§ 93.1     Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 93.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

After BAPCPA, upon objection to confirmation by the trustee or the holder of an allowed unsecured claim, the plan must either pay the objecting creditor in full1 or provide that all of the debtor’s projected disposable income received in the applicable commitment period2 will be applied to make payments to unsecured creditors under the plan.3 “Disposable income” is defined by § 1325(b)(2) as follows:

(2) For purposes of this subsection, the term “disposable income” means current monthly income received by the debtor (other than child support payments, foster care payments, or disability payments for a dependent child made in accordance with applicable nonbankruptcy law to the extent reasonably necessary to be expended for such child)4 less amounts reasonably necessary to be expended—
(A)(i) for the maintenance or support of the debtor or a dependent of the debtor, or for a domestic support obligation, that first becomes payable after the date the petition is filed; and
(ii) for charitable contributions (that meet the definition of “charitable contribution” under section 548(d)(3) to a qualified religious or charitable entity or organization (as defined in section 548(d)(4)) in an amount not to exceed 15 percent of gross income of the debtor for the year in which the contributions are made; and
(B) if the debtor is engaged in business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business.5
[2]

There are five deductions from current monthly income (CMI) necessary to determine disposable income.6 The most complex deduction is “amounts reasonably necessary to be expended—.”7 As explained above,8 for a Chapter 13 debtor with CMI less than applicable median family income, § 1325(b)(2)(A) and (B) are the statutory description of “amounts reasonably necessary to be expended—” that are deductible from CMI on the way to disposable income. For a Chapter 13 debtor with CMI greater than applicable median family income, “amounts reasonably necessary to be expended—” are determined in accordance with § 707(b)(2)(A) and (B) and are significantly different from the calculation described here.9

[3]

There are four amounts identified by § 1325(b)(2)(A) and (B) as necessary to be expended by a Chapter 13 debtor with CMI under applicable median family income. Three of the four amounts are familiar to Chapter 13 practitioners because they are not changed from pre- BAPCPA law.

[4]

First, there are amounts reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor.10 This is the “reasonable and necessary” test for the deductibility of expenses that has been part of the disposable income test since 1984.11 Pre-BAPCPA cases interpreting § 1325(b)(1)(A) should provide good continuing guidance with respect to amounts reasonable and necessary to be expended by a Chapter 13 debtor with CMI under median family income for the maintenance or support of the debtor or a dependent of the debtor.12

[5]

Qualified charitable contributions in an amount not to exceed 15 percent of gross income for the year in which contributions are made are the second component of reasonable and necessary expenses for a Chapter 13 debtor with CMI under applicable median family income.13 This expense component of the disposable income test was added to the Bankruptcy Code by the Religious Liberty and Charitable Donation Protection Act of 199714 and is unchanged by BAPCPA. By definition, qualified religious or charitable contributions not exceeding 15 percent of gross income are amounts reasonably necessary to be expended by a Chapter 13 debtor with CMI under applicable median family income.15

[6]

The third amount reasonably necessary to be expended by a Chapter 13 debtor with CMI less than applicable median family income is expenditures necessary for the continuation, preservation and operation of a business for a debtor engaged in business.16 This element of reasonably necessary expenses is unchanged by BAPCPA and has been a component of the disposable income test since 1984. Pre-BAPCPA cases interpreting this deduction from CMI have continuing vitality.17

[7]

The fourth amount reasonably necessary to be expended by a Chapter 13 debtor with CMI less than applicable median family income is new: “a domestic support obligation, that first becomes payable after the date the petition is filed.”18 Domestic support obligation (DSO) is a new term of art broadly defined by BAPCPA to include any debt in the nature of alimony, maintenance or support that “accrues before, on, or after the date of the order for relief . . . including interest that accrues on that debt.”19 To arrive at disposable income on the way to determining the amount that must be paid to unsecured claim holders in a Chapter 13 case, the debtor with CMI under applicable median family income is allowed to deduct from CMI the portion (only) of a DSO that first becomes payable after the petition.

