § 1325(b)(1)(B):

There is absolutely no language in the disposable income test or definition in Section 1325(b) to suggest that disposable income is limited to income that is not exempt or from nonexempt assets. To the contrary, it is consistent with the premises of Chapter 13 that a debtor’s income from all sources, including income from exempt assets, be included in the determination of disposable income. . . . Income is different from property of the estate, and there is nothing in Chapter 13 to suggest that the income to support a plan must be property of the estate. . . . [R]egular income to qualify a debtor for Chapter 13 may include welfare, pension and social security income. . . . [I]n this case the income that Debtor projects to support his plan, as well as the maintenance and support of his family, relies primarily on income from his Maryland State pension that he has claimed is exempt and from other exempt assets. There is also nothing in 11 U.S.C. § 1325(b) that requires the source of income that is taken into account in determining disposable income to be property of the bankruptcy estate. . . . [A]t least where a debtor elects to use exempt income to satisfy the requirements of Chapter 13, the court is justified in considering the debtor’s exempt income to determine if the requirements of Chapter 13 are satisfied, including the disposable income test. To preserve the integrity of the court’s consideration, all exempt income of a debtor that is available to the debtor should be taken into account. . . . [I]n the instant case Debtor has not previously elected to draw regular payments from several of his separate, qualified I.R.A.s, although he is eligible to do so, without penalty. . . . Unlike some other exempt assets that are inherently not income producing, such as a homestead or home owned as tenants by the entirety, a qualified retirement account is intended to be a source of income in retirement. . . . The conclusion reached here is that the disposable income determination should take into account a reasonable expectation for a debtor’s retirement income where the debtor is eligible to receive that income, but refuses to do so in an effort to limit the Chapter 13 plan payments that the debtor would otherwise be expected to make. Disposable income fixes the minimum plan payment, but it does not dictate what assets Debtor should use to make his plan payments. . . . It would violate the parameters of the disposable income test that appear in the language of the statute to allow a debtor to defeat this minimum protection provided to creditors by refusing receipt of income that is available to him without penalty. . . . The determination of what amount constitutes a reasonable income expectation to be attributed to a qualified I.R.A. requires consideration of the particular circumstances of each Chapter 13 debtor. . . . [A] possible approach might be application of the minimum distribution formulas established by the Internal Revenue Code and Regulations to Debtor’s I.R.A.s.46
[21]

On appeal, the Fourth Circuit reversed, finding no “income expectation” in an individual retirement account when the debtor was not actually receiving disbursements at the time of confirmation:

Solomon’s IRAs are not “income” under the clear terms of [11 U.S.C. § 1325(b)]. Both the statutory definition of “disposable income” as income that is received by the debtor as well as the requirement that projected income must be calculated over the life of the plan contemplate income that a debtor is actually receiving at the time of confirmation. Projected disposable income typically is calculated by multiplying a debtor’s monthly income at the time of confirmation by 36 months, the normal duration of a Chapter 13 plan, then determining the portion of that income which is “disposable” according to the statutory definition. See Anderson v. Satterlee (In re Anderson), 21 F.3d 355, 357 (9th Cir. 1994). It is undisputed that, at the time of the confirmation hearing on Solomon’s plan, he was not actually receiving any disbursements from his IRAs; he further insisted that he had no intention of withdrawing funds from the IRAs during the life of the plan. . . . “[R]ather than engaging in hopeless speculation about the future,” a court should determine projected disposable income by calculating a debtor’s “present monthly income and expenditures” and extending those amounts over the life of the plan. . . . Solomon’s present, regular monthly income does not include distributions from his IRAs, and the bankruptcy court’s imputation of amounts from such speculative distributions in its calculation of disposable income is contrary to the plain terms of the statutory definition. Cases such as In re Schnabel, [153 B.R. 809 (Bankr. N.D. Ill. 1993)] . . . and In re Hagel, [171 B.R. 686 (Bankr. D. Mont. 1994)] . . . are distinguishable: they involved debtors who, at the time the bankruptcy petition was filed, were receiving regular monthly pension or social security payments. . . . In this case, by contrast, Solomon receives no regular distributions from his IRAs, has indicated no intent to take such distributions during the life of the Chapter 13 plan, and is not required to do so by the Internal Revenue Code until he reaches age 70½.47
[22]

The Chapter 13 trustee in In re Stones48 went a step further, arguing that a Chapter 13 debtor was required to borrow from an ERISA-qualified pension plan to make payments into a Chapter 13 plan. In contrast to Solomon, the debtor in Stones was not entitled to regular distributions from an exempt retirement account but was permitted by contract and applicable law to borrow from the pension plan for certain purposes. Citing James v. United States,49 the bankruptcy court in Stones first held that “a bona fide loan is not considered income.”50 James was a Supreme Court case that interpreted the Internal Revenue Code to exclude loans from the definition of income for tax purposes. The Stones court found the tax code to be “the most logical choice of federal law to aid in a definition of income” for purposes of the disposable income test in § 1325(b). As explained by the court:

This result harmonizes the Bankruptcy Code with the I.R.C. It is necessary that the two titles of the United States Code logically mesh with each other. . . . One may logically infer that Congress meant for one to look to the I.R.C. for the definition. . . . [B]ankruptcy courts have not done so. This neglect has led to inconsistent results. . . . The second problem with the trustee’s argument is that the corpus of a trust is not subject to attack. . . . [The debtor] has an ERISA-qualified pension plan. Therefore, the funds are not property of the estate and the trustee may not attack the corpus by forcing the debtor to borrow from it.51
[23]

Several courts have considered whether repayment of a prepetition loan from a pension plan or retirement system is projected income (or a necessary expense)52 for purposes of § 1325(b). In Harshbarger v. Pees (In re Harshbarger),53 the debtor deducted $61.17 per month from income to repay a prepetition loan from an ERISA-qualified profit-sharing account. The debtor argued that the $61.17 per month was not projected income because the profit-sharing account was excluded from the bankruptcy estate. The Sixth Circuit had little trouble finding that the voluntary debt repayment was included in projected disposable income and must be paid to all creditors under the plan:

Section 541(c)(2) excludes a debtor’s beneficial interest in a trust that is subject to a restriction on transfer. . . . [T]his exempts a debtor’s beneficial interest in an ERISA-qualified account from the bankruptcy estate. . . . However, the money debtors wish to repay the ERISA account in the future is not similarly excluded. The $61.17 monthly payroll deductions are not funds already in the ERISA account. Debtors’ Plan must treat these funds as part of the disposable income in the bankruptcy estate.54
[24]

Describing Harshbarger as “not persuasive,” the bankruptcy court in In re Buchferer55 found that a $1,030-per-month expense deduction to repay loans from the debtor’s pension plan was permitted by the projected disposable income test. The debtors in Buchferer borrowed more than $30,000 from their pension plans before the Chapter 13 petition and scheduled an expense of $1,030 per month to repay the pension loans. The Chapter 13 trustee objected to confirmation, citing earlier Second Circuit authority that loans from a pension fund were not debts for bankruptcy purposes.56 The bankruptcy court denied the trustee’s objection and explained why Harshbarger was wrongly decided:

By providing for the retirement system’s right to exercise a setoff against the debtor’s property interest under the plan, New York State law confers the status upon the retirement system of a holder of a secured claim against the debtor. . . . That the debtor cannot be held personally liable for the repayment of this loan, as a matter of underlying state or federal nonbankruptcy law, is irrelevant to the determination of whether the retirement system holds a valid secured claim in a bankruptcy case. . . . [T]he retirement system’s right of setoff against the participant’s vested plan account is also entitled to be characterized as a nonrecourse loan. . . . [Citing Johnson v. Home State Bank, 501 U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991)], . . . there is an extended family of nonrecourse lien creditors, including pension plan administrators, whose claims can be dealt with under a chapter 13 plan. . . . [Harshbarger v. Pees (In re Harshbarger), 66 F.3d 775 (6th Cir. 1995)] is not persuasive. . . . [B]orrowing from one’s pension fund is the equivalent (and surely no more blameworthy) of refinancing one’s first mortgage and using the net loan proceeds to meet accrued unsecured debts. . . . How is that any different in economic result than repaying a pension loan and rebuilding the debtor’s equity in his pension plan which is also exempt from execution under federal and state law?57
[25]

The reported decisions produce at least three positions with respect to whether contributions to a pension or profit sharing plan, when not intended to repay a loan to the debtor, are projected disposable income. Sometimes this issue is stated as whether contributions to a pension or profit sharing plan are “reasonable and necessary” expenses in the § 1325(b) calculation.58 Other times the question is whether a deduction from the debtor’s paycheck for retirement or profit sharing became income for § 1325(b) purposes. The outcome seems not dependent upon how the problem is characterized.

[26]

Some courts hold that “voluntary” contributions to a pension or profit sharing plan, when not intended to repay a loan to the debtor, are projected disposable income for § 1325(b) purposes.59 When pension deductions are characterized as “mandatory” or “involuntary,” some courts conclude that the deductions are not included in the projection of disposable income in § 1325(b).60 Without regard to characterization, a third group of decisions holds that retirement contributions may or may not be included in disposable income, depending on facts and circumstances. This third position is explained by the United States Court of Appeals for the Second Circuit in New York City Employees’ Retirement System v. Sapir (In re Taylor):61

It is within the discretion of the bankruptcy court judge to make a decision, based on the facts of each individual case, whether or not the pension contributions qualify as a reasonably necessary expense for that debtor. . . . [T]he bankruptcy judge may consider any factors properly before the court, including but not limited to: the age of the debtor and the amount of time until expected retirement; the amount of the monthly contributions and the total amount of pension contributions debtor will have to buy back if the payments are discontinued; the likelihood that buy-back payments will jeopardize the debtor’s fresh start; the number and nature of the debtor’s dependents; evidence that the debtor will suffer adverse employment conditions if the contributions are ceased; the debtor’s yearly income; the debtor’s overall budget; who moved for an order to discontinue payments; and any other constraints on the debtor that make it likely that the pension contributions are reasonably necessary expenses for that debtor. Administrative inconvenience to NYCERS and NYCHA, however, is not to be considered. The impact on the administrator of the fund is irrelevant in determining whether or not the pension contribution is a reasonably necessary expense to an individual debtor.62
[27]

Several courts have held that workers’ compensation awards are projected income for purposes of § 1325(b).63 That workers’ compensation awards are sometimes lump sum rather than in periodic payments and that state law protects most workers’ compensation from the claims of creditors have not inspired departure from the general principle that projected income includes money received by the debtor without regard to its source or exempt character. One court reasoned its way around the exemption language in § 522(c) by holding that even though workers’ compensation payments are exempt, a Chapter 13 debtor must decline to assert the exemption in order to satisfy the test in § 1325(b).64

[28]

The social security, pension and workers’ compensation cases paint an interesting picture of projected disposable income. A majority of the cases conclude that the exempt character of money received by a Chapter 13 debtor is not determinative of whether the money is income for purposes of § 1325(b). Solomon and Stones determine whether pension benefits are included in projected income by focusing on the date of confirmation—if the debtor is receiving benefits at confirmation, then those benefits are income; if the debtor is merely eligible but not receiving benefits, then the debtor cannot be required to demand benefits or to borrow against benefits to fund the plan. Voluntary contributions to a pension or profit-sharing plan during the Chapter 13 case generally do not reduce projected income. Most courts hold that Chapter 13 debtors cannot repay loans from their pension, profit-sharing or retirement plans at the expense of other creditors.

[29]

Many reported decisions include the debtor’s spouse’s income in the budget to calculate projected disposable income even when the spouse is not a debtor in the Chapter 13 case.65 The theory is that the nonfiling spouse’s income is available to defray family expenses, thus freeing a portion of the debtor’s income to fund the Chapter 13 plan. Creditors have argued successfully that it would be unfair to exhaust the debtor’s income paying for household necessities and not count a nonfiling spouse’s income that would remain disposable to the debtor and uncommitted to the plan.

[30]

Section 1325(b)(2) states that disposable income is income “which is received by the debtor and which is not reasonably necessary . . . for the maintenance or support of the debtor or a dependent of the debtor.”66 There is a sense in which income of a nonfiling spouse is not “received by the debtor.” On the other hand, the typical debtor and nonfiling spouse pool their incomes and share the family expenses. The income and expenses of both spouses are scheduled together in the Official Bankruptcy Forms.67

[31]

To calculate the portion of the debtor’s income which is “not reasonably necessary . . . for the maintenance or support of the debtor or a dependent of the debtor,”68 it is appropriate to account for the nonfiling spouse’s income and to allocate to that income some portion of the family expenses. If all family income and expenses are lumped together in a single budget, then the nonfiling spouse will bear family expenses in the ratio of that spouse’s income to the total family income.69 This is a logical way to account for a nonfiling spouse’s income, but not the only way. It might be argued that all of a nonfiling spouse’s income should first be consumed by family expenses thus maximizing the portion of the filing spouse’s income that would be projected disposable income under § 1325(b). There are no reported cases adopting this harsher methodology.

