Cite as: Keith M. Lundin, Lundin On Chapter 13, § 92.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
Conceptually and technically, BAPCPA corrupted the disposable income test in § 1325(b) in so many ways it takes restraint not to laugh and cry at the same time. The lobbyists who drafted BAPCPA were apparently unfamiliar with the history of the disposable income test and were clearly clueless with respect to the function and methodology that made § 1325(b) the critical measure of a debtor’s effort at confirmation of a Chapter 13 plan. It will take years to extract and understand the details of the damage BAPCPA did to § 1325(b).
Bankruptcy practitioners know that § 1325(b) was (before BAPCPA) an unambiguous congressional statement that Chapter 13 debtors must make a substantial effort to pay creditors to achieve confirmation of a plan. Prior to 1984, there was no disposable income test. Reported decisions fractured badly over the question whether the “good faith” test in § 1325(a)(3) included a measure of the debtor’s financial effort and, if so, the nature of that measure.1
In the years between passage of the Bankruptcy Code in 1978 and the 1984 amendments, Congress repeatedly considered adding a “bona fide effort” or “substantial effort” test to Chapter 13.2 The disposable income test in § 1325(b) was the eventual product of that effort.
For the two decades between 1984 and 2005, upon objection to confirmation by the Chapter 13 trustee or the holder of an allowed unsecured claim, the Chapter 13 debtor had to commit all “projected disposable income” to payments under the plan for at least three years.3 Disposable income was determined by deducting from the debtor’s actual income expenses “reasonably necessary” for the maintenance and support of the debtor and dependents of the debtor, including business expenses for a debtor engaged in business.4 Disposable income was based on the debtor’s actual income at or near confirmation of the plan.5
The “reasonably necessary” test put into the hands of the Chapter 13 trustee and unsecured claim holders the power to impose objective restraints on the expenses of Chapter 13 debtors. Expensive cars and houses or luxuries could be challenged by objection to confirmation. To confirm a plan, the budget had to be frugal, and the projected income left over for payments to creditors was maximized by the diligence of creditors and trustees.
Of course, within a narrow range, there were disagreements about what expenses were reasonable and necessary for § 1325(b) purposes. Reported cases varied a few hundred dollars a month here and there with respect to car payments, house payments and the like.6 But there was fundamental agreement that all of a debtor’s projected income based on the most current information had to be committed to the plan for at least three years, net of expenses that were subject to scrutiny and objection by unsecured creditors and the trustee.
BAPCPA changes almost all of that. The test for confirmation in § 1325(b) still requires an objection from the trustee or from the holder of an allowed unsecured claim.7 The debtor can still overcome a disposable income test objection by paying the objecting creditor’s claim in full through the plan.8 But from there BAPCPA remodels the disposable income test quite completely.
“Disposable income” for purposes of § 1325(b) is no longer based on actual income at or near confirmation. Instead, BAPCPA substitutes a new concept, current monthly income (CMI), that is an average of income received by the debtor during the six months before the month of the petition.9 Chapter 13 debtors are small, volatile economies. CMI mirrors the debtor’s financial circumstances during the slide into Chapter 13. CMI is easily manipulated by the timing of the petition. CMI does not change as the debtor’s circumstances change from the petition to confirmation and through the years of the Chapter 13 case. These issues disconnect the disposable income test from the reality of individual Chapter 13 debtors and their plans.
From this doubtful platform, BAPCPA builds the new disposable income test as a series of income exclusions and expense deductions that reflect the political environment of the enactment of BAPCPA. Every Chapter 13 debtor excludes from CMI income not actually “received” by the debtor.10 Child support, foster care and disability payments are subtracted.11 Pension loan repayments12 and contributions to retirement plans13 further reduce CMI on the way to disposable income.
Inspired by the abuse test applicable in Chapter 7 cases,14 the new projected disposable income test divides debtors into two groups based on a comparison of CMI to median family income.15 Chapter 13 debtors with CMI less than applicable median family income remain subject to the familiar reasonable and necessary test for the deductibility of expenses in § 1325(b)(2)(A) and (B).16 Chapter 13 debtors with CMI greater than applicable median family income are allowed expense deductions “in accordance with” the statutory formula for measuring abuse in Chapter 7 cases in § 707(b)(2)(A) and (B).17
For over-median-income Chapter 13 debtors, the expense-policing function of an objection to confirmation has been neutralized by BAPCPA. Substituted is a mathematical formula that fixes expense deductions that will routinely be both insufficient to sustain life and in excess of any amount that would survive the reasonable and necessary test of pre-BAPCPA law.
