The debtors were entitled to retain a $46,5000 personal injury settlement they received in the “gap” period before filing their chapter 13 petition, according to Bankruptcy Judge Thomas B. McNamara of Denver.
Even if the settlement proceeds had not been exempt under Colorado law, and even if the money had not arrived in the gap period before filing, Judge McNamara still would not have given the $46,500 to creditors under the debtors’ chapter 13 plan.
The Settlement
The debtors received $46,500 in settlement of a personal injury claim on June 1. Four days later, June 5, they filed a chapter 13 petition.
The debtors calculated that their projected disposable income was $582 a month, requiring them to pay some $35,000 under their 60-month chapter 13 plan. Were they obliged to include the settlement proceeds in the calculation of projected disposable income, the debtors would have been required to pay about $7,800 a month and could not have confirmed a plan.
The personal injury settlement was exempt under Colorado law.
The chapter 13 trustee objected to the debtors’ exemption claim and argued against confirming the plan unless some of the settlement proceeds were paid to creditors. One by one, Judge McNamara knocked down the trustee’s arguments, mostly based on the language of the statutes and Hamilton v. Lanning, 560 U.S. 505 (2010).
Messy Statutory Drafting
For those “uninitiated to the world of bankruptcy,” Judge McNamara said, “current monthly income” in Section 1325(b)(2) is “a bit misleading,” because it refers only to monthly income in the six months before bankruptcy. He also pointed out how the six-month measuring period preceding bankruptcy does not run from the filing date backwards.
Rather, as Judge McNamara said in his March 26 opinion, the six-month measuring period ends on the last day of the month preceding filing. He referred to the interval between the last day of the prior month and the filing date as the “gap” period. The case at hand was a “gap” case.
The Settlement Funds Weren’t Part of ‘PDI’
The trustee contended that the settlement funds should be included in the calculation of projected disposable income under Sections 1325(b)(1)(b) and 1325(b)(2). Those sections use the terms “current monthly income” and “disposable income.”
Because the trustee had objected to confirmation, Section 1325(b)(1) came into play. It requires applying “projected disposable income” to payments under the plan. For Judge McNamara, the meaning of projected disposable income was the “key to unlocking the confirmation puzzle.”
The words are not defined in the statute, but Judge McNamara said that the Supreme Court “solved the statutory Rubik’s cube” in Lanning. There, the Court took a “forward-looking approach” in calculating disposable income. The Court went on to say that “other known or virtually certain information about the debtor’s future income or expenses” should be taken into account, but “only in unusual cases.” Lanning, id. at 519.
Significantly, Congress did not end the “currently monthly income” period on the filing date. Because the settlement fell in the gap, Judge McNamara ruled that the debtors had correctly calculated disposable income at $582 a month by excluding the $46,500 from prefiling income.
Given the “plain meaning” of “currently monthly income” in Section 101(10A), Judge McNamara said that the settlement funds were neither part of currently monthly income nor disposable income. He therefore held that the debtors were “not obligated to commit the Personal Injury Funds as ‘projected disposable income’ in order to confirm.” The result, he said, was “mandated” by the statute that uses the word “future” twice.
Next, Judge McNamara asked what would have happened if the settlement had arrived on the last day of the month before filing, not in the gap. In that event, the settlement would have been included in disposable income. But that wasn’t the end of the story.
The Supreme Court came to the rescue in Lanning and its focus on the future. Because the facts in the case before him were so similar to Lanning, Judge McNamara said that the personal injury settlement “still should not be included” in projected disposable income.
Nevertheless, the trustee argued that the plan was not filed in good faith because the debtors planned on keeping the $46,500, which was more than they would pay under their plan.
The Tenth Circuit was on the debtors’ side. See Anderson v. Cranmer (In re Cranmer), 697 F.3d 1314 (10th Cir. 2012). After the BAPCPA amendments, the appeals court said that the good faith analysis took on a more narrow focus by asking whether the debtor listed debts and income accurately or made any fraudulent misrepresentations. Id. at 1319, n.5.
The debtors had been “forthcoming and honest” and had not “manipulated” the Bankruptcy Code, Judge McNamara said. He therefore confirmed the plan and overruled the trustee’s objection aiming for creditors to receive some of the personal injury settlement. He said that the “Debtors simply are not required to pay more . . . than what the Bankruptcy Code mandates.”
Note: On an issue where courts are divided, Judge McNamara did not decide whether the state-law exemption would have excluded the settlement from the calculation of disposable income. He bypassed the issue in view of his opinion that the settlement proceeds were not part of disposable income as a matter of statutory interpretation.
The debtors were entitled to retain a $46,5000 personal injury settlement they received in the “gap” period before filing their chapter 13 petition, according to Bankruptcy Judge Thomas B. McNamara of Denver.
Even if the settlement proceeds had not been exempt under Colorado law, and even if the money had not arrived in the gap period before filing, Judge McNamara still would not have given the $46,500 to creditors under the debtors’ chapter 13 plan.
The Settlement
The debtors received $46,500 in settlement of a personal injury claim on June 1. Four days later, June 5, they filed a chapter 13 petition.
The debtors calculated that their projected disposable income was $582 a month, requiring them to pay some $35,000 under their 60-month chapter 13 plan. Were they obliged to include the settlement proceeds in the calculation of projected disposable income, the debtors would have been required to pay about $7,800 a month and could not have confirmed a plan.
The personal injury settlement was exempt under Colorado law.
The chapter 13 trustee objected to the debtors’ exemption claim and argued against confirming the plan unless some of the settlement proceeds were paid to creditors. One by one, Judge McNamara knocked down the trustee’s arguments, mostly based on the language of the statutes and Hamilton v. Lanning, 560 U.S. 505 (2010).