Thank you for sharing!

Your article was successfully shared with the contacts you provided.
ALBANY, N.Y.-A federal judge has refused to bail out Congress for an apparent drafting glitch in the new bankruptcy law that frequently results in creditors getting less under the “reform” measure than they got under the old version-even though the clear intent of lawmakers and the president was to aid creditors. Stephen D. Gerling, chief bankruptcy judge for the Northern District of New York, in In re Rotunda, No. 06-60054, broke with the majority of his colleagues who have considered the same issue and said that if Congress is determined to replace judicial discretion with formulaic mandates, it can deal with the seemingly absurd results. “To allow a debtor with income above the state median to provide for zero payments to unsecured creditors in a chapter 13 plan . . . when . . . there remains sufficient funds to pay even a minimal dividend to them is contrary to the approach taken by this Court for over 20 years in considering chapter 13 plans,” wrote Gerling. “Yet . . . it is not for the Court to second guess Congress despite the fact that the statute, as written, may result in a confirmed plan that is contrary to the view expressed by President Bush.” Gerling’s decision is rooted in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The bill was designed to prevent debtors from taking what the creditors viewed as unfair advantage of the bankruptcy law. Many of its provisions were directed at people with income, and premised on the contention that debtors with the means to do so should repay their financial obligations to the extent possible. Now, however, instead of using actual expenses and income to determine how much a Chapter 13 debtor can afford to pay back, the law requires an examination based on the standards the Internal Revenue Service uses to decide how much delinquent taxpayers can commit to a repayment plan. Those standards permit allowances for food, housing, rent and other necessities, based on median values. Unrealistic standards While the standards are unrealistically low in some areas-meaning that it really costs consumers more for basic living expenses than the law recognizes-they are unrealistically high in other regions, such as economically hard-pressed upstate New York, where living costs are less than the median, observers say. In those areas, since the allowance is based not on actual expenses but medians, a strict application of the law enables debtors to deduct more than their actual living expenses. So, money that in the past would have gone toward repaying debts is in some cases now beyond the reach of creditors. No longer does all of the debtor’s disposable income necessarily go to the repayment plan. The question addressed in Rotunda-and by several other judges in other cases-is how to go about determining the debtor’s disposable income. Court records show that Elizabeth and Lawrence D. Rotunda had an annual income of about $68,000, well above the median income for a two-person family in New York. Consequently, their capacity to repay was governed by a rigid “means test.” Before the Bankruptcy Abuse Prevention and Consumer Protection Act, the calculus of how much a Chapter 13 debtor had to pay was measured by his or her “projected disposable income.” Under the old law this was simply the income the debtor listed on the bankruptcy petition minus the expenses. Whatever was left over went toward debt repayment. The new law does not define “projected disposable income,” but it does redefine “disposable income” as current monthly income less certain expense allowances. And under the new definition, Social Security income, like that received by the Rotundas, is excluded from the definition of current monthly income.

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]

Reprints & Licensing
Mentioned in a Law.com story?

License our industry-leading legal content to extend your thought leadership and build your brand.


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.