Not long ago, I wrote about how a Chapter 13 bankruptcy payment was calculated. I noted that there were differences around the country in how courts calculated it. Since then, there have been a couple of significant developments.
First, the US Supreme Court has taken up the issue. Just a couple of weeks ago, oral arguments for Hamilton v. Lanning were heard. The Court is currently debating on how to figure the bankruptcy plan payment for a Chapter 13 case.
The second development is that the Central District of California, the largest federal district in the country in terms of volume if not geographically, is now one of those interpreting the current law literally. This leads to unjust results.
I have a case right now where the debtors worked a lot in the months before they retained our law firm. They were putting in overtime, trying to qualify for a loan modification, trying to pay their mortgage while simultaneously changing it.
Then the overtime dried up. So do they pay a BK payment based on overtime income or regular income? Would Congress force debtors to work overtime to pay debt, if the debtor even had control over the OT? The overtime is in the past. The bankruptcy case is now.
They still make “too much money” for Chapter 7 bankruptcy in that they fail the means test. Yet, when you plug in their income from the last six months before filing (the lookback period), the bottom line from the B22C form is that they are supposed to pay over $4,000 a month in their chapter 13 case. The amount their real budget shows they have is maybe a few hundred bucks a month, not a few thousand.
So, what are our options, in a Chapter 13 case that a formula that Congress clearly wanted us to use fails the debtor?
- We can try to choose a different 6-month period. However, in this case, all the six-month windows in the past show overtime, and all the OT is gone. There isn’t a 6 mo window that accurately reflects what’s currently going on.
- We can let the case get dismissed and refile Chapter Thirteen bankruptcy later, maybe 8 months from now. This hurts the debtors, no doubt, as they will be forced to endure more collection attempts since the bankruptcy will end. They will be forced to pay more money for a bankruptcy attorney. Further, they will have to wait before they can get closure, emotional and psychological. Why? All to get the same result we’re trying to get now, except we’d be trying to manipulate which six months of lookback income to use just to find something that resembles a current paycheck. Surely, Congress did not intend this awkward result.
- We can allow the Chapter 13 trustee to dismiss the chap 13 and we then file a Chapter 7 bankruptcy down the road. Not only does this result in the same delay and cost to the debtor, it will hurt the creditors who otherwise would have gotten something in the chapter 13. If things are changing for the debtors enough, if we can file a Chapter Seven case, the creditors get nothing. Why? There’s a place in Chapter 7 where we can argue special circumstances (”The OT’s gone!”) and qualify. In Chapter 13, using the rigid 9th circuit definition of projected disposable income, there is no “special circumstances” provision. Can this up-is-down result really be what’s best for the creditors? Again, surely Congress did not intend this perverted result.
- Confirm the Chapter 13 case at the formulaic result and then immediately submit a motion to modify the plan arguing that it’s not reasonable or feasible based on change of circumstances. To what ends? To get a resulting plan payment that is the current income minus reasonable expenses. Why waste judicial resources to get the same result which can be determined prior to confirmation if one looks at today’s reality in conjunction with the formula? Did Congress really intend this Rube Goldberg procedure to get to a common sense payment? Let us just use the common sense prior to confirmation and nail it down at that number.
From a debtor’s bankruptcy lawyer in the trenches, I can attest that the current state of jurisprudence makes it difficult to provide relief to those who have income above the median for their area. With the Los Angeles division now embracing the rigid Kagenveama interpretation of the Ninth Circuit and applying a strict formula, it means debtors that file bankruptcy, chapter 13, have no path to success or confirmation.
Further, the status quo provides no easy way to counsel debtors who may not pass the means test. When they ask the all-important question at that first meeting — “What would my bankruptcy debt consolidation payment be?” — we as bankruptcy attorneys have no clear answer. Right now, all we can say is that it’s the product of a 10-page formula that requires us to see all of your expenses, receipts, and, depending on the reasonableness of them as challenged by a chapter thirteen trustee and then clarified by a bankruptcy judge, is something that cannot be predicted at the outset.
And for those of us bankruptcy lawyers who care about customer service, we don’t want to say the BK payment for a chapter 13 would be one thing and have it come in much higher. It gives lawyers a bad name and sours the overall perception on Chapter 13, if the process is unpredictable, painful and ultimately provides a payment that is unaffordable, and as restrictive as a boa snake on the budget. Once the public learns that Chapter 13 is a waste of time and emotion and does not provide a realistic and affordable debt repayment plan, people will sour on bankruptcy overall, and have no pathway for relief.
The alternative? We as bankruptcy lawyers need to be able to tell prospective clients that their bankruptcy payment is likely to be their projected disposable income, based on the income they currently earn minus their real and reasonable expenses. Sadly, Congress does not seem to want this “in the hands of bankruptcy judges,” but instead in the mechanization of a formula. A formula can be fair and level the playing field, but it results in unrealistic outcomes.
And it’s our fear that the US Surpreme Court in Hamilton v. Lanning will put debtors in a rigid situation that results in needless delay and manipulation of six-month lookback periods just to get a result that can be obtained using common sense and reasonableness.