[8]

“Payable” is the key word in this limited deduction of DSOs from CMI. All DSOs, as newly defined by BAPCPA, are priority claims entitled to full payment in a Chapter 13 case.20 Disposable income for a Chapter 13 debtor with CMI under applicable median family income is reduced by only that portion of priority DSO debt that becomes payable after the petition.

[9]

This is significantly different from the treatment of DSOs—and of all priority claims—for Chapter 13 debtors with CMI greater than applicable median family income. Detailed below,21 disposable income for a debtor with CMI greater than applicable median family income is net of all priority debts. In other words, the amount that an under-median-family-income debtor must pay to unsecured claim holders to satisfy the projected disposable income test excludes only the portion of DSO debt that becomes payable after the petition; for an over-median-family-income Chapter 13 debtor, the projected disposable income that must be paid to unsecured creditors excludes all priority debts, including DSO debt payable before the petition.

[10]

Another way to look at this is that unsecured creditors of an under-median-family-income Chapter 13 debtor give up disposable income to priority claim holders only to the extent of DSO debt that first becomes payable after the petition. General unsecured claim holders of a Chapter 13 debtor with CMI greater than applicable median family income give up disposable income for the full amount of all priority debts—including the full amount of all DSOs—without regard to when the debt becomes payable.

[11]

The largest element of “amounts reasonably necessary to be expended—” by an under-median-family-income Chapter 13 debtor is the amount reasonable and necessary for the maintenance and support of the debtor and the dependents of the debtor. This is a “reality-based” analysis in that Chapter 13 trustees (and allowed unsecured claim holders) can use an objection to confirmation as a mechanism to test the reasonableness and necessity of the actual expenses for the maintenance and support of the debtor or the dependents of the debtor when the debtor has CMI less than applicable median family income.

[12]

Even for under-median-income Chapter 13 debtors, there will be a difference from pre-BAPCPA law in this analysis because CMI is not the same as “projected income” under prior law.22 Under new § 101(10A), CMI is a historical measure of a Chapter 13 debtor’s income based on six months before the month in which the petition was filed.23 There will be significant incongruities between “amounts reasonably necessary to be expended—” and CMI because the latter represents average income during the slide into bankruptcy and the former is a measure of expenses at the time of confirmation.

[13]

It is not obvious how Chapter 13 debtors, trustees and creditors will manage this fundamental disconnect in the disposable income calculation as formulated by BAPCPA. The discrepancies will perhaps be greatest for debtors with CMI above applicable median family income,24 but it can be anticipated that all Chapter 13 debtors will have reasonable and necessary expenses at the time of confirmation that are based on different financial and budgetary considerations than the calculation of CMI under § 101(10A). If historically based CMI exceeds the actual income available to the debtor, the deduction from CMI of amounts reasonably necessary to be expended under § 1325(b)(2)(A) and (B) will reveal nonexistent CMI for payment to unsecured creditors. The debtor may not be able to propose a feasible plan that also satisfies the disposable income test as formulated by BAPCPA.25

[14]

Just the opposite might be true for a debtor whose actual income at confirmation is greater than CMI. A debtor whose income has increased since the period for calculation of CMI would have more income and perhaps greater actual expenses at confirmation. Amounts reasonably necessary to be expended by such a debtor might be higher because of the debtor’s higher income, but when subtracted from CMI, less would be required to be paid to unsecured creditors to satisfy the disposable income test. This would be a perverse outcome—a debtor with improving financial circumstances would actually pay less to unsecured claim holders under § 1325(b)(2)(A) and (B). But perverse outcomes may be required by the way the disposable income test was reformulated by BAPCPA.

[15]

When CMI is less than applicable median family income, there is no requirement in the Interim Rules that the debtor calculate disposable income in any particular form. Detailed elsewhere,26 Parts IV, V and VI of Official Form B22C attempt to calculate disposable income for a debtor with CMI greater than applicable median family income, but the instructions to that new form tell an under-median-income debtor to skip those parts. Disposable income for a debtor with CMI under applicable median family income will be determined in the pre-BAPCPA way—whatever that is in a district. The platform for that calculation—the determination of CMI—is required of every debtor in Parts I and II of Official Form B22C. The Official Form may need modifications to accurately produce a statement of CMI for some Chapter 13 debtors.27

[16]