[32]

Accounting for a nonfiling spouse’s income in the projected disposable income test can be complicated and drags the court into considering whether the nonfiling spouse’s lifestyle choices are appropriate. For example, in In re Mathenia,70 the schedules showed net income of $1,089.79. The debtor revealed that his nonfiling spouse had monthly income of $1,052.83. The monthly living expenses for the family were scheduled as $1,982.12. Buried in the expenses was a $439.12 monthly payment for a car driven by the nonfiling spouse. The plan proposed 36 monthly payments of $160.50 for a 7 percent distribution to unsecured claim holders. The car note was scheduled for payment in full by the nonfiling spouse. The bankruptcy court applied a proportional computation that revealed a violation of the disposable income test:

The Trustee contends that debtor is not devoting all his disposable income to the plan. This contention is based upon [trustee’s] assertion that when spouses are both employed, but only one is a debtor in bankruptcy, it may be assumed for purposes of the disposable income computation that each contributes to family living expenses in the same proportion that his or her income bears to the total family income. In this case, the monthly net income of debtor and his spouse represent 51% and 49% . . . . After deduction of the  . . . scheduled family monthly expenses, which includes the $439.12 Rodeo payment, the family’s “disposable income” would be $160.50. Under the Trustee’s formula, the proportionate share of that amount attributable to debtor and his spouse would be $81.86 and $78.64 respectively. It is noted, however, that debtor proposes to devote the entire $160 to Chapter 13 plan payments. The Trustee asserts that the scheduled family monthly expenses must be reduced by the Rodeo payment since it is proposed to be paid entirely by debtor’s spouse. This would reduce the expenses . . . and increase the total family disposable income, before the Rodeo payment, to $599.62, of which $305.81 would be attributable to debtor and $293.81 to his spouse. Obviously, neither debtor nor his spouse would have sufficient disposable income to make the Rodeo payment alone. . . . The Trustee’s conclusion is that debtor would be required to subsidize his spouse by $145.31 per month, which amount should instead be made available through his plan for the benefit of his unsecured creditors.71
[33]

One bankruptcy court reported a decision refusing to include a nonfiling spouse’s postpetition earnings in the disposable income test calculation. Applying Texas community property law, the bankruptcy court in In re Nahat72 first determined that the nonfiling spouse’s postpetition earnings were not property of the Chapter 13 estate because, under Texas law, “[u]nlike that of some other community property jurisdictions, Mrs. Nahat’s earnings are hers to dispose of. They do not become property of the estate.”73 The court then reasoned:

[Section] 1325(b)(1)(B) . . . refers to “debtor’s projected disposable income.” . . . Mrs. Nahat is not a debtor in this case, and § 1325(b)(1)(B) does not apply to her earnings. . . . If a chapter 13 case cannot be commenced involuntarily, it follows that it is contrary to public policy to force a debtor’s spouse to participate on equal terms with the debtor in a plan.74
[34]

Recognizing the potential for abuse, the bankruptcy court posited that good faith would be a limit on the use of the nonfiling spouse’s income:

[T]he Court is mindful that situations may exist requiring a different result. In this case Mrs. Nahat’s income is dedicated to paying [her separate] creditors. To the extent there is a surplus after payment of obligations incurred by her, it is devoted to necessities and satisfaction of the terms of the Plan. Were that surplus being used to underwrite luxuries to be enjoyed by the Debtor and Mrs. Nahat, while the Debtor used chapter 13 for lien stripping, extensions of indebtedness and discharge of unsecured claims, there might exist grounds for dismissal of the case or denial of confirmation on the basis that the chapter 13 filing was in bad faith.75
[35]

The Nahat opinion does not reveal the source of the exclusion from § 1322(b)(1) of a nonfiling spouse’s income that is not property of the Chapter 13 estate. In this respect, Nahat aligns with courts that exclude exempt income from the disposable income test—an outcome not mandated by any particular provision of the Bankruptcy Code. If Mrs. Nahat’s separate debts consume all of her income, the debtor would then be paying all of the family expenses from his income before calculation of disposable income for § 1325(b) purposes. Even if no luxuries are apparent and there is no other evidence of bad faith, the debtor’s creditors in Nahat would then be financing the nonfiling spouse’s repayment of her separate creditors. And if no tentacle of the disposable income test reaches the nonfiling spouse’s separate income, what is different about the good-faith test that it constrains the nonfiling spouse’s spending choices with respect to that same separate income? Nahat is full of odd outcomes.

[36]

Bankruptcy courts have struggled to determine whether future raises and overtime should be included in projected disposable income. Some reported decisions seem to hold that the plan must generically commit all future increases in the debtor’s income to satisfy the requirement that “projected disposable income to be received in the three-year period” is “applied to make payments under the plan.”76 Somewhat more reasonably, one court required the debtors to include overtime in projected disposable income because the debtors earned significant overtime in the past and could reasonably expect to earn overtime during the plan.77 Some courts require the debtor to file periodic earning and expense statements, and the plan must commit the debtor to increases in payments if disposable income increases.78

[37]

Other courts have found that future raises are too speculative if they are not presently guaranteed and need not be included in projected income at confirmation.79 Along these lines, when evidence that the debtor would receive bonuses or raises was “too speculative” to include in projected income, the debtor who received two bonuses after the petition and before confirmation was nonetheless required to include the known bonuses in income to satisfy § 1322(b).80 In a confusing combination of holdings, one court found the likelihood of salary increases “too speculative” to be regarded as projected income but required the debtor to file quarterly earnings and expense statements and required the debtor to amend the plan to commit “50 percent of any net earnings, above and beyond the amount scheduled.”81

[38]

If future increases in income are too speculative to be projected, then the plain language of § 1325(b)(1)(B) does not require the debtor to commit at confirmation to pay those (speculative) increases into the plan. “Projected” would always include the unforeseen if projected means “whatever it turns out to be.”

[39]

Schedule I to Official Bankruptcy Form 6—the schedule in which the debtor lists all income—includes a requirement that the debtor “describe any increase or decrease of more than 10% in any of the above categories anticipated to occur within the year following the filing of this document.”82 Does “anticipated” mean the same thing as projected? When do projected or anticipated changes in income become speculative? Are all speculative increases in income excluded from projected and anticipated income?

[40]

One court suggested this solution to managing speculative wage increases: if the debtor receives wage increases, the plan may be modified on motion of the trustee or an allowed unsecured claim holder.83 But modification after confirmation is not a comprehensive solution to dealing with future wage increases because the disposable income test in § 1325(b) functions poorly, if at all, at modification of a confirmed Chapter 13 plan.84

[41]

One court has confused the concept of projected income still further with the holding that commissions too speculative to be included in the debtor’s income for purposes of the feasibility test in 11 U.S.C. § 1325(a)(6)85 nonetheless are sufficiently concrete to be included in projected disposable income for purposes of § 1325(b).86 The feasibility test in § 1325(a)(6) is worded that the debtor “will be able to make all payments under the plan.”87 It is not obvious why the test for feasibility in § 1325(a)(6) and the test for projected income in § 1325(b) would have different standards when both tests turn on whether future income and expenses will be as represented by the debtor. If the debtor’s right to receive future income is too speculative to satisfy § 1325(a)(6), surely that same income is too speculative to be projected disposable income under § 1325(b).

[42]

Courts that have required the debtor to project future wage increases, no matter how uncertain, do not offer a balancing methodology for projecting decreases in income and do not suggest how the debtor will project future increases in expenses. The court in In re Krull88 arbitrarily required the debtor to commit 50 percent of future wage increases to funding the plan. If reasonable and necessary expenses increase as fast or faster than future wages, the debtor cannot pay more to unsecured claim holders based on any predetermined formula.

[43]

Including future changes in income quickly becomes an administrative nightmare for the Chapter 13 trustee and an expensive problem of monitoring for creditors. Imagine a jurisdiction that interprets projected in § 1325(b) to require that Chapter 13 debtors include all future income changes in the plan. Any such requirement, to be meaningful, must include that all Chapter 13 debtors file periodic reports of income and expenses after confirmation. Changes in expenses have to be included in these reports, else it would not be possible to periodically recalculate disposable income. These postconfirmation reports would probably look something like Schedules I and J to Official Bankruptcy Form 6.89 These schedules are not easily completed by debtors at the filing of the original petition. Multiply the variety of forms, the range of content and the varying quality of information by the number of pending Chapter 13 cases in the district. The volume of paper would be staggering. Will debtors’ counsel be obligated to participate in preparing these periodic reports? What will happen to the cost of a routine Chapter 13 case if debtor’s counsel has to track down and confer with the debtor every six months or every year and prepare (under oath?) reports of income and expenses?

[44]

With each reporting period, the trustee would be obligated to review every pending Chapter 13 case to determine whether income and expenses have adjusted to require a change in contributions to the plan. In jurisdictions with large Chapter 13 programs, this would require hundreds or thousands of additional staff hours in the office of the Chapter 13 trustee. Any creditor that undertakes to monitor the periodic filings of income and expense statements would quickly realize that it is an expensive search for a needle in a haystack: future wage increases for most Chapter 13 debtors will be offset by reasonable increases in expenses; many Chapter 13 debtors will actually experience reductions in disposable income during the life of the plan. There is no good evidence that monitoring income and expenses after confirmation on a program-wide basis is cost effective or will improve the average outcome for creditors in Chapter 13 cases.

[45]

The U.S. Court of Appeals for the Fifth Circuit recognized in the context of a debtor’s expectation of overtime that “projected” is fact bound, and the possibility of future increases in income need not always be included in the plan to satisfy the disposable income test.90 This view leaves the bankruptcy courts with discretion to assess the reality of each debtor’s projections of income. It is consistent with the tests devised by the courts to measure the feasibility of proposed plans under § 1325(a)(6).91

[46]

Agreeing with the Fifth Circuit, the U.S. Court of Appeals for the Ninth Circuit has rejected the argument that projected disposable income means whatever income net of expenses turns out to be. In Anderson v. Satterlee (In re Anderson),92 it was the practice at the § 341 meeting of creditors that the Chapter 13 trustee would request each debtor to sign a “best efforts certification.” The certification was an agreement that the debtor would pay to the Chapter 13 trustee all actual disposable income from month to month. The amount of disposable income would be determined by the trustee based on a periodic review of the debtor’s financial status, with automatic adjustments to the plan. The debtors in Anderson refused to sign the certification and appealed the resulting denial of confirmation.

[47]

The Ninth Circuit sustained the debtors’ refusal to sign the certificate:

[Section] 1325(b)(1)(B) does not require debtors to give such an assurance. Instead, § 1325(b)(1)(B) requires provision for “payment of all projected disposable income” as calculated at the time of confirmation, and we reject the Trustee’s attempt to impose a different, more burdensome requirement on the debtors’ plan as a prerequisite to confirmation. . . . The Trustee’s efforts to force the Andersons to agree to a periodic adjustment to their payments without a court order is inconsistent with the procedures established for modifying a debtor’s plan. . . . Under § 1329, the trustee may request modification of the debtor’s plan. . . . If the debtor or a creditor objects to the modification, the trustee “must bear the burden of showing a substantial change in the debtor’s ability to pay since the confirmation hearing and that the prospect of the change had not already been taken into account at the time of confirmation.” . . . [T]he Trustee asks us to ignore § 1329 and sanction the use of the Certification requirement as a means of vesting the Trustee with the authority to unilaterally adjust the Andersons’ payments without a court order. . . . By providing in § 1329 a mechanism to modify a confirmed plan, Congress plainly did not intend to vest trustees with such unfettered authority.93
[48]

The Ninth Circuit’s view gives appropriate meaning to the word “projected” in § 1325(b). Anderson puts reasonable emphasis on careful calculation of a Chapter 13 debtor’s disposable income at confirmation and does not burden debtors and trustees with the impossible task of constantly adjusting plans with each month’s variation in income or expenses. The Ninth Circuit’s holding—that projected means projected and not “whatever it actually turns out to be”—is a good model for other courts. At least one court of appeals has interpreted the identical language in § 1225(b) to require a Chapter 12 debtor to commit to pay actual disposable income into a Chapter 12 plan.94 Anderson is the better-reasoned decision.

[49]

In some jurisdictions, the Chapter 13 trustee routinely objects to plans that do not commit all income tax refunds to the plan. As one court explained, a tax refund is overwithholding of income taxes—a “virtual savings account” that is appropriately contributed to the plan to satisfy the disposable income test.95 This outcome is consistent with the intent, if not the actual wording, of § 1325(b). The U.S. Court of Appeals for the Tenth Circuit affirmed the holding of its bankruptcy appellate panel that tax refunds to which a Chapter 13 debtor becomes entitled during the first three years of a plan must be accounted for in the disposable income calculation even when a refund is actually received more than three years after the debtor commenced making payments under the plan.96 The Tenth Circuit had no trouble equating the debtor’s entitlement to a tax refund during the third year of the plan with “income to be received” by the debtor in the three-year period after the first payment was due for § 1325(b)(1)(B) purposes. It has also been held that tax refunds after three years after confirmation need not be committed to funding the plan to satisfy the disposable income test.97

[50]

When the debtor correctly anticipates withholding for income taxes, the amount of income “received by” the debtor is greater than when the debtor miscalculates and overwithholds. Requiring the debtor to pay future income tax refunds into the Chapter 13 plan simply adjusts for the (inevitable) miscalculation of withholding.