Then there is a new “commitment period” calculation based on a different formulation of CMI and median family income.18 Projected disposable income received in the applicable commitment period must be applied to make payments to unsecured creditors under the Chapter 13 plan.19 Because CMI, disposable income and commitment period are mathematical constructs—not temporal or empirical measurements—the new projected disposable income test will have no predictable relationship to the terms of the plan, to the feasibility of the plan, or to the time or effort a confirmable plan will require. This disconnect is so extraordinary that it is almost certain that BAPCPA has substantially reduced the leverage and expectations of unsecured claim holders in Chapter 13 cases.
The details are if anything more telling than this overview. There is every reason to conclude that the drafters of BAPCPA did not understand the fundamental role played by the disposable income test in guaranteeing the minimum rights of unsecured claim holders in Chapter 13 cases. Particularly, over-median-income Chapter 13 debtors have been released from the clutches of Chapter 13 trustees. Ironically, for the wealthiest Chapter 13 debtors confirmation has been changed from an assessment of honest financial needs to a mathematical game of how to maximize the exclusions and reductions imported from Chapter 7. The lobbyists for the consumer credit industry who drafted the new disposable income test have completely underestimated the talents of attorneys who represent debtors in Chapter 13 cases. Unsecured claim holders in Chapter 13 cases will pay the price of this miscalculation.
1 See § 163.1 [ In General ] § 91.1 In General. See also § 496.2 [ Good-Faith Plans after BAPCPA ] § 110.2 Good-Faith Plans after BAPCPA for discussion of good faith after BAPCPA amendments to disposable income test.
2 See S. Rep. No. 97-150 (July 10, 1981) (S. 863, “bona fide effort”); S. Rep. No. 97-446 (May 27, 1982) (S. 2000, “substantial effort by the debtor to pay his debts”); S. Rep. No. 98-65 (Apr. 26, 1983) (S. 445, “substantial effort by the debtor”).
3 See 11 U.S.C. § 1325(b) (prior to BAPCPA), discussed beginning at § 91.1 In General.
5 See § 164.1 [ Projected (Disposable) Income ] § 91.2 Projected (Disposable) Income.
6 See § 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3 Reasonably Necessary for Maintenance or Support.
7 11 U.S.C. § 1325(b)(1). See, e.g., In re Benson, 352 B.R. 740 (Bankr. E.D.N.C. 2006) (Because § 1325(b) applies only upon objection by trustee or allowed unsecured claim holder, compromise between debtors and trustee with respect to requirement that debtors remain in plans for a specific period of time brings plans into compliance with In re Alexander, 344 B.R. 742 (Bankr. E.D.N.C. 2006).).
8 11 U.S.C. § 1325(b)(1)(A), discussed in §§ 168.1 [ Payment-in-Full Option ] § 91.7 Payment-in-Full Option and 467.1 [ Projected Disposable Income: All Debtors ] § 92.2 Projected Disposable Income: All Debtors.
9 See 11 U.S.C. § 101(10A), discussed in §§ 379.1 [ Form B22C: Statement of Current Monthly Income ] § 36.19 Form 122C-1: Statement of Current Monthly Income and 468.1 [ Current Monthly Income: The Baseline ] § 92.3 Current Monthly Income: The Baseline.
10 See 11 U.S.C. § 1325(b)(2), discussed in § 489.1 [ Amounts Paid by Others under § 101(10A)(B) ] § 99.2 Amounts Paid by Others under § 101(10A)(B).
11 See 11 U.S.C. § 1325(b)(2), discussed in § 490.1 [ Child Support, Foster Care and Disability Payments ] § 99.3 Child Support, Foster Care and Disability Payments.
12 See 11 U.S.C. §§ 1322(f) and 362(b)(19), discussed in § 491.1 [ Pension Loan Repayments ] § 99.4 Pension Loan Repayments.
13 See 11 U.S.C. § 541(b)(7), discussed in § 492.1 [ Employee Benefit Plan Contributions ] § 99.5 Employee Benefit Plan Contributions.
14 See 11 U.S.C. § 707(b), discussed beginning at § 94.1 Big Picture: Too Many Issues.
15 See § 469.1 [ Comparison of CMI to Applicable Median Family Income: § 1325(b)(3) ] § 92.4 Household Size and Comparison of CMI to Median Family Income: § 1325(b)(3).
16 See § 470.1 [ Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Applicable Median Family Income ] § 93.1 Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income.
17 11 U.S.C. § 1325(b)(3), discussed in § 92.4 Household Size and Comparison of CMI to Median Family Income: § 1325(b)(3) and beginning at § 94.1 Big Picture: Too Many Issues.
18 See 11 U.S.C. § 1325(b)(4), discussed in § 493.1 [ Applicable Commitment Period Calculation ] § 100.1 Applicable Commitment Period Calculation.
19 11 U.S.C. § 1325(b)(1)(B), discussed in § 494.1 [ Projected Disposable Income ] § 101.1 What Do Unsecured Creditors Get?.