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Must a Debtor Always Pay All Disposable Income to Unsecured Creditors Over the Commitment Period in Chapter 13 Bankruptcy?
If you are a debtor seeking debt relief through Chapter 13 bankruptcy, whether you need time to get caught up with your mortgage or other secured loan payments, avoid a foreclosure or repossession, or repay an income tax debt in a more manageable way, the feasibility of a repayment plan may depend on the period over which you can spread your payments and how your disposable income is defined under the bankruptcy laws. Since the deemed amount of disposable income determined by the artificial Means Test may bear little reality to a person’s actual monthly expenses, the issue of how much disposable income must be paid into the Chapter 13 plan over which commitment period can determine whether a debtor is able to propose an affordable repayment plan that a court will confirm. This article reviews recent court decisions that clarify misconceptions regarding the commitment period and a debtor’s obligation to dedicate all of his disposable income to payment of the unsecured creditors.
The precise issue can be illustrated as follows: If you are an above-median debtor whose disposable income under the Means Test is say $1800 a month and your total debt can be satisfied over the five year commitment period by monthly payments of say $800, do you need to pay $800 a month for 60 months or $1800 a month until the Plan obligation is paid in full? This issue has been the subject of uncertainty for some time and different trustees and courts have interpreted and applied the law both ways.
The general rule is that one has to propose a Chapter 13 plan that pays all one’s disposable income to repayment of the unsecured creditors over the applicable commitment period. The Bankruptcy Code provides that the “commitment period” for a below-median income Debtor to repay his debt is 36 months and for an above-median income Debtor the commitment period is 60 months. Many trustees contend that the plan must be either 36 months or 60 months and that a shorter plan is not permitted.
The Bankruptcy Court in the First Circuit, in the case of In re Donald and Selena Richall (Bankr. D.N.H. 5/11/12), has ruled that a Chapter 13 Debtor has the right to commit only as much of his disposable income as is necessary to fully repay the unsecured creditors over the 60 months commitment period and is not required to pay in more and complete the plan payments in less than 60 months simply because, according to the Form B22C, the Debtor has more disposable income. This means that if the Debtor proposes a Chapter 13 repayment plan in good faith, the Debtor has met his obligation to pay according to his ability under the Bankruptcy Code (See Sections 1322(d)(1), 1325(b)(1) and 1325(a)(3)), and the Court has no authority to require the Debtor to pay in an amount that would result in the plan payments being completed in less than the applicable commitment period.
Similarly, a bankruptcy court in the Fourth Circuit, In re Floyd. and Bonnie M. Winn (Bankr. W.D.N.C. 5/12/12), reviewed the applicable Bankruptcy Code sections and stated that a debtor’s plan is confirmable if either of the two prongs are satisfied. - As long as the plan proposes to pay all allowed claims in full, Section 1325(b)(4)(B) permits the debtor to propose a plan over period less than the commitment period applicable under Section 1325(b)(4)(A). The court pointed out that the language of the statute permits but does not require the debtor to propose a plan to repay the unsecured creditors in less than the applicable commitment period.
A little background will be helpful to place this issue in context. - Debtors who file for bankruptcy relief under Chapter 13 are required by the Bankruptcy Code (See Sections 1322(d)(1), 1325(b)(1)) to commit all their disposable income to the repayment of their unsecured debts over a period of thirty six (36) or sixty (60) months, depending on the commitment period applicable to such debtor. Disposable income refers to income that exceeds the reasonable and necessary budget for that Debtor. Simply stated, if you have more income than the allowed deductions from income, you will have disposable income. Disposable income for the purposes of the Means Test is calculated using Form B22 by taking your countable gross household income, deducting all allowed expenses based on IRS published national and local standards. Allowed expenses are various categories of expenses, such as allowances for housing, utilities, food, clothing, medical, and transportation expenses, among others, and including mortgage, automobile and other secured payments. The amount remaining is considered to be “disposable income.”
As a practical matter, the deemed amount of disposable income determined by the artificial Means Test may bear little reality to a person’s actual monthly expenses. In some cases, a caring, experienced bankruptcy lawyer, such as Rob Goldman, Esq., of Rob Goldman Legal Solutions, with locations in Dundalk, Bel Air, Owings Mills and Baltimore City, can thoroughly review the facts and circumstances of your situation and advise you how the bankruptcy laws may be interpreted and applied in the manner most favorable to you, and explore all debt relief options.
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