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5th Circuit Rules That Changes in Debtor Income Should Be Addressed in Chapter 13 Bankruptcies
Federal appeals court joins 8th and 10th Circuits in ruling that §1325(b)(2)'s definition of 'disposable income' is only a starting point
Texas Lawyer
July 27, 2009
The 5th U.S. Circuit Court of Appeals has determined how "projected disposable income" is to be calculated in Chapter 13 bankruptcies, an important ruling that could mean debtors pay more or less to their unsecured creditors in some instances.
The case, Nowlin v. Peake, involves an issue of first impression in the 5th Circuit concerning a common problem in Chapter 13 bankruptcy proceedings: What happens when a debtor's level of disposable income changes during the 60-month payment plan period? The court's answer gives U.S. Bankruptcy Court judges and litigants more flexibility in dealing with that issue, several experts say.
The court's July 17 opinion in Nowlin lays out the following facts: Pamela Page Nowlin filed for Chapter 13 bankruptcy on Sept. 16, 2006, in the U.S. Bankruptcy Court for the Southern District of Texas. Her filing included the required schedules and her proposed payment plan.
Nowlin listed a Schedule 1 monthly income of $7,145.86 and monthly deductions of, among other items, $1,062.51 for her 401(k) retirement plan and $1,134.79 to repay a 401(k) loan. Because Nowlin's annualized income of $89,046.36 was more than $34,408, the median family income for a single-person household in Texas, she was an "above-median debtor."
As amended by Congress in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), 11 U.S.C. §1325(b)(2) modified the definition of "disposable income" by using an average of past monthly income and by adding a means test for above-median debtors.
"For purposes of this subsection, the term 'disposable income' means current monthly income received by the debtor ... less amounts reasonably necessary to be expended," the 5th Circuit wrote referring to §1325(b)(2). Current monthly income is calculated by the average monthly income received by the debtor in a six-month period prior to filing a schedule, the court wrote.
But the new definition of "disposable income" was not reconciled with 11 U.S.C. §1325(b)(1), which states that as of the effective date of the plan, "the plan provides that all of the debtor's projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan," the 5th Circuit wrote referring to §1325(b)(1).
At a bankruptcy court hearing on her proposed payment plan, Nowlin testified that the loan from her 401(k) plan would be repaid within two years and would free up an additional $1,134.79 a month in disposable income. Nowlin argued to the bankruptcy court that the additional money in her budget after the loan was repaid should not be considered for purposes of confirming her payment plan because the calculation of "projected disposable income" under §1325(b)(1) should be nothing more than a mechanical calculation involving determining her current disposable income under §1325(b)(2) and multiplying that amount by the plan's term.
The Chapter 13 trustee, David G. Peake, opposed confirmation of Nowlin's plan. Peake argued that Nowlin's disposable-income calculation should allow for the consideration of known future events and thus the additional money should be diverted to repay unsecured creditors.
The bankruptcy court refused to confirm Nowlin's proposed plan because she did not allocate all of her projected disposable income to pay her unsecured creditors. A U.S. District Court affirmed the decision, and Nowlin appealed to the 5th Circuit.