[51]

On the other hand, income tax refunds are difficult to project at confirmation because the existence or amount of a tax refund is often unknowable even for the current tax year, much less for three to five tax years into the future. Several courts in the Ninth Circuit have applied Anderson to conclude that tax refunds are projected income for § 1325(b) purposes only if there is evidence at confirmation that refunds will be received by the debtor during the plan.98 In the context of a motion to modify the plan after confirmation to allow the debtors to keep tax refunds, one court rejected a best-interests-of-creditors test objection by reasoning that tax refunds unknown at confirmation of the original plan should not affect modification of the plan when the refunds become known after confirmation.99

[52]

The U.S. Court of Appeals for the Sixth Circuit adopted an ambiguous rule of inclusion of postconfirmation tax refunds in projected disposable income. In Freeman v. Schulman (In re Freeman),100 the confirmed plan paid the trustee all income tax refunds during the three-year life of the plan. The debtors claimed an exemption in an expected tax refund of $200 for the year in which the case was filed. The debtors discovered after confirmation that their tax refund would be between $1,200 and $1,500. The debtors moved to amend the confirmed plan to “exempt” the larger than expected tax refund, arguing that more than 97 percent of the refund was attributable to income earned before the petition. The trustee objected, citing § 1325(b) for the proposition that the tax refund was projected disposable income that must be applied to payments under the plan without regard to exemptions. The Sixth Circuit agreed with the trustee:

The plain language of [§ 1325] makes no express or implied reference to the exempt status of income under state law. . . . “Disposable income” under section 1325 is to be interpreted broadly . . . . In this case, as a factual matter, the debtor had specifically identified that tax refunds should go to the plan and made no argument that the funds were needed for “maintenance and support” of the debtor or her dependents. The income therefore qualifies as “projected disposable income” under section 1325.101

But then, without offering rules for decision in the next case, the Sixth Circuit reopened the question whether tax refunds are necessarily included in projected disposable income:

Situations may arise where a debtor did not specifically list tax refunds for inclusion in the plan and those situations would need to be examined on a case-by-case basis to decide whether a tax refund arising from pre-petition income qualified as “projected disposable income.”102
[53]

Gratuitous contributions from family and friends have been excluded from projected disposable income.103 The problem with including gratuitous contributions in projected disposable income is the same as the problem with gratuitous contributions as regular income for eligibility purposes104—the debtor must prove the stability of the source and the likelihood of continuity. There is nothing in the statute to prohibit a finding that gratuitous contributions are included in projected disposable income.

[54]

The same logic should apply on the expense side of the debtor’s budget: when a third party pays expense items that would otherwise fall on the debtor, projected disposable income increases accordingly. For example, the obligation of a cotenant to pay part of a mortgage was included in the debtor’s income for purposes of § 1325(b) when the nondebtor’s partial payment relieved the debtor of an expense.105

[55]

One final aspect of projecting disposable income is the problem of the “underachieving” debtor. Trustees and creditors, trying to squeeze out the maximum projected income, sometimes complain that the debtor is not earning as much as the debtor can. These cases quickly become painful exercises as the objecting creditor tries to prove that the debtor should be earning more money and the debtor is cast in the role of proving as little capacity to earn as possible. In one reported decision, the objecting creditor failed to prove that the debtor should be earning more money when the debtor was working “one of the simplest of service-industry jobs” but the debtor’s physical condition and “vocational profile” demonstrated he was doing the best he could.106 Another court held that the projected disposable income test requires consideration of the debtor’s earning capacity; after finding the debtor physically and mentally capable of earning more money, the court denied confirmation because the debtor appeared lazy.107


 

1  11 U.S.C. § 1325(b)(2).

 

2  11 U.S.C. § 1325(b)(1)(B). In the alternative, the debtor can satisfy the test in § 1325(b)(1)(A) by proposing to pay 100% of the claim of the objecting allowed unsecured claim holder. See § 168.1 [ Payment-in-Full Option ] § 91.7  Payment-in-Full Option.

 

3  Webster’s New Twentieth Century Dictionary 1439 (2d ed. 1983).

 

4  See, e.g., Solomon v. Cosby (In re Solomon), 67 F.3d 1128, 1132 (4th Cir. 1995) (“Projected disposable income typically is calculated by multiplying a debtor’s monthly income at the time of confirmation by 36 months, the normal duration of a Chapter 13 plan, then determining the portion of that income which is ‘disposable’ according to the statutory definition.”); Commercial Credit Corp. v. Killough (In re Killough), 900 F.2d 61 (5th Cir. 1990) (Ordinarily, projected disposable income is determined in two steps: (1) the bankruptcy court must first project the income of the debtor over the next three years. “[T]his task is usually accomplished by multiplying the debtor’s monthly income by 36”; (2) next, the bankruptcy court must determine what amount of the debtor’s projected income will be “disposable.”); In re Crompton, 73 B.R. 800 (Bankr. E.D. Pa. 1987).

 

5  In re Goodrich, 257 B.R. 101 (Bankr. M.D. Fla. 2000).

 

6  In re James, 260 B.R. 498, 515 (Bankr. D. Idaho 2001).

 

7  In re Weiss, 251 B.R. 453 (Bankr. E.D. Pa. 2000).

 

8  See § 35.10 [ Schedules I and J—Income and Expenditures ] § 36.16  Schedules I and J—Income and Expenditures.

 

9  See In re Mattson, 241 B.R. 629 (Bankr. D. Minn. 1999) (Plan fails disposable income test because $1,500 per month is approximately $1,450 per month below the disposable income available based on the debtors’ testimony. Debtors failed to account for family income from part-time work as a Shakley products distributor.); In re Ferrell, 227 B.R. 706 (Bankr. S.D. Ind. 1998) (Debtor who spends $90 a week for 142 weeks on ads for his business but claims to only generate five or six jobs a year at $50 per job has understated his income and cannot satisfy § 1325(b).); In re Martin, 189 B.R. 619 (Bankr. E.D. Va. 1995) (The plan fails disposable income test because debtor mistakenly listed his hourly wage as $14.50 rather than $14.80 and failed to account for mileage reimbursements as a truck driver.).

 

10  See, e.g., “individual with regular income” in 11 U.S.C. § 101(30), discussed in § 8.1 [ What Is Regular Income? ] § 11.1  What Is Regular Income?; entities from whom the debtor “receives income” in 11 U.S.C. § 1325(c), discussed in § 248.1 [ Order to Debtor’s Employer ] § 125.1  Order to Debtor’s Employer.

 

11  See discussion of regular income for eligibility purposes beginning at § 11.1  What Is Regular Income?.

 

12  11 U.S.C. § 1306(a)(2) includes in property of the Chapter 13 estate “earnings from services performed by the debtor after the commencement of the case.” See § 46.1 [ Postpetition Earnings ] § 46.3  Postpetition Earnings. See also § 68.2 [ Additional Protection for Postpetition Property and Income ] § 58.3  Additional Protection for Postpetition Property and Income for discussion of automatic stay and postpetition income.

 

13  See § 9.11 [ Income from Leasing, Selling or Liquidating Assets ] § 12.11  Income from Leasing, Selling or Liquidating Assets.

 

14  See §§ 9.1 [ Self-Employment ] § 12.1  Self-Employment, 31.1 [ Special Information Needs ] § 33.1  Special Information Needs In Business Cases and 57.1 [ Operating a Chapter 13 Debtor Engaged in Business ] § 52.1  Operating a Chapter 13 Debtor Engaged in Business.

 

15  See § 9.9 [ Alimony, Maintenance or Child Support ] § 12.9  Alimony, Maintenance and Child Support.

 

16  See § 8.1 [ What Is Regular Income? ] § 11.1  What Is Regular Income?. See, e.g., In re Minor, 177 B.R. 576, 581–82 (Bankr. E.D. Tenn. 1995) (“Arguably, a lump-sum workers’ compensation settlement award is not considered ‘income’ . . . because it is not regularly or periodically received by the debtor. However, . . . ‘[t]here is nothing in the Code to require that income be regular or periodic for § 1325(b) purposes.’ . . . The debtors have not met the ‘exceptionally heavy’ burden of persuading the court that Congress intended to limit or restrict the statute to only include periodic or regular income in disposable income.”). Contra McDonald v. Burgie (In re Burgie), 239 B.R. 406, 410 (B.A.P. 9th Cir. 1999) (Net proceeds from sale of debtors’ home are not disposable income. “A debtor’s prepetition homestead is a capital asset, not postpetition income. . . . The test is whether the asset in question is an anticipated stream of payments. If it is a stream of payments, the payments must be included in projected income. If the asset is not a stream of payments, it is not included.”).

 

17  See Moen v. Hull (In re Hull), 251 B.R. 726, 731 (B.A.P. 9th Cir. 2000) (“The characterization of Linda Hull’s income as property of the estate or not has no impact on the disposable income analysis here. ‘Projected disposable income’ is not confined to ‘property of the estate.’”); In re Talley, 240 B.R. 22, 23 (Bankr. D. Neb. 1999) (Social security benefits and deferred compensation plan payments are projected disposable income without regard to whether the benefits are property of the estate. “[T]here is no language in Section 1325 from which one can infer that the term ‘disposable income’ is limited to revenue received from property of the estate . . . . Therefore, the status of the property, whether property of the estate, . . . or not property of the estate, which is the source of the revenue, is not relevant for determining whether the revenue received by the debtor should be included in disposable income. . . . In this case, the corpus of the Pebsco Plan, which is an employer-provided deferred compensation plan, . . . may not be property of the estate at all. Once revenue is received from the plan administrator by the debtor, the case law is clear that such revenue should be included in the calculation of disposable income.”); In re Solomon, 166 B.R. 832, 841 (Bankr. D. Md. 1994) (“There is also nothing in 11 U.S.C. § 1325(b) that requires the source of income that is taken into account in determining disposable income to be property of the bankruptcy estate.”), rev’d on other grounds, 67 F.3d 1128 (4th Cir. 1995).

 

18  See § 9.11 [ Income from Leasing, Selling or Liquidating Assets ] § 12.11  Income from Leasing, Selling or Liquidating Assets.

 

19  See § 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3  Reasonably Necessary for Maintenance or Support.

 

20  See §§ 254.1 [ Application of Tests for Confirmation ] § 126.2  Application of Tests for Confirmation, 255.1 [ Does Disposable Income Test Apply? ] § 126.3  Does Disposable Income Test Apply?, 263.1 [ To Sell or Refinance Property of the Estate ] § 127.6  To Sell or Refinance Property of the Estate and 266.1 [ To Increase Payments to Creditors ] § 127.9  To Increase Payments to Creditors.

 

21  See § 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3  11 U.S.C. § 1327(b): Vesting Effect on Property of Estate.

 

22  In re Moore, 188 B.R. 671, 676 (Bankr. D. Idaho 1995) (Debtor is entitled to insurance proceeds in excess of balance of allowed secured claim at destruction of car after confirmation. “Essentially the payment of insurance proceeds for the Ford Explorer was no more than the conversion of the Debtors’ property from one form to another. Had the Debtors simply traded the Ford Explorer for a similar vehicle, the Trustee would not be contending that the new vehicle was income. The fact that in this case the vehicle was forcibly converted into cash does not change this result. The mere conversion of the debtors’ pre-conversion assets from one form to another (even cash) does not produce income.” In re Boothe, 167 B.R. 943 (Bankr. D. Colo. 1994), is wrongly decided. “Under Boothe, any cash received during the pendency of the plan would be considered income. I believe this would undercut the rational [sic] of Chapter 13. If a debtor meets all the requirements of sections 1325(a) and (b), the debtor may keep all prepetition assets (whether exempt or nonexempt).”).

 

23  In re Baker, 194 B.R. 881, 885 (Bankr. S.D. Cal. 1996) (At modification after confirmation, proceeds of life insurance on codebtor who died after confirmation are not projected disposable income; however, interest earned on proceeds is. Plan was confirmed in 1994. Codebtor passed away in 1995. Surviving codebtor moved to modify plan to reduce payments and disclosed the life insurance proceeds totaling $53,000. Citing In re Stones, 157 B.R. 669 (Bankr. S.D. Cal. 1993), Hagel v. Drummond (In re Hagel), 184 B.R. 793 (B.A.P. 9th Cir. 1995), aff’d, 184 B.R. 793 (B.A.P. 9th Cir. 1995), In re Tomasso, 98 B.R. 513 (Bankr. S.D. Cal. 1989), and Solomon v. Cosby (In re Solomon), 67 F.3d 1128 (4th Cir. 1995), “[f]rom these cases we distill a simple and workable test: If the exempt asset in question is an anticipated stream of payments, it is included in projected income; if the exempt asset is other than a stream of payments, it is not included. In this case, the Debtor satisfies the ‘projected disposable income’ test by including in her income the Interest generated by the Insurance Proceeds. She will not be required to invade the Proceeds to fund the Plan.”). Accord McDonald v. Burgie (In re Burgie), 239 B.R. 406, 410 (B.A.P. 9th Cir. 1999) (“The test is whether the asset in question is an anticipated stream of payments. If it is a stream of payments, the payments must be included in projected income. If the asset is not a stream of payments, it is not included.”).

 

24  239 B.R. 406 (B.A.P. 9th Cir. 1999).

 

25  See § 266.1 [ To Increase Payments to Creditors ] § 127.9  To Increase Payments to Creditors for discussion of modification after confirmation to increase payments to creditors.

 

26  See § 255.1 [ Does Disposable Income Test Apply? ] § 126.3  Does Disposable Income Test Apply?. Even if § 1325(b) does apply at modification after confirmation, it would not apply on the facts in McDonald v. Burgie (In re Burgie), 239 B.R. 406 (B.A.P. 9th Cir. 1999), when the trustee moved to modify the plan and the debtor objected.

 

27  239 B.R. at 409–12.

 

28  See § 161.1 [ Exemption Issues ] § 90.2  Exemption Issues.

 

29  98 B.R. 513 (Bankr. S.D. Cal. 1989).

 

30  167 B.R. 146 (S.D. Ill. 1994).

