§ 86.2 — Less Money after BAPCPA
Revised: July 13, 2007
There are good reasons to believe that general unsecured claim holders will not fare as well in Chapter 13 cases after BAPCPA. The Bankruptcy Code still does not prescribe a precise percentage or amount that general unsecured creditors must receive in a Chapter 13 case, but the tests that determine the range of possible outcomes are affected by BAPCPA in ways that will produce less money for the Great Unwashed.
Unsecured claim holders are at least entitled to the amount that would be paid if the Chapter 13 estate were liquidated under Chapter 7—the best-interests-of-creditors test.1 This test was not changed by BAPCPA, but the liquidation value of a bankruptcy estate is determined in large part by what property comes into the estate through § 541 and by what property leaves the estate by exemption under § 522. BAPCPA enlarged the list of property interests that are excluded from the estate by § 541 and BAPCPA changed the exemption rules in ways that are likely to increase exemptions for many Chapter 13 debtors.
For example, § 541(b) was amended by BAPCPA to exclude from the Chapter 13 estate funds in an education IRA,2 funds used to purchase tuition credit or contributed to a state tuition program3 and any amount withheld from wages or received by an employer as contributions to an employee benefit plan, a deferred compensation plan, a deferred annuity or health insurance plan.4 Any Chapter 13 debtor in a state with exemptions less generous than the federal exemptions in § 522(d) who is rendered ineligible for any exemption by the new domicile rules in § 522(b)(3)(A) may realize increased exemptions when the federal exemptions become available under the hanging sentence at the end of § 522(b)(3).5 The net effect of the new exclusions from property of the estate and the new exemption rules is likely to be smaller Chapter 13 estates available for liquidation in a hypothetical Chapter 7 case. This will lower the minimum amount that must be paid to unsecured claim holders to satisfy the best-interests-of-creditors test at confirmation.
As modified by BAPCPA, upon objection to confirmation by the holder of an allowed unsecured claim or by the Chapter 13 trustee, the debtor must pay unsecured claim holders all projected disposable income for the applicable commitment period.6 Before BAPCPA, the disposable income test gave the Chapter 13 trustees substantial leverage to force debtors to make their best effort to fund the plan for at least three years. This was true because only “reasonable and necessary” expenses were deductible from a debtor’s actual income to determine the amount of disposable income that must be committed to funding the plan under the pre-BAPCPA version of § 1325(b). Chapter 13 trustees could insist that debtors live within a sparse budget which maximized the amount that must be paid to creditors to accomplish confirmation.
BAPCPA changed this (healthy) dynamic in several ways hurtful to the interests of unsecured creditors. After BAPCPA, the projected disposable income available to pay unsecured creditors is no longer based on the debtor’s actual disposable income at confirmation but is instead based on “current monthly income” (CMI), which is an average of six months of income prior to the filing of the Chapter 13 petition.7 BAPCPA added new exclusions from disposable income, such as monies withheld to repay pension loans.8 BAPCPA created new and enlarged priority debts that must be paid in full from disposable income before the entitlement of general unsecured creditors is determined.9 And perhaps most importantly, BAPCPA substituted the abuse test in § 707(b)(2)(A) and (B) for the reasonable and necessary test for allowable expenses in the disposable income calculation for Chapter 13 debtors with CMI greater than applicable median family income.10
The cumulative effect of these changes will reduce the amount of disposable income in Chapter 13 cases after BAPCPA. Without the leverage of an effective test of the debtor’s effort, Chapter 13 trustees are significantly less empowered by BAPCPA to defeat confirmation of plans that do not exhaust a debtor’s reasonable financial ability to pay unsecured debt from future income.
The rules for determining the length of a Chapter 13 plan after BAPCPA are likely to reduce the amount of money available for unsecured creditors. Under pre-BAPCPA law, upon objection by an allowed unsecured claim holder or the trustee, a Chapter 13 debtor had to propose at least three years of payments to creditors.11 BAPCPA requires a minimum three-year or five-year “commitment period,” depending on whether the debtor’s (combined with the debtor’s spouse’s) CMI is above or below median family income.12 Curiously, this new commitment period requirement is mathematically disconnected by BAPCPA from the debtor’s actual income at confirmation and from the provisions of the confirmed plan. The result is that some Chapter 13 debtors will complete payments under their plans before the end of the “applicable commitment period” and be entitled to discharge notwithstanding continuing ability to pay more money to general unsecured creditors. Under pre-BAPCPA law, this was an unlikely outcome because at confirmation, the Chapter 13 trustee could insist on commitment of all of the debtor’s projected disposable income for the entire period of the plan based on actual income at confirmation and reasonable and necessary expenses.