Subtracting from CMI “amounts reasonably necessary to be expended—” as determined under § 1325(b)(2)(A) and (B) is the first step in the transformation of CMI into disposable income for a debtor with CMI under applicable median family income. There are four additional deductions before CMI becomes “disposable income” for purposes of the confirmation test in § 1325(b).28


 

1  See 11 U.S.C. § 1325(b)(1)(A), discussed in § 168.1 [ Payment-in-Full Option ] § 91.7  Payment-in-Full Option.

 

2  Applicable commitment period in 11 U.S.C. § 1325(b)(4) is discussed in § 493.1 [ Applicable Commitment Period Calculation ] § 100.1  Applicable Commitment Period Calculation.

 

3  11 U.S.C. § 1325(b)(1)(B).

 

4  This (parenthetical) deduction from current monthly income to arrive at disposable income is discussed in § 490.1 [ Child Support, Foster Care and Disability Payments ] § 99.3  Child Support, Foster Care and Disability Payments.

 

5  11 U.S.C. § 1325(b)(2).

 

6  See §§ 467.1 [ Projected Disposable Income: All Debtors ] § 92.2  Projected Disposable Income: All Debtors and 468.1 [ Current Monthly Income: The Baseline ] § 92.3  Current Monthly Income: The Baseline.

 

7  Only “amounts reasonably necessary to be expended—” for a Chapter 13 debtor with CMI less than applicable median family income is discussed in this section. “Amounts reasonably necessary to be expended—” for a Chapter 13 debtor with CMI greater than applicable median family income is discussed beginning at § 94.1  Big Picture: Too Many IssuesThe other four deductions from CMI to arrive at disposable income are discussed beginning at § 99.2  Amounts Paid by Others under § 101(10A)(B)

 

8  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).

 

9  See 11 U.S.C. § 1325(b)(3), discussed beginning at § 94.1  Big Picture: Too Many Issues.

 

10  11 U.S.C. § 1325(b)(2)(A)(i).

 

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

 

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

 

13  11 U.S.C. § 1325(b)(2)(A)(ii).

 

14  Pub. L. No. 105-183, 112 Stat. 517 (1998). See § 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3  Reasonably Necessary for Maintenance or Support.

 

15  The same cannot be said for Chapter 13 debtors with CMI greater than applicable median family income. See § 471.1 [ Big Picture: Too Many Issues ] § 94.1  Big Picture: Too Many Issues.

 

16  11 U.S.C. § 1325(b)(2)(B).

 

17  See § 167.1 [ Debtor Engaged in Business ] § 91.6  Debtor Engaged in Business.

 

18  11 U.S.C. § 1325(b)(2)(A)(i).

 

19  11 U.S.C. § 101(14A), discussed in §§ 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA and 519.1 [ Domestic Support Obligations ] § 136.21  Domestic Support Obligations after BAPCPA.

 

20  See 11 U.S.C. §§ 507(a)(1) and 1322(a)(2), discussed in §§ 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA and 519.1 [ Domestic Support Obligations ] § 136.21  Domestic Support Obligations after BAPCPA.

 

21  See § 486.1 [ Total Priority Debts and Divide by 60 ] § 97.1  Total Priority Debts and Divide by 60.

 

22  See § 164.1 [ Projected (Disposable) Income ] § 91.2  Projected (Disposable) Income.

 

23  See §§ 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.

 

24  See discussion beginning at § 94.1  Big Picture: Too Many Issues.

 

25  See 11 U.S.C. § 1325(a)(6), discussed in § 497.1 [ Feasibility Turned on Its Head ] § 111.2  Feasibility Turned on Its Head after BAPCPA.

 

26  See §§ 379.1 [ Form B22C: Statement of Current Monthly Income ] § 36.19  Form 122C-1: Statement of Current Monthly Income, 379.2 [ Form B22C: Commitment Period Calculation ] § 36.20  Form 122C-1: Commitment Period Calculation and 380.1 [ Form B22C: Disposable Income Calculation ] § 36.21  Form 122C-2: Disposable Income Calculation.

 

27  Id.

 

28  The four other deductions are discussed beginning at § 99.1  In General.