 

31  167 B.R. at 147–48. Accord In re Baines, 263 B.R. 868 (Bankr. S.D. Ill. 2001) (Applying Watters v. McRoberts (In re Watters), 167 B.R. 146 (Bankr. S.D. Ill. 1994), proceeds of prepetition lawsuit are disposable income available to fund Chapter 13 plan.); In re Pendleton, 225 B.R. 425, 426–27 (Bankr. E.D. Ark. 1998) (Applying Stuart v. Koch (In re Koch), 109 F.3d 1285 (8th Cir. 1997), proceeds from personal injury lawsuit are projected disposable income notwithstanding that debtor claimed proceeds exempt. Confirmed plan provided that the debtor “must pay all disposable income into the plan for the benefit of unsecured creditors for no less than 36 months.” Schedules revealed personal injury lawsuit, and debtor claimed exemption in proceeds that was allowed. After confirmation, lawsuit was settled, and Chapter 13 trustee received approximately $30,000. “In re Koch is dispositive here. Its holding dictates that the exempt proceeds from the Debtors’ personal injury settlement be characterized as disposable income pursuant to section 1325(b)(2). The fact that the Debtors previously claimed the proceeds as exempt does not invoke the restrictions of res judicata, estoppel or law of the case because the Debtors’ confirmed plan provided for funding the plan with all disposable income, despite the exempt status of such income.” Court rejected on evidentiary grounds debtors’ arguments that proceeds were necessary for dental work, replacement of an old car, the down payment on a home and other expenses.); Gaertner v. Claude (In re Claude), 206 B.R. 374, 380–81 (Bankr. W.D. Pa. 1997) (Although a portion of personal injury settlement proceeds is exempt under § 522(d)(11)(D), “[w]e conclude that § 1325(b) does not qualify income with reference to its exempt status. Thus, the Proceeds are only exempt to the extent reasonably necessary for the support of the Debtors or their dependents, a factual determination which must be resolved by an evidentiary hearing.”). But see In re Ferretti, 203 B.R. 796 (Bankr. S.D. Fla. 1996) (At modification after confirmation, settlement proceeds from prepetition automobile accident are not projected disposable income because debtor claimed the proceeds exempt and no one objected.).

 

32  See § 161.1 [ Exemption Issues ] § 90.2  Exemption Issues.

 

33  See § 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3  Reasonably Necessary for Maintenance or Support. See, e.g., Gaertner v. Claude (In re Claude), 206 B.R. 374 (Bankr. W.D. Pa. 1997) (Personal injury settlement proceeds are projected disposable income, but portion of proceeds reasonably necessary for the support of the debtors or their dependents determined after an evidentiary hearing would be deducted to determine amount that must be paid into plan.).

 

34  11 U.S.C. § 522(c) (with exceptions not relevant). See §§ 49.1 [ Available and Important in Chapter 13 Cases ] § 48.1  Available and Important in Chapter 13 Cases and 49.2 [ Timing and Procedure ] § 48.4  Timing and Procedure.

 

35  199 B.R. 370 (Bankr. N.D. Ill. 1996).

 

36  Application of the projected disposable income test at modification after confirmation is discussed in § 255.1 [ Does Disposable Income Test Apply? ] § 126.3  Does Disposable Income Test Apply?. In re Kerr, 199 B.R. 370 (Bankr. N.D. Ill. 1996) does not explain why § 1325(b) is at issue on a trustee’s motion to modify the plan.

 

37  199 B.R. at 373–74. Accord In re Martinez, 293 B.R. 387 (Bankr. N.D. Tex. 2003) (Exempt proceeds from settlement of personal injury claim are not property of the Chapter 13 estate; use of proceeds to pay personal injury counsel and medical providers is not subject to bankruptcy court approval or control.); In re Graham, 258 B.R. 286, 292–93 (Bankr. M.D. Fla. 2001) (On the trustee’s postconfirmation motion to increase payments to unsecureds, the proceeds of the settlement of a postpetition automobile accident are not disposable income because the debtors’ one-dollar exemption in the cause of action conclusively exempts the property for all purposes, including § 1325(b). “The Court finds that the instant case fits squarely into the rule of [Gamble v. Brown (In re Gamble), 168 F.3d 442 (11th Cir. 1999)], and therefore that the personal injury settlement may not be treated as ‘disposable income.’ Debtors properly claimed an exemption in the personal injury claim in the Addendum to Schedule C. The Rule 4003(b) period passed without objection. Thus, under § 522(l) and [Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992)], the personal injury claim and any proceeds therefrom became conclusively exempt, no matter how viable the original claim of exemption. Under the controlling precedent of Gamble, § 522(c) and Taylor operate to protect the conclusively exempt personal injury settlement from liability to creditors under Chapter 13 and Chapter 7. Therefore, the exempt personal injury settlement may not be applied to Debtors’ Plan as ‘disposable income,’ but is released completely into the custody, use and enjoyment of Debtors without qualification.”); In re Hunton, 253 B.R. 580, 582 (Bankr. N.D. Ga. 2000) (Citing Gamble v. Brown (In re Gamble), 168 F.2d 442 (11th Cir. 1999), proceeds from settlement of personal injury accident that were exempted without objection are not included in projected disposable income. Debtors disclosed an interest in a personal injury accident, and no one objected. After confirmation of 1% plan, debtors settled the injury claim for less than the amount of the exemption. Trustee objected to motion to approve settlement. In Gamble, “the Eleventh Circuit stated in unequivocal terms that ‘[o]nce the property is removed from the estate [through exemption], the debtor may use it for his own.’ . . . To subject the Debtors’ exempt settlement proceeds to the claims of creditors, by treating the proceeds as ‘disposable income,’ would conflict with this Court’s reading of Gamble. Accordingly, the settlement proceeds which the Debtors exempted during the course of this bankruptcy proceeding do not constitute ‘disposable income’ under § 1325(b).”); In re Ferretti, 203 B.R. 796, 800 (Bankr. S.D. Fla. 1996) (At modification after confirmation, settlement proceeds from prepetition automobile accident are not projected disposable income because debtor claimed the proceeds exempt and no one objected. “The clear language of 11 U.S.C. § 522(c) protects exempt property, regardless of form, from pre-petition debts. . . . To include exempt property within the parameters of 11 U.S.C. § 1325(b)(2) directly conflicts with §  522(c). As Debtor herein has claimed the full value of the Auto Accident Claim proceeds as exempt and no objections to the claim were filed, the property is deemed exempt. The Debtor is entitled to the balance of the undistributed proceeds of the Auto Accident Claim, even though auto accident claim proceeds are not entitled to exemption under existing law.”).

 

38  See Taylor v. United States (In re Taylor), 212 F.3d 395, 396 (8th Cir. 2000) (On a motion to dismiss a Chapter 7 case under § 707(b), in a hypothetical Chapter 13 case income from an ERISA-qualified pension plan is projected disposable income for § 1325(b)(2)(A) and (B) purposes. “The Taylors argue that ERISA’s anti-alienation provisions, see 29 U.S.C. § 1056(d)(1), exempts the pension plan from the disposable income calculation. The Taylors base their argument on Patterson v. Shumate, 504 U.S. 753, 112 S. Ct. 2242, 119 L. Ed. 2d 519 (1992). In Patterson, the Supreme Court held that ERISA’s anti-alienation provision constituted an enforceable transfer restriction in a proceeding instituted under 11 U.S.C. § 541(c)(2). . . . The fact that a pension is exempt from the reach of creditors does not preclude a bankruptcy court from finding that the pension is also disposable income for purposes of Chapter 13. The question of whether income from a pension is exempt from creditors is a wholly independent inquiry from the question whether the pension income is reasonably necessary to support the debtor. . . . [N]othing in the language of Chapter 13 prevents the funding of a Chapter 13 plan with exempt income.”); Stuart v. Koch (In re Koch), 109 F.3d 1285, 1289 (8th Cir. 1997) (For § 707(b) purposes, a debtor’s workers’ compensation benefits, though exempt under state law, are projected disposable income notwithstanding § 522(c). “Including exempt income in disposable income does not make exempt property ‘liable’ to Chapter 13 unsecured creditors. Chapter 13 relief is at the option of the debtor. See § 1307(a), (b). The disposable income limitation in § 1325(b) simply defines the terms upon which Congress has made the benefits of Chapter 13 available.”); In re Sohn, 300 B.R. 332, 336 (Bankr. D. Minn. 2003) (Applying Stuart v. Koch (In re Koch), 109 F.3d 1285 (8th Cir. 1997), tax refunds on account of earned income credit and the like though exempt are income for purposes of § 1325(b). “[E]xcess income available beyond those allowed expenses constitutes disposable income within the meaning of § 1325(b) and must be contributed to the plan, regardless of whether it is exempt. . . . The Court in Koch also went on to discuss and reject the argument that ‘treating exempt income as Chapter 13 disposable income violates the mandate in § 522(c) that exempt property “is not liable” for any pre-petition debt. . . . Including exempt income in disposable income does not make exempt property “liable” to Chapter 13 unsecured creditors. . . . Chapter 13 relief is at the option of the debtor. . . . Chapter 13 relief remains wholly voluntary. . . . The disposable income limitation in § 1325(b) simply defines the terms upon which Congress has made the benefits of Chapter 13 available.’”); In re Gebo, 290 B.R. 168, 170 (Bankr. M.D. Fla. 2002) (Exempt workers’ compensation proceeds are disposable income. “[T]he vast majority of courts hold that even exempt property must be included ‘disposable income’ devoted to a Chapter 13 plan. . . . [T]his Debtor has a choice and can elect to seek relief under chapter 7 and keep the funds allowed as exempt, or seek relief under chapter 13 and use its liberal and remedial provisions to save the family home from loss through foreclosure sale. But if that is the Debtor’s choice, it is unfair and grossly inequitable and smacks of bad faith to immunize exempt funds by excluding them from the ‘disposable income test.’”); In re Florida, 268 B.R. 875, 880–81 (Bankr. M.D. Fla. 2001) (On trustee’s motion to modify plan after confirmation, proceeds of life insurance on debtor who died postpetition are projected disposable income notwithstanding § 522(c). “A majority of courts have held § 522(c) does not render income from exempt property immune from treatment as disposable income.”); In re Stephens, 265 B.R. 335, 337–38 (Bankr. M.D. Fla. 2001) (Workers’ compensation proceeds claimed exempt by the debtors but objected to by the trustee are projected disposable income subject to § 1325(b) analysis. Trustee objected to confirmation of plan that did not contribute workers’ compensation proceeds. Debtors amended Schedule C to claim the proceeds exempt. Trustee objected to amended exemptions. “While the worker’s compensation proceeds may be exempt pursuant to Florida Statutes, the Court holds that they are nonetheless subject to the disposable income analysis. . . . The Court notes that it is not faced with the issue of whether ‘conclusively exempted’ property is subject to the disposable income analysis. It is clear that property which is claimed as exempt and to which no timely objection is filed is not subject to the disposable income test.”); In re Baines, 263 B.R. 868 (Bankr. S.D. Ill. 2001) (Proceeds of prepetition lawsuit and workers’ compensation are disposable income.); In re Tolliver, 257 B.R. 98 (Bankr. M.D. Fla. 2000) (Distinguishing Gamble v. Brown (In re Gamble), 168 F.3d 442 (11th Cir. 1999), and In re Ferretti, 203 B.R. 796 (Bankr. S.D. Fla. 1996), at modification after confirmation, Chapter 13 trustee can capture proceeds of workers’ compensation suit because the debtor did not schedule the lawsuit and did not exempt the proceeds under § 522(c).); In re Turpen, 218 B.R. 908, 915 (Bankr. N.D. Iowa 1998) (Plan that proposes to pay unsecured claim holders from liquidation of nonexempt assets fails disposable income test. “[T]he income from liquidating exempt assets would be considered in evaluating the plan under the disposable income test. Stuart v. Koch (In re Koch), 109 F.3d 1285, 1289 (8th Cir. 1997).”).

 

39  See § 8.1 [ What Is Regular Income? ] § 11.1  What Is Regular Income?.

 

40  See below in this section and see § 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 and § 12.9  Alimony, Maintenance and Child Support.

 

41  See § 198.1 [ Able to Make Payments and Comply with Plan ] § 111.1  Able to Make Payments and Comply with Plan for discussion of the feasibility test for confirmation.

 

42  153 B.R. 809 (Bankr. N.D. Ill. 1993).

