By: Donald L Swanson
Back in the mid-1990s, the Eighth Circuit Court of Appeals issued two opinions declaring the plain meaning of “projected disposable income” in § 1225(b)(1) to be “absurd” and that the true meaning thereof is, instead, “actual disposable income” determined at the end of the debtor’s confirmed Chapter 12 plan.
Such two opinions are:
- Rowley v. Yarnall, 22 F.3d 190 (8th Cir. 1994) (a plain reading of the statutory “projected disposable income” phrase “yields an absurd result”); and
- In re Broken Bow Ranch, Inc., 33 F.3d 1005 (8th Cir. 1994)(creditors may “require a final disposable income determination at the end of the plan, prior to discharge,” to ensure that debtor does not “accumulate an unreasonably large reserve of funds that would provide a windfall at the time of discharge”).
However, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) explicitly overruled both such opinions by adding the following provisions to § 1225(b)(1) and § 1229.
§ 1225(b)(1). Adding this part (C) to § 1225(b)(1), preceded by the “or” conjunction: “or (C) the value of the property to be distributed under the plan . . . is not less than the debtor’s projected disposable income for such period.”[Fn. 1]
§ 1229. Adding this part (d) to § 1229 on plan modification—“(d) A plan may not be modified under this section”:
- “to increase the amount of any payment due before the plan as modified becomes the plan”;
- “by anyone except the debtor, based on an increase in the debtor’s disposable income, to increase the amount of payments to unsecured creditors required for a particular month so that the aggregate of such payments exceeds the debtor’s disposable income for such month”; or
- “in the last year of the plan by anyone except the debtor, to require payments that would leave the debtor with insufficient funds to carry on the farming operation after the plan is completed.”
Here are the practical effects of such additions.
The § 1225(b)(1)(C) Addition
The Eighth Circuit opinions described above occurred more than a decade before enactment of BAPCPA—at which earlier time § 1225(b)(1) had only two subparts: (A) & (B).
The said Eighth Circuit opinions apply subpart (B) of § 1225(b)(1), which says: the plan must provide that “all of the debtor’s projected disposable income to be received in the three-year period . . . will be applied to make payments under the plan.”
So, BAPCPA’s addition of subpart (C), with the conjunction “or,” provides an additional-and-alternative way to determine whether the “projected disposable income” requirement of § 1225(b)(1) is satisfied.
The additional-and-alternative way, under the subpart (C) that BAPCPA added, is this:
- the focus shifts (i) away from debtor’s plan payments out of future earnings, and (ii) to the “value” of all plan distributions from any and every source;
- so, if for example debtor sells assets under the terms of a confirmed Chapter 12 plan and distributes the sale proceeds to creditors, those sale proceeds are included in the determination of whether debtor’s plan satisfies the “projected disposable income” requirement; and
- hypothetically under § 1225(b)(1)(C), if debtor’s plan proposes (i) a sale of debtor’s assets for $1 million and distribution of those proceeds to one or more creditors, and (ii) monthly payments of $100 each for 36 months from future earnings, then:
- the total “value of property” being distributed under the plan is $1,003,600; and
- so long as “projected disposable income” (including under the Eighth Circuit’s “final disposable income determination at the end of the plan”) is less than $1,003,600, these two results will follow—(i) the plan can be confirmed, and (ii) a discharge can be granted, upon debtor’s compliance with plan provisions through the end of the plan’s term.
This hypothetical result is based upon an opinion from the Ninth Circuit BAP[fn. 2] declaring that a corresponding provision in Subchapter V[fn. 3] is satisfied by paying bankruptcy sale proceeds of $432,972.95 to creditors under the confirmed plan, even though the actual amounts of payments from future earnings are uncertain.
The § 1229(d) Addition
The § 1229(d) added by BAPCPA also overrules the two Eighth Circuit opinions on “projected disposable income.” It does so by adding these specific limitations on an any post-confirmation effort to modify debtor’s plan to increase monthly payment amounts based upon actual income beyond projections:
- payments under a confirmed plan cannot be increased retroactively—i.e., once a plan payment is made, that payment amount cannot be increased by a subsequent plan modification;
- only the debtor can seek an increase in a plan payment amount to unsecured creditors that is greater than debtor’s actual disposable income for a particular month—this prevents a court from imposing payment obligations upon the debtor that are greater than the debtor’s current disposable income; and
- in the last year of a confirmed plan, payment amounts cannot be increased to a level “that would leave the debtor with insufficient funds to carry on the farming operation after the plan is completed.”
These specific limitations are discussed at length in a law review article titled “Bankruptcy Reform and Family Farmers: Correcting the Disposable Income Problem.”[Fn. 4]
Conclusion
One of the few positive things BAPCPA did was this:
- it overruled the two Eighth Circuit opinions that rejected as “absurd” the plain meaning of “projected disposable income” in § 1225(b)(1)(B).
20th Anniversary!
NOTE: The year 2025 is the twenty-years anniversary of the enactment of BAPCPA. This article is the seventh in a series of seven articles looking back over what BAPCPA has wrought.
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Footnote 1. The full text of the § 1225(b)(1)(C) addition is this: “or (C) the value of the property to be distributed under the plan in the 3-year period, or such longer period as the court may approve under section 1222(c), beginning on the date that the first distribution is due under the plan is not less than the debtor’s projected disposable income for such period.”
Footnote 2. The opinion is Legal Services Bureau, Inc. v. Orange City Bail Bonds, Inc. (In re Orange County Bail Bonds, Inc.), 638 B.R. 137 (B.A.P. 9th Cir. 2022).
Footnote 3. The corresponding provision in Subchapter V is § 1191(c)(2)(B).
Footnote 4. Susan A. Schneider, “Bankruptcy Reform and Family Farmers: Correcting the Disposable Income Problem,” Tex. Tech L. Rev. 309, 338-42 (Winter, 2006).
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