In Chapter 13, a debtor’s plan payment must, at a minimum, reflect the difference between the debtor’s income and expenses, so a debtor with monthly income of $3,000 and expenses of $2,500 must, at a minimum, pay $500 to the plan. A plan which fails to pay this disposable income minimum can be denied confirmation on the grounds the debtor’s plan was not filed in good faith, under Bankruptcy Code Section 1325(a)(3). But must social security income be included in this income/expense calculation? No, says a bankruptcy judge in Syracuse.
In re Burnett (NDNY Ch. 13 Bk. #10-31788; joint decision with In re Uzailko; Hon. Margaret Cangilos-Ruiz; decision January 21, 2011).
Why is social security income different from other forms of income? In the 2005 BAPCPA changes to the bankruptcy code, Congress created the so-called ‘means test’ in Chapter 7; an arbitrary test which compares a debtor’s income from the previous six months with a set of standardized expenses. If the debtor’s income significantly exceed expenses, the case fails the means test and may be dismissed as abusive in Chapter 7 under Bankruptcy Code Sect. 707(b)(3). The chapter 13 equivalent to the means test is the ‘disposable income test’, which subtracts the means test expenses from means test income to calculate the minimum amount of money that must be paid to general unsecured creditors in chapter 13.
In both the Burnett and Uzailko bankruptcy cases, the ‘disposable income test’ itself was not an issue. The Burnett household income was $117 less than means test expenses; and the Uzailko household income was below the New York State median, and so the disposable income test didn’t apply.
But one big reason that both debtors ‘passed’ the disposable income test is that their social security income was not counted toward their household income. When the ch. 7 means test and the ch. 13 disposable income test were added to the bankruptcy code in 2005, the very definition of ‘current monthly income’, found in Section 101(10A), specifically excluded benefits received from the Social Security Act, as well as child support.
Since 1939, social security income cannot be seized by creditors outside of bankruptcy by operation of federal law (42 USC Sect. 407.) And this ‘anti-assignment’ provision applies in bankruptcy as well, by an amendment passed 1983 (42 USC Sect. 407(b)).
Income and expenses are listed in a chapter 13 debtor’s bankruptcy filings on schedules I and J, in addition to the disposable income test. And it is the difference between net income on schedule I and household expenses on schedule J that, at a minimum, must be paid into a chapter 13 plan.
The attorney who filed the chapter 13 cases for Burnett and Uzailko did not include social security income on schedule I (the income was listed elsewhere, so there was no question that the debtors were trying to hide it.) As filed, the Burnett plan projected paying usecured creditors 10% of their claims; for Uzailko it was 37%.
Without social security income included, the Burnett’s Schedule I income exceeded Schedule J expenses by $493,67. If social security was added, the difference would increase by $878 to $1,371.67. The Schedule I and J difference in the Uzailko case would balloon from $400.25 to $1,496.25, with social security added.
The chapter 13 trustee in Syracuse filed objections to both plans on the sole grounds that social security income was not included in calculating the minimum plan payment. There were no other aggravating factors in either case. The trustee contended that the cases were not filed in ‘good faith’, the catch-all grounds for denying confirmation of a chapter 13 plan.
As Judge Cangilos-Ruiz analyzes it, circuit courts of appeals have taken two basic paths in determining whether a plan is filed in good faith. “In his treatise on chapter 13 bankruptcy, Keith Lundin observes that the requirement of good faith for confirmation under Code 1325(a)(3) has been the single, most litigated provision of chapter 13 and has divided the circuit cases into two basic camps. Some courts employ the “factors approach” considering several discrete factors to assess good faith, as exemplified by the Eighth Circuit in In re Estus, 695 F.2d 311 (8th Cir. 1982). Other courts adopt a “generic test” equating good faith with “honesty of intention.” Keith M. Lundin, Chapter 13 Bankruptcy, 3rd ed. 2007-1, Vol. 3 177.1 (2000 & Supp. 2004).”
Burnett, page 7. The judge goes on to quote a decision from the Bankruptcy Appeals Panel for the First Circuit:
” The meaning of the term “good faith” has gone far afield from that intended by the drafters of the Bankruptcy Code. Applying individualized standards of moralistic decision-making reserved only for Congress, many courts have interpreted “good faith” to mean fairness to creditors as determined by the court. But fairness is a relative term, and … many of the factors employed in
the case law have been preempted by contrary judgments explicitly made by Congress … The meaning of good faith is simple honesty of purpose … And, if there can be any doubt that this was its meaning intended by Congress when it passed the Code, that doubt is resolved by examination of decisions under the prior Act. In applying the same good faith requirement under the prior Act, courts looked only to the honesty of the debtor”s postfiling conduct. They did not concern themselves with … the “purpose or spirit” of bankruptcy law. If Congress intended to change this pre-Code approach, we must presume Congress would have expressed that intent. The contrary view of good faith, so prevalent in the case law, is blatantly inconsistent with a debtor”s clear statutory rights.”
Keach v. Boyajian (In re Keach), 243 B.R. 851, 867-868 (B.A.P. 1st Cir. 2000).
In other words, should ‘good faith’ be determined by a list of factors not necessarily included in the bankruptcy code? Or should a case filed with an honest intent be considered to be in good faith? In this case, Judge Cangilos-Ruiz falls into the second category, citing as authority the Second Circuit Court of appeals decision Johnson v. Vanguard Holding Corp (In re Johnson), 708 F.2d 865, 868 (2d Cir. 1983). The judge acknowledged that some other decisions around the country cited the failure to include social security income as a factor in denying chapter 13 plans (In re Westing, Bk 09-03594 (Bankr. D. Idaho July 13, 2010); In re Rodgers, 430 B.R. 910 (Bankr. M.D. Fla. 2010); In re Cranmer, 433 B.R. 391 (Bankr. D. Utah 2010)). But Judge Cangilos-Ruiz concluded that the social security income was one of multiple factors of bad faith in those cases, while in this case it is the only reason.
The judge also noted that the Supreme Court last year, in Hamilton v. Lanning (In re Lanning), 130 S. Ct. 2464 (2010), which held that unusual fluctuations in income in the six months prior to filing bankruptcy do not necessarily have to be reflected in plan payments, specifically acknowledged that social security income do not have to be included in the disposable income test.
The court accepted the reasoning in a another series of cases that concluded the treatment of social security income in BAPCPA’s disposable income test precluded requiring a chapter 13 debtor to apply social security income in a plan: In re Carpenter, 614 F.3d 930, 936 (8th Cir. 2010); In re Barfknecht, 378 B.R. 154 (Bankr. W.D. Tex. 2007); Fink v. Thompson (In re Thompson), 439 B.R. 140 (B.A.P. 8th Cir. 2010); In re Green, Bk #09-44481 (W.D. Mo. Feb. 1, 2010)). Accordingly, as there were no other ‘bad faith’ factors in these cases, the judge confirmed the plans over the trustee’s objections.