 

43  153 B.R. at 815–16. Accord Taylor v. United States (In re Taylor), 212 F.3d 395, 396 (8th Cir. 2000) (On a motion to dismiss a Chapter 7 case under § 707(b), in a hypothetical Chapter 13 case income from an ERISA-qualified pension plan is projected disposable income for § 1325(b)(2)(A) and (B) purposes. “The Taylors argue that ERISA’s anti-alienation provisions, see 29 U.S.C. § 1056(d)(1), exempts the pension plan from the disposable income calculation. The Taylors base their argument on Patterson v. Shumate, 504 U.S. 753, 112 S. Ct. 2242, 119 L. Ed. 2d 519 (1992). In Patterson, the Supreme Court held that ERISA’s anti-alienation provision constituted an enforceable transfer restriction in a proceeding instituted under 11 U.S.C. § 541(c)(2). . . . The fact that a pension is exempt from the reach of creditors does not preclude a bankruptcy court from finding that the pension is also disposable income for purposes of Chapter 13. The question of whether income from a pension is exempt from creditors is a wholly independent inquiry from the question whether the pension income is reasonably necessary to support the debtor. . . . [N]othing in the language of Chapter 13 prevents the funding of a Chapter 13 plan with exempt income.”); In re Talley, 240 B.R. 22, 23 (Bankr. D. Neb. 1999) (Social security benefits and deferred compensation plan payments are projected disposable income whether the benefits are property of the estate or are exempt property. “[T]here is no language in Section 1325 from which one can infer that the term ‘disposable income’ is limited to revenue received from property of the estate or non-exempt income. . . . Therefore, the status of the property, whether property of the estate, but exempt, or not property of the estate, which is the source of the revenue, is not relevant for determining whether the revenue received by the debtor should be included in disposable income. . . . In this case, the corpus of the Pebsco Plan, which is an employer-provided deferred compensation plan, may be exempt property or may not be property of the estate at all. Once revenue is received from the plan administrator by the debtor, the case law is clear that such revenue should be included in the calculation of disposable income.”); In re Cornelius, 195 B.R. 831, 835 (Bankr. N.D.N.Y. 1995) (“Social Security Income, while exempt under state law, is to be incorporated in any projections of future income for purposes of determining disposable income. . . . Social Security Income received by the Debtor on behalf of her minor daughter is properly included in the Debtor’s calculation of disposable income.”); In re Hagel, 171 B.R. 686, 688 (Bankr. D. Mont. 1994) (Citing In re Schnabel, 153 B.R. 809 (Bankr. N.D. Ill. 1993), plan fails § 1325(b)(1)(B) because the debtor omitted $914 per month in exempt social security disability income. “While [42 U.S.C. § 407(a)] may make social security benefits not subject to attachment, levy, or garnishment, or to the operation of any bankruptcy or insolvency law, it must be remembered that these Debtors voluntarily seek adjustment of debts under Chapter 13. In order to enjoy the benefits of Chapter 13 they must satisfy its requirements, and may not justify the failure to satisfy the confirmation requirements of § 1325 simply by invoking § 407(a). . . . Section 1322(b)(8) provides that a plan may ‘provide for the payment of all or part of a claim against the debtor from property of the estate or property of the debtor.’ . . . [T]he Debtors receive $914 per month in exempt social security disability income [and] may use that income to pay for their living expenses as it is intended, thus freeing their nonexempt income to make payments under the Plan.”), aff’d, 184 B.R. 793, 796–98 (B.A.P. 9th Cir. 1995) (“Section 1325(b) does not qualify income by reference to its exempt status. . . . The Debtors have not met their burden to show that in enacting Section 1325(b)(2), Congress implicitly assumed that disposable income refers to non-exempt income only. . . . [I]t would be more reasonable to assume that Congress meant to include exempt income in the definition of disposable income, so as to prevent a debtor from sheltering exempt income away from creditors when the debtor otherwise has sufficient income to meet his or her basic needs. . . . [I]ncluding social security benefits in the disposable income calculation does not conflict with the objective underlying 42 U.S.C. § 407. . . . Because Chapter 13 is a wholly voluntary proceeding, the debtor’s benefits will not be seized in any legal process against the debtor unless and except to the extent that the debtor so desires.”).

 

44  166 B.R. 832 (Bankr. D. Md. 1994), rev’d, 67 F.3d 1128 (4th Cir. 1995).

 

45  166 B.R. at 844.

 

46  166 B.R. at 841–45.

 

47  Solomon v. Cosby (In re Solomon), 67 F.3d 1128, 1132 (4th Cir. 1995). Accord In re Smith, 222 B.R. 846, 858–61 (Bankr. N.D. Ind. 1998) (Projected disposable income does not include distributions under an ERISA-qualified pension and profit-sharing plan that the debtor elects not to receive in cash. One of the debtors was entitled to cash distributions from a profit-sharing plan but elected in the current year to reinvest the distribution rather than take it in cash. Applying Patterson v. Shumate, 504 U.S. 753, 112 S. Ct. 2242, 119 L. Ed. 2d 519 (1992), “the anti-alienation provisions of the Profit Sharing Plan are enforceable until Mrs. Smith actually receives the funds held in trust for her benefit. . . . [M]onies held in the Profit Sharing Plan . . . are not property of the debtors’ estate. In addition, this court holds that undisbursed or deferred benefits are not ‘disposable income’ to the debtors within the meaning of § 1325(b)(1)(B). . . . In the event Mrs. Smith receives a cash distribution from the Profit Sharing Plan during the term of the amended plan, this court will require the debtors to devote the net proceeds of the distribution (after taxes and penalties) to make plan payments to creditors. . . . The Trustee argues that this court should require Mrs. Smith to take future benefits under the Profit Sharing Plan in the form of a cash distribution . . . . The court, however, finds that the protections of ERISA preclude the relief which the Trustee seeks. Just as a court cannot force a debtor to withdraw or borrow pension or retirement monies to fund a Chapter 7 distribution or Chapter 13 plan, the court holds as a matter of law that it cannot require Mrs. Smith to elect to take her benefits under the Profit Sharing Plan in the form of a cash distribution. . . . Mrs. Smith’s election to defer the income to which she would have been entitled this year under the Profit Sharing Plan . . . does not violate the disposable income test of § 1325(b)(1)(B). . . . Mrs. Smith’s decision to defer her benefits under the Profit Sharing Plan . . . is clearly distinguishable from the situation where a debtor voluntarily elects to contribute a portion of his or her income to a retirement or 401(k) savings plan. . . . In the latter scenario, the benefit which the debtor elects to defer is income at the time of the transfer. The income is the property of the debtor’s estate and is subject to the disposable income test of § 1325(b)(1)(B) at the time of the transfer.”); In re Short, 176 B.R. 886, 889 (Bankr. S.D. Ind. 1995) (Distinguishing In re Solomon, 166 B.R. 832 (Bankr. D. Md. 1994) [later reversed by Fourth Circuit], 33-year-old debtor with $17,000 in an exempt pension plan is not required by the disposable income test to withdraw funds and suffer statutory penalties, notwithstanding that the objecting creditor holds a claim for embezzlement that would be nondischargeable in a Chapter 7 case. “Mrs. Short is 33 years old and to gain access to the pension proceeds would require her to pay a 10% penalty. . . . This fact is a key distinction. . . . [T]he Court finds Solomon to be inapplicable. . . . Debtors’ failure to apply any or all of the $17,000.00 pension payout to their Chapter 13 Plan does not violate the ‘disposable income test’ of § 1325(b)(1)(B) because Mrs. Short is not eligible to receive income from the qualified retirement account without penalty.”). See also Education Assistance Corp. v. Zellner, 827 F.2d 1222 (8th Cir. 1987) (Affirms without discussion bankruptcy court conclusion that $6,000 lump sum payment from liquidation of debtor’s retirement fund during Chapter 13 case was not disposable income under § 1325(b)(1)(B).).

 

48  157 B.R. 669 (Bankr. S.D. Cal. 1993).

 

49  366 U.S. 213, 81 S. Ct. 1052, 6 L. Ed. 2d 246 (1961).

 

50  157 B.R. at 670.

 

51  157 B.R. at 670–71.

 

52  See § 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3  Reasonably Necessary for Maintenance or Support.

 

53  66 F.3d 775 (6th Cir. 1995).

 

54  66 F.3d at 777. Accord In re Nation, 236 B.R. 150, 152–55 (Bankr. S.D.N.Y. 1999) (Mandatory payroll deductions for pension contributions and repayment of pension loans are projected disposable income; supremacy clause supports order that pension contributions and loan repayments cease during Chapter 13 case. “[T]he great majority of courts have held under Section 1325(b) that funds contributed to savings or pension plans constitute ‘disposable income’ that must be paid to creditors under a plan if the plan is to be confirmed. . . . [T]he same statutory and equitable analysis applies to a debtor’s repayment to a savings or pension plan of money ‘borrowed’ from the plan. The Second Circuit has stated that when a person ‘borrows’ from his own pension account, this does not give rise to a true ‘loan’ in the sense of a legally enforceable debt or claim. [New York City Employees Retirement System v. Villarie, 648 F.2d 810 (2d Cir. 1981).] . . . [S]everal decisions have held that contributions to pension plans are to be included in the calculations of disposable income ‘as long as they are not mandatory.’ . . . [I]t is by no means clear that the debtor’s pension contribution and repayments are ‘mandatory’ in any material, consequential sense. Nevertheless, the [New York] regulations on their face do require the payroll deductions, and it appears that Respondents deduct the amount in question from the debtor’s paycheck irrespective of the debtor’s wishes . . . . The statute and regulations at issue directly conflict with the Bankruptcy Code’s requirement that all property listed under Sections 541 and 1306 be included as property of the estate, as well as Section 1325’s requirement that all disposable income be included in the plan. . . . The Supremacy Clause requires that state statutes and regulations be preempted by the Bankruptcy Code . . . . Preemption is appropriate in this instance and the pension contribution deductions must be disallowed and the money previously deducted for them included in the debtor’s disposable income.”); In re Jaiyesimi, 236 B.R. 145, 148–49 (Bankr. S.D.N.Y. 1999) (Pension loan repayments are projected disposable income. “The Second Circuit has determined in the case of [New York City Employees Retirement System v. Villarie,] 648 F.2d 810 (2d Cir. 1981), that ‘the debtor’s obligation to repay their retirement loan is not a “debt” which gives rise to payment.’” That there may be tax consequences if debtors fail to repay the pension loans does not change the result because “the repayment of pension loans must be considered disposable income . . . ‘to hold otherwise would be to convey a message to debtors contemplating bankruptcy that they may borrow against their retirement funds pre-petition and then insulate the repayment of those monies from their creditors post-petition.’”), rev’d on other grounds sub nom. New York City Employees’ Retirement Sys. v. Sapir (In re Taylor), 243 F.3d 124 (2d Cir. 2001); In re Gilliam, 227 B.R. 849, 851 (Bankr. S.D. Ind. 1998) (Repayment of pension plan loan is included in projected disposable income and is not reasonably necessary for the support of the debtor, citing Harshbarger v. Pees (In re Harshbarger), 66 F.3d 775 (6th Cir. 1995), and rejecting In re Buchferer, 216 B.R. 332 (Bankr. E.D.N.Y. 1997). Court not moved by evidence that discharge of $38,000 retirement account debt would create income tax liability of $1,596. Court rejected debtors’ proposal to extend plan beyond three years to maintain the percentage to unsecured claim holders and repay the pension plan loan.); In re Anes, 216 B.R. 514 (Bankr. M.D. Pa. 1998) (Mandatory repayment of pension “borrowings” is not an appropriate expense for purposes of disposable income test.), aff’d, 195 F.3d 177, 179–82 (3d Cir. 1999) (Citing Harshbarger v. Pees (In re Harshbarger), 66 F.3d 775 (6th Cir. 1995), “[t]he payments, even if classified as debt payments, therefore, will increase their retirement benefits rather than repay the retirement systems or ensure the viability of either pension system. In effect, the payments are contributions to the Debtors’ retirement accounts. Voluntary contributions to retirement plans, however, are not reasonably necessary for a debtor’s maintenance or support and must be made from disposable income. . . . ‘[a]lthough investments may be financially prudent, they certainly are not necessary expenses for the support of the debtors or their dependents. Investments of this nature are therefore made with disposable income; disposable income is not what is left after they are made.’ Debtors’ proposed payments, regardless of their financial prudence, must be understood as being made out of ‘disposable income’ under the terms of their proposed plans.” (internal citations omitted)); In re Fulton, 211 B.R. 247, 256–64 (Bankr. S.D. Ohio 1997) (On court’s own motion, Chapter 13 debtors cannot repay loans to retirement plans in full and less than 100% to unsecured claim holders and satisfy good faith. “Having determined that a bankruptcy court has the independent authority to consider the standards under § 1325(b) in analyzing whether a debtor’s proposed plan comports with § 1325(a)(3)’s good faith requirement, we believe also that the Court is under an affirmative duty to ensure that the plans comply with the [Harshbarger v. Pees (In re Harshbarger), 66 F.3d 775 (6th Cir. 1995),] doctrine. . . . In each of the Chapter 13 plans presently before the Court, the debtors are proposing to pay a small dividend to unsecured creditors while concurrently repaying funds borrowed from their pension accounts at 100%. As such, each plan violates principles espoused in Harshbarger. . . . The plans before this Court fail to provide for submission of a satisfactory portion of the debtors’ disposable income towards repayment of unsecured creditors to satisfy Harshbarger and § 1322(a)(1). The debtors are attempting to deduct from future income an amount in order to repay their retirement loans at 100%, which under both the statute and Harshbarger falls under the supervision and control of the Trustee for execution of the plan.” Tax implications of failing to repay the debtors’ pension plan loans are “equal to only a percentage of the unpaid retirement loan and are not equal to the total amount the debtors are seeking authorization to repay to their pension plans.” That debtors propose to extend their payments beyond 36 months does not support a finding of “good faith” sufficient to disregard Harshbarger. Court rejects argument that retirement loans are secured debt: “What the pension plans possess, as a prerequisite for the exemption under ERISA, are rights to offset funds held in a debtor’s retirement account to satisfy a promissory note that is in default, and nothing more. This is the precise transaction contemplated by the legislative history of subsection 101(12), which makes it analogous to a loan on an insurance policy, and thus a transaction that is excluded from the definition of a debt under the Code. . . . Absent the existence of a right of repayment, there can be no ‘claim’ and thus, no ‘debt.’ The pension plan administrators have no right to sue any of the debtors for the outstanding balances on the loans . . . . [T]he plans do not possess a claim against any of the debtors and, thus, the funds borrowed by the debtors from their own pension accounts do not constitute debts within the meaning of the bankruptcy laws. . . . When a debtor borrows money from his retirement account, he is, in essence, borrowing money from himself. The debtor is in no position to assert a right of payment against himself to establish a ‘claim’ under the Bankruptcy Code.”); In re Delnero, 191 B.R. 539, 543–44 (Bankr. N.D.N.Y. 1996) (Deductions for repayment of loans from a retirement plan that can be stopped by a bankruptcy court order are projected disposable income. “[I]n connection with the repayment of the two loans from the Retirement Account, . . . the Debtors provided the Court with a letter from A. Delnero’s employer, . . . stating that repayment was mandatory and that an employee (emphasis added) cannot make a request to stop the payroll deductions. . . . While the letter indicates that an employee cannot make a request to stop the deductions, the Court is not precluded from ordering the employer to cease said deductions. . . . [T]hat the Debtors may incur certain tax liability if the employer is required to cease making the deductions does not alter the Court’s position that the deductions for the repayment of the loans are to be included in the Debtors’ disposable income. . . . Debtors’ obligation to repay the loans is not a ‘debt.’ . . . The loans ‘actually constitute a use of the borrowers’ own contributions, rather than a lending of additional funds.’ . . . The Court concludes, as did the bankruptcy court in [Harshbarger v. Pees (In re Harshbarger), 66 F.3d 775 (6th Cir. 1995),] that the deductions for repayment of the two loans to the Retirement Account are also to be included in the Debtors’ disposable income.”); In re Goewey, 185 B.R. 444 (Bankr. N.D.N.Y. 1995) (Payroll deduction of $121.33 to repay a “retirement loan” from the New York State and Local Employees Retirement System is projected disposable income. The obligation to repay the retirement loan is not a “debt” because it is a use of the debtors’ own contributions, and the retirement plan’s sole remedy is to offset the amount withdrawn against future benefits. State law permits the debtor to discontinue the payroll deductions, and repayment of the amount withdrawn is not a condition of employment.); In re Scott, 142 B.R. 126 (Bankr. E.D. Va. 1992) (Projected disposable income includes voluntary wage assignment intended to repay the debtor’s prepetition withdrawal from an ERISA-qualified pension plan. Future earnings of the debtor are property of the estate, and the debtor’s voluntary wage assignment takes out of the bankruptcy estate money that would otherwise be available for payment of unsecured claim holders under § 1325(b).).

