Memo to Congress Fix Needed on New Best Interest Test in 1325(b)

The last time I wrote a column was shortly after the birth of my son. Since
then, I’ve been delightfully occupied with the all-important task of raising
Harrison, who I am happy to report is a bright, handsome and happy little guy
(don’t worry, I won’t inflict pictures on my readers—though
they are available upon request!).<br>
<br>
Since 2003, much else has happened in the world—and especially so in the
last six months. The Bankruptcy Abuse Prevention and Consumer Protection Act
of 2005 (BAPCPA) was passed by Congress. Forces have been at work trying to
get the provisions in this law enacted since 1997. Ultimately, they succeeded,
without regard to its many imperfections (needless to say, as one required to
become an expert on the new law, I dismiss as ridiculous the testimony of one
expert before Congress that every word of the new law is “perfect”).<br>
<br>
Never mind whether we agree with the policies expressed in this new law. That’s
irrelevant. What is relevant (at least to members of Congress) is that the bill
was sold to Congress as an effort to get more debtors to use chapter 13 rather
than chapter 7. If the bill fails to actually achieve that stated goal, then
I would think that Congress might be concerned enough to make changes.<br>
<br>
I’ve come across a provision within chapter 13 that, if read literally
(and that is what the Supreme Court tells us judges we are supposed to do),
will undo chapter 13 as an effective form of relief for hundreds of thousands
of Americans. What is more, those same Americans will almost certainly lose
their homes. I seriously doubt that Congress had that intention in mind. Yet
if we judges do our jobs as we have been instructed by higher courts and apply
a “plain meaning” interpretation to the words of the statute, I
fear that the consequences will be exactly as I have predicted.<br>

<br>
Here is the problem, in a nutshell (time to get out your new Codes, everyone).
Section 1325(b) is the “best efforts” test that Congress added to
the Code in 1984. It requires debtors to apply all of their net disposable income
to creditors, unless their plan already repays creditors in full. Simple enough.
For years, judges have been scrutinizing Schedule I (income) and Schedule J
(expenses) to see whether all the excess income is going into the debtor’s
plan. For what it’s worth, I think the “best efforts” provision
is a good idea.<br>
<br>
In BAPCPA, Congress amended §1325(b)(1)(B) in a subtle way, but with serious
consequences for debtors whose incomes fall below the median (in our district,
that’s a family of four with an income of less than $54,554). The statute
now says that projected disposable income to be received during the term of
the plan has to be applied to make payments to unsecured creditors under the
plan. Sounds good, right?<br>
<br>
Wrong. It’s bad. Very bad indeed. Suppose our debtor is a couple with
two children, making $50,000 a year. They have a mortgage for $120,000, and
two cars with loans of $18,000 and $22,000, respectively (in Texas, couples
have to have two cars, because we don’t have subway systems like they
do in Washington, D.C.). That means they have mortgage payments and car payments
that must be made, or they will lose their cars and their house. But the plan,
according to §1325(b)(1)(B), has to apply all of the debtor’s disposable
income to pay unsecured creditors. That leaves how much to pay any arrearages
on the home mortgage? That’s right. Zero. Nada. And how much to pay on
the car loans? Same answer.<br>
<br>

Well, you say, don’t we have some relief in the definition of disposable
income in §1325(b)(3)? Doesn’t that direct us to the allowed expenses
under §707(b)(2)(A)? And isn’t one of the categories of allowed expenses
that the debtor can deduct from income payments to secured creditors necessary
to keep property the debtor needs, in order to calculate disposable income (go
check §707(b)(2)(B)(iii) for details)?<br>
<br>
There is relief in §1325(b)(3)—but only for families who earn more
than the median family income. So, if the family is fortunate enough to make
$70,000 a year instead of $50,000 a year, they can pay secured creditors, and
pay whatever is left over (if any) to unsecured creditors, and pass the “best
efforts” test with flying colors.<br>
<br>
For families who earn less than the median, however, we’re back to Schedules
I and J, just like we used to do it—except now, with that unfortunate
addition of <br>
the words “to unsecured creditors” in §1325(b)(1)(B), these
families won’t be allowed to make any payments to secured creditors at
all. That means the plan fails, and the secured creditors get to repossess the
house and the cars.<br>
<br>

This is an odd result—so odd that the law cannot be read literally. Perhaps.
There are certainly other rules of statutory construction besides the plain-meaning
rule. But with the drumbeat of Supreme Court authority rumbling in my head,
I, for one, am not particularly comfortable with departing from plain meaning.
And the meaning is plain indeed—families with big incomes get to do chapter
13 plans, but families with smaller incomes get to lose their houses.<br>
<br>
Members of Congress, is this what you intended, really? This problem needs to
be fixed, and soon. Because when families lose their homes, they also lose their
neighborhoods and the schools their children have been going to. They often
move to less safe neighborhoods and poorer schools. Bad enough what this does
to Mom and Dad, who stand to lose the most valuable asset they will ever own
in their lives. But what about the children? Please, Congress. Fix this.