In August, Congress adopted the so-called HAVEN Act, which allows military veterans to exclude disability benefits from the calculation of “current monthly income.” In practical terms, the new law means that veterans will no longer be compelled to pay a portion of their disability benefits to creditors under chapter 13 plans.
Chief Bankruptcy Judge Phillip J. Shefferly of Detroit decided on March 10 that the HAVEN Act allows veterans to modify confirmed chapter 13 plans by reducing payments to creditors.
Judge Shefferly’s holdings are more nuanced, so bear with us while we lay out the background and drill down on his rulings.
The Debtor’s Plan and Finances
The debtor filed a chapter 13 petition in December 2018 and confirmed a plan in March 2019 with a 100% distribution to unsecured creditors. The debtor was paying her mortgage directly alongside $600 a month paid to the trustee.
In October 2019, the debtor filed a proposed modification to her plan that would reduce her payments to $500 a month. The modified plan would reduce the recovery by unsecured creditors.
The debtor justified the plan modification by filing amended schedules eliminating some $1800 in monthly veteran’s disability benefits from her disposable income.
The trustee objected to approval of the modified plan, contending that the debtor should not be allowed to invoke the HAVEN Act retroactively and deduct disability benefits from the calculation of disposable income.
The HAVEN Act
In the amendments to the Bankruptcy Code in 2005, Section 101(10A) broadly defined “current monthly income” to include income from all sources. The subsection as it then read had several specific exclusions, such as Social Security benefits and payments to victims of domestic terrorism. However, disability payments to military veterans were not excluded.
As Judge Shefferly said in his 16-page opinion, current monthly income is the “building block” for determining eligibility for chapter 7 and a debtor’s right to confirm a plan in either chapter 11 or 13.
Aiming to rectify mistreatment of members of the military who were injured on died in service to the country, Congress adopted the Honoring American Veterans in Extreme Need Act, Public Law No. 116-52, 133 Stat. 1076, commonly known as the HAVEN Act. Judge Shefferly said the Act was intended to treat veterans’ “benefits the same as Social Security benefits by excluding them from [current monthly income] and, therefore, from an individual debtor’s projected disposable income.”
From the calculation of current monthly income, Section 101(10A)(B)(ii)(IV) now excludes “monthly compensation, pension, pay, annuity, or allowance paid under title 10, 37, or 38 in connection with a disability, combat-related injury or disability, or death of a member of the uniformed services . . . .”
The HAVEN Act became law on August 23, 2019, but did not by its own terms state whether the new definition of current monthly income would apply to pending cases.
Judge Shefferly identified three issues regarding the application of the Act to pending cases.
The Act Applies to Pending Cases
Judge Shefferly first addressed the question of whether the Act applies only to cases filed after enactment. He cited Supreme Court authority for the proposition that a court applies the law in effect at the time of rendering a decision unless “doing so would result in manifest injustice.” Bradley v. School Board of Richmond, 416 U.S. 696, 711 (1974).
Judge Shefferly found no manifest injustice in applying the law to pending cases. Indeed, he said the legislative history “strongly suggests” there would be manifest injustice if the new law were not immediately applicable to remedy an “obvious inequity.”
Finding nothing in the Act, the legislative history, or the official forms indicating that the new law should be applied only to cases filed after enactment, Judge Shefferly held that he would apply the HAVEN Act as “the law in effect at the time that the Court will render its decision.”
Is HAVEN Retroactive?
Supreme Court authority includes a presumption against retroactivity absent a clear congressional intent to the contrary. Landgraf v. USI Film Products, 511 U.S. 244 (1994).
Given that Congress did not explicitly make the Act retroactive, Judge Shefferly analyzed whether retroactivity “would impair the rights that a party possessed when they acted.”
Judge Shefferly decided it would be “fundamentally unfair” were he to apply the Act by deducting the debtor’s disability benefits and unraveling confirmation. In other words, he said that “‘retroactive’ application of the HAVEN Act to confirmation of the Debtor’s plan is not permitted.”
The Debtor May Employ HAVEN to Modify the Plan
Although the debtor may not employ the Act retroactively to set aside confirmation, may the debtor nevertheless rely on the Act to modify her plan? In other words, does the new statute provide grounds to modify the plan, even though the Act does not apply retroactively?
Section 1329 allows a plan to be modified after confirmation. On an issue where the courts are split, the Sixth Circuit Bankruptcy Appellate Panel has held that the ability to modify a plan does not require an unanticipated or substantial change in the debtor’s circumstances.
The BAP, however, takes something of a middle ground by precluding modification, as Judge Shefferly said, of “issues that were or could have been decided at the time the plan was originally confirmed.” Storey v. Pees (In re Storey), 392 B.R. 266, 272 (B.A.P. 6th Cir. 2008).
Surely, Judge Shefferly said, the adoption of the Act was “not something that the Debtor or the Trustee could have anticipated when the Debtor’s plan was confirmed.” He found “nothing unfair” about employing the Act to modify the plan when the creditors were all given notice and none objected.
In fact, Judge Shefferly said that precluding the debtor from taking advantage of the HAVEN Act “would be to shackle the Debtor going forward to a policy . . . that Congress has expressly rejected as an “‘obvious inequity.’”
Judge Shefferly allowed the debtor to modify the plan.
In August, Congress adopted the so-called HAVEN Act, which allows military veterans to exclude disability benefits from the calculation of “current monthly income.” In practical terms, the new law means that veterans will no longer be compelled to pay a portion of their disability benefits to creditors under chapter 13 plans.
Chief Bankruptcy Judge Phillip J. Shefferly of Detroit decided on March 10 that the HAVEN Act allows veterans to modify confirmed chapter 13 plans by reducing payments to creditors.
Judge Shefferly’s holdings are more nuanced, so bear with us while we lay out the background and drill down on his rulings.