 

55  216 B.R. 332 (Bankr. E.D.N.Y. 1997).

 

56  See New York City Employees Ret. Sys. v. Villarie, 648 F.2d 810 (2d Cir. 1981).

 

57  216 B.R. at 335–44. See also In re McDonald, 222 B.R. 69, 76 (Bankr. E.D. Pa. 1998) (Although there is merit to the holding in In re Buchferer, 216 B.R. 332 (Bankr. E.D.N.Y. 1997), that repayment of a retirement plan is a debt that can be necessary to the maintenance or support of a debtor in a Chapter 13 case, evidence here failed to establish the kind of retirement plan, whether the loans were secured and what rights the plan administrator had against the debtor. “Without evidence that the Debtors’ monthly repayments to loans from their retirement plans are reasonably necessary expenses or that they are debts subject to a specific security interest, there is no basis upon which to justify excluding these expenses from the Debtors’ disposable income.”).

 

58  See § 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3  Reasonably Necessary for Maintenance or Support.

 

59  See, e.g., In re Bayless, 264 B.R. 719, 720 (Bankr. W.D. Okla. 1999) (“[C]ontributions to a voluntary retirement program . . . are part of Debtors’ disposable income.”); In re Nation, 236 B.R. 150, 152–55 (Bankr. S.D.N.Y. 1999) (“[T]he great majority of courts have held under Section 1325(b) that funds contributed to savings or pension plans constitute ‘disposable income’ that must be paid to creditors under a plan if the plan is be confirmed. . . . [S]everal decisions have held that contributions to pension plans are to be included in the calculations of disposable income ‘as long as they are not mandatory.’”), probably overruled by New York City Employees’ Retirement Sys. v. Sapir (In re Taylor), 243 F.3d 124 (2d Cir. 2001).

 

60  In re Davis, 241 B.R. 704, 707–09 (Bankr. D. Mont. 1999) (Mandatory deductions for retirement contributions are not projected disposable income. Debtor worked for county. Payroll deductions included $142 per month to Montana Public Employees Retirement System. Citing In re Nation, 236 B.R. 150 (Bankr. S.D.N.Y. 1999), “I do not agree that the disposable income requirement of § 1325(b) is directly in conflict with the PERS provisions of the Montana Code mandating the retirement deductions. . . . Charlton has no control over the PERS deductions, and they are required to be deducted from his wages . . . . Charlton’s employment by Yellowstone County is reasonably necessary to the support of the Debtors and their three minor children. . . . [T]his Court does not view Montana’s PERS requirements as actually conflicting with federal law . . . . [T]he Debtors never receive as income to pay current debts or expenses the PERS deductions . . . . [U]nder Montana law the creditors cannot reach the retirement contributions by levy or attachment outside bankruptcy since they are exempt . . . . PERS deductions are part of a pension trust fund to pay benefits to all eligible members . . . . The employer can be compelled to make up the shortfall and pay a penalty. . . . Section 1325(b)(1) requires that the Debtors pay their disposable income into the Plan, but it cannot be read to require that Charlton’s employer subsidize Debtors’ Plan by making up for the shortfall in his PERS deductions so that they can be paid to creditors instead of PERS members.”); In re Colon Vazquez, 111 B.R. 19 (Bankr. D.P.R. 1990) (A compulsory 3% wage deduction required of school teachers by Puerto Rican law to maintain membership in the teachers’ union is excluded from projected disposable income.).

 

61  243 F.3d 124, 126–27 (2d Cir. 2001).

 

62  Accord In re Tibbs, 242 B.R. 511, 517–21 (Bankr. N.D. Ala. 1999) (Contributions to the Alabama Teacher Retirement System are involuntary but not automatically excluded from disposable income. “This Court agrees with existing case law which has consistently held that . . . voluntary contributions to a retirement or pension fund should be included as disposable income. . . .  However, § 1325(b) does not excuse those expenses which are merely involuntary. Therefore, even an ‘involuntary’ expense must be considered in light of each debtor’s unique circumstances to determine whether it is reasonably necessary. If a retirement contribution is truly involuntary, the court must then examine what consequences would result from the debtor losing his job. In determining whether the involuntary contribution is reasonably necessary in light of the circumstances, the Court will examine and balance several factors. These include: (1) whether the debtor is seeking to shelter income through the retirement contributions; (2) the debtor’s ability to find similar or better employment elsewhere; (3) the harm to creditors if the contributions are excluded from disposable income; (4) the type of unsecured debt to be paid; (5) the purpose or reason for which the debt was originally incurred; (6) other reasonably necessary expenses of the debtor; and (7) the types of assets the debtor owns and/or for which he is paying. . . . Considering all of the above factors, this Court concludes the contributions to the Retirement System are essential for the Debtor to keep his job and thus are ‘reasonably necessary’ and should not be included as part of the Debtor’s disposable income.”).

 

63  See In re Gebo, 290 B.R. 168 (Bankr. M.D. Fla. 2002) (Distinguishing Gamble v. Brown (In re Gamble), 168 F.3d 442 (11th Cir. 1999), exempt workers’ compensation proceeds are disposable income.); In re Stephens, 265 B.R. 335 (Bankr. M.D. Fla. 2001) (Workers’ compensation proceeds, though exempt under Florida law, are projected disposable income for purposes of § 1325(b) when the trustee objected to the exemption and the court is not faced with the issue whether “conclusively exempted” property is subject to § 1325(b).); In re Baines, 263 B.R. 868 (Bankr. S.D. Ill. 2001) (Workers’ compensation benefits are projected disposable income that is available to fund a Chapter 13 plan.); In re Tolliver, 257 B.R. 98 (Bankr. M.D. Fla. 2000) (Distinguishing Gamble v. Brown (In re Gamble), 168 F.3d 442 (11th Cir. 1999), and In re Ferretti, 203 B.R. 796 (Bankr. S.D. Fla. 1996), at modification after confirmation, Chapter 13 trustee can capture proceeds of workers’ compensation suit because the debtor did not schedule the lawsuit and did not exempt the proceeds under § 522(c).); In re Minor, 177 B.R. 576, 581–82 (Bankr. E.D. Tenn. 1995) (Lump-sum workers’ compensation settlement received during the three-year payment period is projected disposable income notwithstanding that it is exempt property under state law. “This court overrules its holding in [In re Red, 60 B.R. 113 (Bankr. E.D. Tenn. 1986),] to the extent that decision may be construed as authority for the proposition that exempt income should be excluded from disposable income regardless of whether the time limitation of § 1325(b)(1)(B) or the provisions of § 1325(b)(2) apply. . . . [Section] 1322(b)(2), in defining disposable income, makes no exception for exempt income. . . . Arguably, a lump-sum workers’ compensation settlement award is not considered ‘income’ . . . because it is not regularly or periodically received by the debtor. However, . . . ‘[t]here is nothing in the Code to require that income be regular or periodic for § 1325(b) purposes. Compare the “regular income” requirement for eligibility in 11 U.S.C. §§ 109(e) and 101(29).’ . . . The debtors have not met the ‘exceptionally heavy’ burden of persuading the court that Congress intended to limit or restrict the statute to only include periodic or regular income in disposable income. . . . [A] lump-sum workers’ compensation settlement award is an item of ‘income’ as the term is used in § 1325(b)(2). Moreover, the settlement awards . . . although in a lump sum, were based primarily on weekly disability benefits which would otherwise have been paid each debtor during the period of his or her plan. The court cannot adopt a definition of income that would allow debtors receiving disability payments in a lump sum to be treated differently from those receiving the payments periodically.”); In re Jackson, 173 B.R. 168, 171 (Bankr. E.D. Mo. 1994) (On the debtors’ motion to modify the plan after confirmation, a workers’ compensation award is income for purposes of the disposable income test in § 1325(b). “Unlike the asset based best interest of creditors test, § 1325(b) looks at income which can be derived from many sources including exempt property. . . . This Court shall follow the reasoning in Watters v. McRoberts, 167 B.R. 146 (S.D. Ill. 1994), In re Schnabel, 153 B.R. 809 (Bankr. N.D. Ill. 1993), and In re Solomon, 166 B.R. 832 (Bankr. D. Md. 1994), and will not read § 1325(b) with a limitation on the word ‘income,’ such that all exempt property would be excluded from its definition. Thus, even though the Debtors’ workers compensation proceeds are exempt, the Debtors are required to include these proceeds as income which must be devoted to the Chapter 13 plan unless ‘reasonably necessary for maintenance or support of the debtor[s].’”).

 

64  In re Lush, 213 B.R. 152, 155–56 (Bankr. C.D. Ill. 1997) (Following In re Schnabel, 153 B.R. 809 (Bankr. N.D. Ill. 1993), and rejecting In re Kerr, 199 B.R. 370 (Bankr. N.D. Ill. 1996), workers’ compensation proceeds are projected disposable income notwithstanding § 522(c). “Section 522(c)’s use of the participle ‘exempted’ rather than the adjective ‘exempt’ suggests that the protection provided by § 522(c) extends only to exempt property in which a debtor also chooses to assert his exemption. Accordingly, § 522(c) protection would not extend to property which is ‘exempt’ by statutory definition, but in which the debtor has elected not to assert his right to claim an exemption. In view of this distinction, this Court reads Schnabel to hold that, where ‘exempt property’ is also a source of ‘disposable income’, a Chapter 13 debtor must decline to assert the exemption to which he would otherwise be entitled, and apply the income to his Chapter 13 plan in order for the debtor to pass the ‘disposable income test’ of § 1325(b)(1)(B). This is not prohibited by § 522(c) and is required by § 1325(b)(1)(B). . . . [T]here is no mention of exemptions in the definition of disposable income in § 1325(b)(2). . . . [T]he Kerr holding makes Chapter 13 too easy on debtors at the expense of creditors. . . . Once the necessary living expenses of the debtor and the debtor’s family are met through the use of exempt assets, either alone or in combination with other assets, any additional funds constitute disposable income. Thus, exempt assets are clearly part of the disposable income equation.”). Accord In re Gebo, 290 B.R. 168, 170 (Bankr. M.D. Fla. 2002) (Exempt workers’ compensation proceeds are disposable income. “[T]he vast majority of courts hold that even exempt property must be included ‘disposable income’ devoted to a Chapter 13 plan. . . . [T]his Debtor has a choice and can elect to seek relief under chapter 7 and keep the funds allowed as exempt, or seek relief under chapter 13 and use its liberal and remedial provisions to save the family home from loss through foreclosure sale. But if that is the Debtor’s choice, it is unfair and grossly inequitable and smacks of bad faith to immunize exempt funds by excluding them from the ‘disposable income test.’ . . . [T]he proceeds of the settlement received by this Debtor, post-petition, is not excluded [from] the ‘disposable income test.’”).