The good-faith test for confirmation is unchanged in § 1325(a)(3) but nothing in BAPCPA suggests that the good-faith test will pick up the slack for general unsecured claim holders. As detailed elsewhere,13 after the 1984 amendments added the disposable income test to § 1325(b), several appellate courts concluded there was little if any economic component to the good-faith test in § 1325(a)(3). The elaborate and extensive amendments to § 1325(b) in BAPCPA add weight to the argument that the economic tests for confirmation are fully contained in sections of the Bankruptcy Code other than the amorphous good-faith test in § 1325(a)(3).14
Perhaps the only aspect of Chapter 13 practice after BAPCPA that offers new advantages to unsecured claim holders is nondischargeable claims. The list of debts that are nondischargeable at the completion of payments in a Chapter 13 case was significantly expanded by BAPCPA.15 There are new nondischargeable debts for taxes,16 for fraud and misrepresentation,17 for defalcation in a fiduciary capacity18 and for some willful or malicious injuries.19 Many of these newly nondischargeable debts will be unsecured claims that may be paid in whole or in part through the confirmed plan, with any unpaid balance surviving discharge.
Perversely, by eroding the “super discharge” in Chapter 13 cases, BAPCPA has reduced the incentive for debtors to file Chapter 13 cases that typically pay more to unsecured creditors than Chapter 7 cases. Some debtors who would have filed Chapter 13 to discharge claims that were nondischargeable only in Chapter 7 will now see no reason not to file a Chapter 7 case that discharges (without payment) all dischargeable unsecured claims. The effect on general unsecureds is likely to be fewer Chapter 13 cases in which dischargeable unsecured creditors get paid something.
The creation of many new nondischargeable debts in Chapter 13 cases is an incentive for Chapter 13 debtors to propose plans that separately classify the nondischargeable debt for more favorable treatment. Though not common, a few reported decisions allow the separate classification of nondischargeable debts for more favorable treatment under some circumstances—with the effect that other (dischargeable) unsecured creditors receive less money.20 It cannot be said with any certainty that enlarging the class of debts that are nondischargeable in a Chapter 13 case produces any net benefit to unsecured claim holders generally.
It is hard to find unambiguous good news for general unsecured creditors in the BAPCPA amendments to Chapter 13. As before BAPCPA, unsecured claim holders do not vote on confirmation of Chapter 13 plans and an objection to confirmation remains the principal way for an unsecured claim holder to protect its rights in a Chapter 13 case. After BAPCPA, the potency of that objection ain’t what it used to be.
1 11 U.S.C. § 1325(a)(4), discussed in §§ 160.1 [ In General: Plan Payments vs. Hypothetical Liquidation ] § 90.1 In General: Plan Payments vs. Hypothetical Liquidation–162.2 [ Discount Rates and Interest If Liquidation Would Produce Dividend ] § 90.5 Discount Rates and Interest If Liquidation Would Produce Dividend, 464.1 [ New Exclusions and Exemptions ] § 90.3 Exclusions and Exemptions after BAPCPA and 465.1 [ Discount Rates and Interest ] § 90.6 Discount Rates and Interest after BAPCPA.
2 11 U.S.C. § 541(b)(5), discussed in § 403.1 [ Property of the Chapter 13 Estate—New Ins and Outs ] § 46.2 Property of the Chapter 13 Estate—Changes by BAPCPA.
3 11 U.S.C. § 541(b)(6), discussed in § 403.1 [ Property of the Chapter 13 Estate—New Ins and Outs ] § 46.2 Property of the Chapter 13 Estate—Changes by BAPCPA.
4 11 U.S.C. § 541(b)(7), discussed in § 403.1 [ Property of the Chapter 13 Estate—New Ins and Outs ] § 46.2 Property of the Chapter 13 Estate—Changes by BAPCPA.
5 11 U.S.C. § 522(b)(3), discussed in § 406.1 [ New Domicile Rules ] § 48.6 Domicile Rules after BAPCPA.
6 11 U.S.C. § 1325(b), discussed beginning at § 91.1 In General.
7 See 11 U.S.C. § 101(10A), discussed in § 468.1 [ Current Monthly Income: The Baseline ] § 92.3 Current Monthly Income: The Baseline.
9 See §§ 440.1 [ New and Changed Priority Claims ] § 73.3 Priority Claims Added or Changed by BAPCPA, 486.1 [ Total Priority Debts and Divide by 60 ] § 97.1 Total Priority Debts and Divide by 60 and 494.1 [ Projected Disposable Income ] § 101.1 What Do Unsecured Creditors Get?.
10 See discussion beginning at § 94.1 Big Picture: Too Many Issues.
11 See § 166.1 [ Counting the Three-Year Period ] § 91.5 Counting the Three-Year Period.
12 11 U.S.C. §§ 1322(d) and 1325(b)(4), discussed in § 493.1 [ Applicable Commitment Period Calculation ] § 100.1 Applicable Commitment Period Calculation.
14 See § 496.2 [ Good-Faith Plans after BAPCPA ] § 110.2 Good-Faith Plans after BAPCPA for further discussion of this question.
16 See § 548.1 [ Taxes ] § 159.1 Taxes.
17 See § 549.1 [ False Representations and Fraud: § 523(a)(2) ] § 159.2 False Representations and Fraud: § 523(a)(2).
18 See § 550.1 [ Fraud and Defalcation: § 523(a)(4) ] § 159.3 Fraud and Defalcation: § 523(a)(4).
19 See § 554.1 [ Willful or Malicious Injury: § 1328(a)(4) ] § 159.7 Willful or Malicious Injury: § 1328(a)(4).
20 See discussion beginning at § 88.1 In General.