Update: Projected Disposable Income under BAPCPA

An earlier article in the Consumer Bankruptcy Committee Newsletter[1] described differing responses to the issue of whether “projected disposable income” is distinguishable from “disposable income” for the purposes of compliance with 11 U.S.C. §§1325(b)(1) and (2). The conclusion observed that the differences among those responses await resolution by review or legislative action. Since then, many bankruptcy courts and three bankruptcy appellate panels have spoken on the issue.

According to a majority of courts examining this issue, the addition of the participial adjective “projected,” as well as the particularization of income “as of the effective date of the plan,” which is “to be received in the applicable commitment period” the Bankruptcy Code appears to require a determination of a debtor’s anticipated income. For confirmation of a plan in the face of objection thereto, this anticipated income must be applied to paying unsecured creditors. 11 U.S.C. §1325(b)(1). The standard-bearer for this approach is the U.S. Bankruptcy Court for the Northern District of Texas, which conducted its oft-cited textual and contextual analysis of the germane statutory language and concluded that projected disposable income “necessarily refers to income that the debtor reasonably expects to receive during the term of her plan.” In re Hardacre, 338 B.R. 718, 723 (Bankr. N.D. Tex. 2006).

Predictably, others, led by the widely cited In re Alexander, 344 B.R. 742 (Bankr. E.D.N.C. 2006), eschew any independent operation of the term “projected” as used to modify “disposable income.” The Alexander court opined that the Code “plainly sets forth a new definition and method for calculating disposable income,” to which projected disposable income is “linked” (although the court avoided “equated”), and that determination of disposable income is a mathematical calculation mandated by 11 U.S.C. §1325(b)(2). Resultantly, “debtors with no disposable income under the new law have no projected disposable income.”

Appellate Reviews

As mentioned above, three bankruptcy appellate panels (BAP) have reviewed the issue of the distinction, if any, between “projected disposable income” and “disposable income” Each has concluded that the two are not the same.

The First Circuit

The U.S. Bankruptcy Appellate Panel for the First Circuit furnished the first of the three decisions. In Kibbe v. Sumski, 361 B.R. 302 (B.A.P. 1^st Cir. 2007), the court affirmed a bankruptcy court’s denial of the confirmation of a debtor’s chapter 13 plan. The so-called “below-median” debtor’s plan faced a trustee’s motion to dismiss (treated by the court as an objection to confirmation) for its failure to devote to all of the debtor’s projected disposable income to payments to unsecured creditors. More specifically, the trustee objected to the manner by which the debtor calculated her projected disposable income. Because of a job change, the debtor’s income at the time of her petition was substantially greater than her current monthly income, properly calculated as a monthly average of her income immediately six months pre-petition. The debtor argued that because her reasonably necessary expenses exceeded her current monthly income, she had neither disposable income nor projected disposable income to devote to her plan. The trustee argued that her income at the time of her petition, much higher than her statutorily derived current monthly income, provided substantial projected disposable income for payment to unsecured creditors. Her proposed plan, he argued, was therefore not confirmable.

The BAP agreed with the trial court that the debtor’s plan was impermissible because it understated the debtor’s projected disposable income by its failure to account for the known substantial increase in the debtor’s income, as projected over the plan’s applicable commitment period. Noting and describing the two disparate approaches adopted by bankruptcy courts,[2] the panel agreed that the term “projected” must be given independent significance so as to distinguish “projected disposable income” from “disposable income,” such that the former is the debtor’s anticipated actual income. Such an interpretation of the Code’s language, so opined the panel, accorded with rules of statutory construction by avoiding the consigning of “projected” to impermissible surplusage and an absurd result distinctly discordant with congressional intent and common sense. Indeed, the panel observed that “life informs otherwise” than to assume that income is immutable after the inception of a case or during the applicable commitment period.

As a practical matter, the appellate review adopted the approach in In re Jass, 340 B.R. 411 (Bankr. D. Utah 2006) and found that the projected disposable income resulting from proper completion of Official Form 22C was presumptively determinative unless it materially differs from a debtor’s income at confirmation, or as may be reasonably anticipated over the applicable commitment period, or otherwise fails to show what a debtor can realistically pay to creditors. If any such showings are made, then a court must eschew a calculation on a form and seek a “reality-based determination of a debtor’s capabilities to repay creditors.” The panel believed that this approach was the most faithful to the Code, and to the goals of bankruptcy to provide a fresh start for a debtor and “a uniform and equitable distribution to creditors.”

The Ninth Circuit

In an as yet unpublished (but ordered published) decision, the U.S. Bankruptcy Panel for the Ninth Circuit arrived at the same conclusion, on the basis of very similar reasoning, in affirming a bankruptcy court’s denial of confirmation of a plan proposed by a debtor whose income saw a substantial rise shortly prior to his petition. Pak v. eCAST Settlement Corp. (In re Pak), No. NC-07-1201-DCaK, Opinion (B.A.P. 9th Cir. Nov. 7, 2007). The panel affirmed a bankruptcy court’s denial of confirmation of a debtor’s proposed chapter 13 plan. It opined that the addition of “projected” distinguished “projected disposable income” from “disposable income.” Additionally, “projected” is an essentially forward-looking term, consistent with pre-BAPCPA practice. Furthermore, BAPCPA’s “as of the effective date of the plan” language (see supra) seems to make a pre-petition six month average of income not determinative of projected disposable income. The panel found that while legislative history is unhelpful, it is nevertheless apparent that Congress intended a debtor to attempt, in good faith, to pay all he can afford. Reminiscent of the Kibbe panel, this appellate review observed that to equate “projected disposable income” with “disposable income” is unrealistic in a situation where income changes dramatically during the six months prior to petition. Lastly, such an approach is also consistent with modifications of plans under 11 U.S.C. §§1323 and 1329.

Like the Kibbe court, the Pak panel found that disposable income is the starting point for the determination of projected disposable income, but that the latter may diverge from the former upon evidence of a change to income prior to the effective date of the plan.

One of the panel’s members penned his own concurrence. He found that current monthly income may be, in calculating projected disposable income, adjusted pursuant to the “special circumstances” provisions of 11 U.S.C. §707(b)(2)(B). Alternatively, he proffered that, under the circumstances of the case before him, the debtor’s proposal of his plan lacked good faith.

The Tenth Circuit

The third review of this issue by a BAP is found in In re Lanning, No. KS-07-067, 2007 Bankr. LEXIS 4107 (B.A.P. 10^th Cir. Dec. 13, 2007). A bankruptcy court confirmed a debtor’s plan over a trustee’s objection, even though the plan’s projected disposable income was substantially less than the debtor’s disposable income due to a “bump” in income, not to be repeated, in the six months pre-petition. The appellate review affirmed. Recounting and relying upon the reasoning in Kibbe and Pak, the panel agreed that disposable income is the starting point for determining projected disposable income, and may be modified upon a showing that it does not accurately “predict a debtor’s actual ability to fund a plan.” Echoing the Kibbe concurrence, the Lanning panel determined to look to the “special circumstances” provisions of 11 U.S.C. §707(b)(2)(B) for guidance when a debtor claims that a change to her income fatally undermines the predictive and determinative effect of disposable income on projected disposable income.

Conclusion

It appears that most courts—as well as those BAPs that have spoken on the issue—distinguish projected disposable income from disposable income while nevertheless acknowledging the close relationship between the two. However, majority is not unanimity. Perhaps at some point this issue will win certiorari for its authoritative resolution. Alternatively, statutory amendment could answer the question. For either answer, practitioners might face a long wait.