 

65  See, e.g., Moen v. Hull (In re Hull), 251 B.R. 726, 731–33 (B.A.P. 9th Cir. 2000) (Applying Washington community property law, nonfiling spouse’s income is included in projected disposable income. At the filing, the debtor was a self-employed consultant with net income of $3,060 per month, and the debtor’s nonfiling spouse was an attorney with net income of $3,975 per month. Within a few months after filing, the debtor’s spouse became a lobbyist earning more than $20,000 net per month. After the Chapter 13 case was dismissed and before the dismissal was reversed on appeal, the debtor and his nonfiling spouse executed an antenuptial agreement which provided that their respective incomes were converted into separate property. “[A]part from some exception to Washington’s general rule, Linda Hull’s earnings would presumptively be community property. Hull had a present undivided one-half interest in any community property . . . . That anticipated future stream of income must be considered in determining Hull’s projected disposable income.” BAP remands to bankruptcy court to determine whether any exception to Washington community property law applied, including the question whether the antenuptial agreement removed the nonfiling spouse’s income from the debtor’s projected disposable income.); In re Williamson, 296 B.R. 760, 764–65 (Bankr. N.D. Ill. 2003) (Nonfiling spouse’s income and expenses must be considered to determine projected disposable income. “The nondebtor spouse’s income is included in the § 1325(b) analysis not because it is treated as statutorily defined income to the debtor but rather because consideration of that resource is necessary to an accurate assessment of the debtor’s budget. . . . [A] married couple is a single economic unit. They both receive in the case of the filing spouse all benefits of the joint income and expenses as well as the benefits of debt payment. To allow a different standard to apply would encourage parties to ‘game’ the bankruptcy system by one spouse filing and the other not doing so to allow greater discretion in use of their joint income. . . . [T]he non-Debtor’s income and expenses must be taken into account, and his expenses as well as her expenses must be ‘reasonably necessary’ according to 11 U.S.C. § 1325(b)(2).”); In re Bottelberghe, 253 B.R. 256, 263 (Bankr. D. Minn. 2000) (Nondebtor spouse’s income is included for purposes of the disposable income test. “[I]n order to make an accurate determination of the debtor’s disposable income, all of the nondebtor spouse’s income and expenses must be disclosed and must be included in the calculation.”); In re McNichols, 249 B.R. 160, 169–70 (Bankr. N.D. Ill. 2000) (“[A] nondebtor spouse’s income and expenses are to be taken into consideration when determining whether all of a debtor’s disposable income is being applied to the plan. . . . The family is a functioning unit, of which the Debtor is an integral and important member, and the totality of the family’s income and expenses is appropriately considered in calculating . . . the disposable income of the Debtor for purposes of § 1325(b)(2) . . . . The Court rejects the Debtor’s argument that she is a separately operating economic unit.”); In re Ehret, 238 B.R. 85, 88 (Bankr. D.N.J. 1999) (Nonfiling spouse’s income is included to determine projected disposable income. “Although section 1325(b) does not explicitly require the inclusion of a non-debtor spouse’s income in the disposable income computation, case law addressing the question holds that such income must be considered in computing the debtor’s disposable income.”); In re Mathenia, 220 B.R. 427 (Bankr. W.D. Okla. 1998) (Nonfiling spouse’s income and expenses must be considered to determine whether the debtor satisfies the disposable income test; large monthly payment to car lender by nonfiling spouse distorts the debtor’s projected disposable income.); In re Carter, 205 B.R. 733, 735–36 (Bankr. E.D. Pa. 1996) (Plan fails disposable income test because debtor failed to account for nonfiling spouse’s income and expenses. “[C]ourts base their calculation of the debtor’s disposable income on the debtor’s family budget, including the income and expenses of the nondebtor spouse. . . . Consideration of the nondebtor spouse’s income is seen as necessary because a portion of that spouse’s income is likely to be applied to the basic needs of the debtor, potentially increasing the share of the debtor’s own income that is not reasonably necessary for support. . . . This view recognizes the reality that married couples live as a unit, pooling their income and expenses. . . . Without income and expense information from the Debtor’s husband we are unable to make a determination of the Debtor’s disposable income.”); In re Rothman, 204 B.R. 143, 159 (Bankr. E.D. Pa. 1996) (“We agree with the courts which have held that a nondebtor spouse’s income and expenses must be taken into account when determining whether a debtor’s disposable income meets the requirements of § 1325(b)(1)(B).”); In re Cardillo, 170 B.R. 490, 491 (Bankr. D.N.H. 1994) (Nondebtor spouse’s income and expenses are considered to determine whether all of the debtor’s disposable income is applied to the plan.); In re Schnabel, 153 B.R. 809 (Bankr. N.D. Ill. 1993) (Nondebtor spouse’s social security payments are also included in disposable income for § 1325(b) purposes. To hold otherwise would require the debtor’s creditors to “subsidize” the debtor’s spouse’s living expenses. Exclusion of the debtor’s spouse’s income “would be unfair and unjust, in a joint household,” where the wife’s share of expenses has been accounted for as part of the debtor’s overall living expenses in the Chapter 13 case.); In re Belt, 106 B.R. 553 (Bankr. N.D. Ind. 1989) (Disposable income test requires inclusion of the income and expenses of the nondebtor spouse.); In re Saunders, 60 B.R. 187 (Bankr. N.D. Ohio 1986). See also In re Bottorff, 232 B.R. 171, 173 (Bankr. W.D. Mo. 1999) (Denies confirmation on good faith ground when debtor failed to fully account for the income and expenses of nonfiling spouse. Debtor had net monthly income of $1,828. Nonfiling husband had net income of $2,792 a month. Household living expenses totaled $3,275 per month leaving $1,345. All unsecured debts were incurred separately by debtor before marriage to nonfiling husband. Plan would pay $434 per month. Attributing one-half of household expenses to the debtor would produce net disposable income of only $190.50 per month. “[B]ankruptcy courts and other jurisdictions have consistently interpreted § 1325 to require the consideration of a non-debtor spouse’s income in determining the debtor’s disposable income and, ultimately, the debtor’s good faith in proposing the Chapter 13 plan. . . . Because the Debtor in this case has not given adequate weight and consideration to her husband’s income, as well as his necessary and reasonable expenses, the Court finds that the Debtor’s Plan has not been proposed in good faith as required by 11 U.S.C. § 1325(a)(3).”).

 

66  11 U.S.C. § 1325(b)(2) (emphasis added).

 

67  See § 35.10 [ Schedules I and J—Income and Expenditures ] § 36.16  Schedules I and J—Income and Expenditures.

 

68  See § 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3  Reasonably Necessary for Maintenance or Support.

 

69  See, e.g., In re Mathenia, 220 B.R. 427, 431 (Bankr. W.D. Okla. 1998) (“[W]hen spouses are both employed, but only one is a debtor in bankruptcy, it may be assumed for purposes of the disposable income computation that each contributes to family living expenses in the same proportion that his or her income bears to the total family income.”).

 

70  220 B.R. 427 (Bankr. W.D. Okla. 1998).

 

71  220 B.R. at 431–32. Accord In re Ehret, 238 B.R. 85 (Bankr. D.N.J. 1999) (Nonfiling spouse’s income is included to determine projected disposable income. Debtor’s income was $2,000, and nonfiling wife’s income was $5,538.46. Expense schedule included $2,000-per-month tuition payment for 16-year-old son to attend private school. Debtor contended that reasonableness of $2,000 payment was not at issue because $2,000 was paid from nonfiling spouse’s separate income.).

 

72  278 B.R. 108 (Bankr. N.D. Tex. 2002).

 

73  278 B.R. at 117.

 

74  278 B.R. at 114–15.

 

75  278 B.R. at 117.

 

76  See In re Riggleman, 76 B.R. 111 (Bankr. S.D. Ohio 1987); In re Akin, 54 B.R. 700 (Bankr. D. Neb. 1985). See also In re Dunning, 157 B.R. 51 (Bankr. W.D.N.Y. 1993) (Court denies confirmation on bad-faith grounds of a 60-month, 1% plan where there is evidence that the debtor’s net disposable income “may have increased” prior to confirmation “but no provision is made to share that benefit with creditors.” Court indicates that the debtor could project a “floor” for payments into the plan and propose to share any net earnings above that floor as a way of solving the disposable income and good-faith problems.).

 

77  In re Smith, 222 B.R. 846, 858 (Bankr. N.D. Ind. 1998) (Projected disposable income includes overtime that the debtor reasonably expects to receive. “The court finds . . . that the Trustee’s concerns about additional overtime income to which the debtors may become entitled during the life of their amended plan are warranted. As these particular debtors have earned significant amounts of overtime pay in the past, the court finds that one can reasonably expect that they will have the opportunity to earn similar overtime pay in the next three years.”).

 

78  In re Smith, 222 B.R. 846, 858 (Bankr. N.D. Ind. 1998) (“To protect their creditors’ interests, the court will require the debtors to provide copies of their paycheck stubs and year-to-date earnings to the Trustee once every six months, commencing six months from the date of confirmation. In the event the debtors receive overtime in a given month during the plan term exceeding the projected amount set forth on Schedule I, the court will require the debtors to increase their plan payment to the Trustee for that month in an amount equal to the net increase in income attributable to the additional overtime work.”). Accord In re Falquist, 85 B.R. 566 (Bankr. D. Or. 1988); In re Riggleman, 76 B.R. 111 (Bankr. S.D. Ohio 1987). See also In re James, 260 B.R. 498, 515–16 (Bankr. D. Idaho 2001) (The debtor “could be expected to provide monthly statements” of his income from law practice, and “this reporting should satisfy Trustee’s concerns about future monitoring of Debtor’s income, and provide a ready source of information to the creditors.”).

 

79  Education Assistance Corp. v. Zellner, 827 F.2d 1222 (8th Cir. 1987); In re Compton, 88 B.R. 166 (Bankr. S.D. Ohio 1988); In re Schyma, 68 B.R. 52 (Bankr. D. Minn. 1985).

 

80  In re McGovern, 278 B.R. 888 (Bankr. S.D. Fla. 2002), rev’d on other grounds, 297 B.R. 650 (S.D. Fla. 2003).

 

81  In re Krull, 54 B.R. 375 (Bankr. D. Colo. 1985).

 

82  Schedule I to Official Bankruptcy Form 6 (emphasis added). See § 35.10 [ Schedules I and J—Income and Expenditures ] § 36.16  Schedules I and J—Income and Expenditures.

 

83  In re Schyma, 68 B.R. 52 (Bankr. D. Minn. 1985). See also Petro v. Mishler, 276 F.3d 375, 378 (7th Cir. 2002) (It is not appropriate for bankruptcy court to condition confirmation that the debtors must send income reports to the Chapter 13 trustee every six months after confirmation; “the Trustee retains a remedy . . . . Section 1329 of the Bankruptcy Code allows a Trustee to move to amend the provisions of a debtor’s Chapter 13 plan if circumstances warrant an alteration.”); In re James, 260 B.R. 498, 515–16 (Bankr. D. Idaho 2001) (With respect to the possibility that the debtor’s income would increase during the Chapter 13 plan and it might be appropriate to amend the plan to increase payments to creditors, bankruptcy court observes that the debtor “could be expected to provide monthly statements” of his income from his law practice and “this reporting should satisfy Trustee’s concerns about future monitoring of Debtor’s income, and provide a ready source of information to the creditors.”). But see In re Dunning, 157 B.R. 51 (Bankr. W.D.N.Y. 1993) (Where there is evidence that a debtor’s net disposable income has increased but no provision has been made to share that benefit with creditors, the good-faith and disposable-income test problems with confirmation are not solved by the fact that an unsecured creditor could file a motion to modify the plan after confirmation under § 1329. Instead, the debtor must project a minimum amount that will be paid into the plan and propose to share any increase in net earnings above that minimum amount.).

 

84  See 11 U.S.C. § 1329(b)(1), discussed in § 255.1 [ Does Disposable Income Test Apply? ] § 126.3  Does Disposable Income Test Apply?. See, e.g., Forbes v. Forbes (In re Forbes), 215 B.R. 183 (B.A.P. 8th Cir. 1997) (The disposable income test is not applicable at modification after confirmation, except in the sense that the plan as modified must satisfy the three-year calculation from the date the first payment was due under the originally confirmed plan.).

 

85  See § 198.1 [ Able to Make Payments and Comply with Plan ] § 111.1  Able to Make Payments and Comply with Plan.

 

86  In re Rose, 101 B.R. 934 (Bankr. S.D. Ohio 1989).

 

87  11 U.S.C. § 1325(a)(6). See § 198.1 [ Able to Make Payments and Comply with Plan ] § 111.1  Able to Make Payments and Comply with Plan.

 

88  54 B.R. 375 (Bankr. D. Colo. 1985).

 

89  See § 35.10 [ Schedules I and J—Income and Expenditures ] § 36.16  Schedules I and J—Income and Expenditures.

 

90  Commercial Credit Corp. v. Killough (In re Killough), 900 F.2d 61, 66 (5th Cir. 1990) (Although the debtor worked significant overtime in the past and the debtor’s employer indicated that overtime was frequently available, it was not clearly erroneous for the bankruptcy court to determine that overtime might not always be available and that the debtor’s health might not withstand her working as much overtime as she had in the past. “[T]here may be instances where income obtained through working overtime can and should appropriately be included in a debtor’s projected and disposable income for the purposes of a Chapter 13 case. This is not such a case.”). Compare In re Smith, 222 B.R. 846, 858 (Bankr. N.D. Ind. 1998) (Projected disposable income includes overtime; when “these particular debtors have earned significant amounts of overtime pay in the past, the court finds that one can reasonably expect that they will have the opportunity to earn similar overtime pay in the next three years.”).

 

91  See § 198.1 [ Able to Make Payments and Comply with Plan ] § 111.1  Able to Make Payments and Comply with Plan.

 

92  21 F.3d 355 (9th Cir. 1994).

 

93  21 F.3d at 358. Accord Petro v. Mishler, 276 F.3d 375, 376–78 (7th Cir. 2002) (When trustee does not object to confirmation, it is inappropriate for bankruptcy court to condition confirmation that debtors must “send the Standing Chapter 13 Trustee at his offices both an affidavit which shows ALL income in the previous six months for both debtors and . . . attach[ ] ALL check stubs for both debtors for the previous six months. . . . If the Trustee in this case suspected that the Petros were not acting in good faith in proposing their Chapter 13 plan or that they had failed to allocate a significant portion of their disposable incomes to the payment of their creditors, he could have objected under sections 1325(a) or (b). However, he took no such step. . . . [T]he Trustee retains a remedy . . . . Section 1329 of the Bankruptcy Code allows a Trustee to move to amend the provisions of a debtor’s Chapter 13 plan if circumstances warrant an alteration.”); In re Bass, 267 B.R. 812, 818 (Bankr. S.D. Ohio 2001) (Citing Anderson v. Satterlee (In re Anderson), 21 F.3d 355 (9th Cir. 1994), and Freeman v. Schulman (In re Freeman), 86 F.3d 478 (6th Cir. 1996), and declining to follow Rowley v. Yarnall, 22 F.3d 190 (8th Cir. 1994), “[t]his Court believes that the Sixth Circuit, if confronted with the issue of whether § 1325(b)(1)(B) precludes confirmation of a plan that does not commit all actual disposable income, would follow the projected disposable income standard set forth in Anderson.”).

 

94  See Rowley v. Yarnall, 22 F.3d 190, 193 (8th Cir. 1994) (In a Chapter 12 case, “projected disposable income” means the net disposable income actually received by the debtors during the plan period. “[W]e hold that § 1225(b)(1)(B) imposes a duty on debtors to include a provision in their reorganization plan that promises payment of net disposable income received during the plan period to unsecured creditors in the event that the trustee or holder of an allowed unsecured claim objects to confirmation of the plan.”). Accord In re Turpen, 218 B.R. 908, 915–16 (Bankr. N.D. Iowa 1998) (Plan that proposes to pay unsecured claim holders from liquidation of nonexempt assets but makes no provision for payments from other income fails disposable income test because, when it faces the issue, Eighth Circuit is likely to require a Chapter 13 plan to propose to pay whatever net disposable income the debtor receives during the plan period. “It is likely in this circuit that upon a triggering objection by the trustee or an unsecured creditor, a Chapter 13 plan is not confirmable unless the debtor includes in the plan a provision ‘that promises payment of net disposable income received during the plan period to unsecured creditors.’ Rowley v. Yarnall, 22 F.3d 190, 193 (8th Cir. 1994). . . . Debtors’ plan projects no disposable income during the three-year period. Debtors propose, therefore, that no disposable income, in the form of future income, will be paid to the plan. In view of the trustee’s objection, the debtors’ plan cannot be confirmed.”).

 

95  In re Rhein, 73 B.R. 285 (Bankr. E.D. Mich. 1987).

 

96  Midkiff v. Dunivent (In re Midkiff), 271 B.R. 383, 384, 386–88 (B.A.P. 10th Cir. 2002) (Confirmed plan that defined disposable income to include “income tax refunds to which the debtors are entitled during the first 36 months of the plan” captured refund for calendar year that ended before the 36th month notwithstanding that refund was actually received after the trustee certified the completion of payments and a discharge was entered. Bankruptcy court appropriately vacated discharge order under Rule 60(b) to permit distribution of the tax refund. “A debtor’s right to a federal income tax refund arises at the end of the tax year and not on the day of the filing of the tax return. . . . Debtors must include all disposable income in their Chapter 13 plan, including tax refunds where debtors have had a history of income tax refunds. . . . The right to the Debtors’ income tax refund arose during the first 36 months of the plan and therefore is included as disposable income. Had the estimated tax payments been correct, the Debtors would have paid this disposable income during the first 36 months.”), aff’d, 342 F.3d 1194, 1202–03 (10th Cir. 2003) (“[T]he tax refund constitutes ‘disposable income’ to which the Midkiffs were ‘entitled’ and which the Midkiffs were obligated to submit to the Trustee.”).

 

97  In re Messinger, 241 B.R. 697 (Bankr. D. Idaho 1999).

 

98  Itule v. Heath (In re Heath), 182 B.R. 557, 561 (B.A.P. 9th Cir. 1995) (Speculative tax refunds are not projected disposable income. Applying Anderson v. Satterlee (In re Anderson), 21 F.3d 355 (9th Cir. 1994), trustee sought to require debtors to include tax refunds as projected disposable income. The trustee did not present any evidence that future tax refunds could be “projected” at the effective date of the plan. “No showing was made that there was some indication, from the debtors’ prior financial history or from withholding records, that the debtors were likely to receive future tax refunds during plan years. Therefore, the Trustee failed to meet her burden necessary to shift the burden of proving compliance with section 1325(b)(1)(B) to the debtors.”); In re O’Brien, 181 B.R. 71, 75, 78 (Bankr. D. Ariz. 1995) (Interpreting Anderson v. Satterlee (In re Anderson), 21 F.3d 355 (9th Cir. 1994), where plan provided that “net tax refunds for the first 36 months” would be turned over to the trustee “to reduce the duration of the plan, except the duration shall not decrease to fewer than 36 months,” debtors are “simply accelerating the payments under the plan” by using tax refunds, and such a plan should be confirmed if the debtors have calculated their withholding in “good faith.” “[A]t confirmation, the court should consider in determining projected disposable income whether the proposed withholdings for taxes are at an appropriate level. Once the court has determined that the debtor is proceeding in good faith, the plan may be confirmed. If the debtor has made a best efforts determination of projected disposable income and the withholdings are at an appropriate level, then if the debtor receives a tax refund, it should be de minimis in amount. If the debtor does receive a postconfirmation tax refund, the debtor may make an advance payment under the plan or request modification of the plan.”); In re Kuehn, 177 B.R. 671, 673 (Bankr. D. Ariz. 1995) (Trustee’s insistence on commitment of tax refunds to funding Chapter 13 plans is prohibited by Anderson v. Satterlee (In re Anderson), 21 F.3d 355 (9th Cir. 1994). “[A] blanket turnover of all tax refunds, without a showing that such refunds are in fact projected in a certain amount, violates Anderson, 21 F.3d at 358 (9th Cir. 1994). The Debtors do not project tax refunds during the Plan years and the Trustee has neither projected that such tax refunds will occur or challenged the Debtors’ proposed tax withholdings. In this setting, the Trustee’s attempt to require a blanket turnover of all tax refunds is in fact an attempt to reach actual disposable income, whatever it turns out to be, as opposed to projected disposable income at the time of confirmation. Again, this is prohibited by Anderson. Should the financial circumstances of the Debtors change over the life of the Plan, the Trustee has certain rights, including the right to seek a modification of the Plan under § 1329.”). Accord In re Abner, 234 B.R. 825 (Bankr. M.D. Ala. 1999) (Sustains trustee’s objection to plan that failed to commit tax refunds. Case was filed on January 29, 1999. During February, debtors received a $3,800 tax refund. At the meeting of creditors, debtors testified that current income was approximately the same as the year before and that a similar tax refund was likely. Plan proposed to pay 25% of unsecured claims over 55 months. Citing Itule v. Heath (In re Heath), 182 B.R. 557 (B.A.P. 9th Cir. 1995), once the trustee demonstrated that tax refunds were likely during the plan, burden shifted to the debtor to show that no tax refund was projected. Debtors did not meet burden.).

 

99  See In re Emly, 153 B.R. 57, 58 (Bankr. D. Idaho 1993) (At confirmation of a modified plan, the best-interests-of-creditors test in § 1325(a)(4) is satisfied because the debtors’ proposal that state and federal tax refunds be paid to the debtors instead of to the trustee does not affect the regular monthly payments provided in the confirmed plan. “Without evidence to the contrary, it is presumed the ‘best interests of creditors’ test was originally met on the basis of those monthly payments. The determination of whether the test has been met could not have taken into consideration the use of income tax refunds because the extent of those refunds was unknown at the time of confirmation. Thus, the ‘property to be distributed under the plan’ is the same, and the requirements of Section 1325(a)(4) are still deemed to be met by the modification.”). See also In re McCray, 172 B.R. 154 (Bankr. S.D. Ga. 1994) (Tax refund received after confirmation of plan is not included in projected disposable income because debtor is already living below subsistence level, refund is not property of the estate under § 1327(b), and the amount ($1,698) is not an “extraordinary” or “substantial” change in financial circumstances sufficient to justify paying the refund to creditors.).

 

100  86 F.3d 478 (6th Cir. 1996).

 

101  86 F.3d at 480–81. Accord In re Jones, 301 B.R. 840, 845 (Bankr. E.D. Mich. 2003) (Freeman v. Schulman (In re Freeman), 86 F.3d 478 (6th Cir. 1996), requires that “tax refunds constitute disposable income that must be applied to plan payments”; “base plan” amended to include tax refunds fails disposable income test because base amount was not also modified to reflect the addition of the tax refunds.); In re Sohn, 300 B.R. 332, 336 (Bankr. D. Minn. 2003) (Applying Stuart v. Koch (In re Koch), 109 F.3d 1285 (8th Cir. 1997), tax refunds on account of earned income credit and the like though exempt are income for purposes of § 1325(b). “[E]xcess income available beyond those allowed expenses constitutes disposable income within the meaning of § 1325(b) and must be contributed to the plan, regardless of whether it is exempt. . . . The Court in Koch also went on to discuss and reject the argument that ‘treating exempt income as Chapter 13 disposable income violates the mandate in § 522(c) that exempt property “is not liable” for any pre-petition debt. . . . Including exempt income in disposable income does not make exempt property “liable” to Chapter 13 unsecured creditors. . . . Chapter 13 relief is at the option of the debtor. . . . Chapter 13 relief remains wholly voluntary. . . . The disposable income limitation in § 1325(b) simply defines the terms upon which Congress has made the benefits of Chapter 13 available.’”).

 

102  86 F.3d at 481.

 

103  In re Schyma, 68 B.R. 52 (Bankr. D. Minn. 1985). See § 12.10  Contributions from Family, Friends, Nonfiling Spouses and Former Spouses; Grants and Awards for discussion of gratuitous contributions as “regular income” for eligibility purposes.

 

104  See § 12.10  Contributions from Family, Friends, Nonfiling Spouses and Former Spouses; Grants and Awards.

 

105  In re McKean, 81 B.R. 9 (Bankr. W.D. Tex. 1987).

 

106  In re Sitarz, 150 B.R. 710, 719 (Bankr. D. Minn. 1993) (“The only evidence of record suggests that [the debtor] is in fact maximizing his current vocational profile, even though he is working one of the simplest of service-industry jobs and is making relatively little. . . . [T]he Debtor’s past work experience is limited to unskilled employment. . . . The innuendo is that the Debtor should be working more than one job, or working at some occupation that is physically more taxing, and, presumably, more lucrative. The only evidence of record suggests that this is just not possible; the Debtor has been the victim of a medical condition involving a major bodily system, apparently life-threatening in the past and perhaps still so.”). Accord Mason v. Young (In re Young), 237 B.R. 791, 800 (B.A.P. 10th Cir. 1999) (Creditor failed to prove that debtor could earn more income for purposes of disposable-income test objection to confirmation. “[T]he bankruptcy court found that Young’s past positions, first as an elected official and then as an appointed one, were public positions and, as such, did not particularly qualify him for any jobs he might find in the non-public sector. Additionally, the bankruptcy court pointed out that if Young’s income did increase, Mason could move to have the Second Plan modified.”); In re Goodrich, 257 B.R. 101, 104 (Bankr. M.D. Fla. 2000) (Court rejects creditor’s argument that debtor is “purposely not fulfilling his earning potential” when debtor, a self-employed real estate agent, had income in the three years before bankruptcy ranging from $15,421.62 to $32,123.54 and projects income during the Chapter 13 case of $2,830.41 per month. “The Court . . . finds that Debtor’s degree of effort is sufficient to establish good faith.”); In re James, 260 B.R. 498 (Bankr. D. Idaho 2001) (Bankruptcy court rejects creditor’s argument that the debtor, an attorney, was undercompensated or deliberately underearning.).

 

107  In re Jobe, 197 B.R. 823, 827 (Bankr. W.D. Tex. 1996) (Citing Commercial Credit Corp. v. Killough (In re Killough), 900 F.2d 61 (5th Cir. 1990), “clearly the capacity of the debtor to earn more money and, thereby, pay more in plan payments has been a factor that the Fifth Circuit and other courts have considered. . . . Here, however, the record is silent as to a medical condition or a negative employment history that would preclude Mr. Jobe from increasing his income by getting a job. Quite the contrary. He is relatively young and able-bodied with no medical problems. He has had a successful career in the U.S. Army and, therefore, has marketable skills. Mr. Jobe has testified that he has no crops to tend or livestock of his own on his farm. . . . [T]hey are within easy commuting distance of a metropolitan area, Killeen, Texas. . . . Sitting idly by on a farm, the down payment for which was advanced by one’s second largest unsecured creditor, and collecting ‘early’ retirement pay from the Army while offering unsecured creditors [$.17] on the dollar hardly strikes the Court as one’s ‘best efforts’.”).