Taking the middle ground between the majority and minority on a split, Chief Bankruptcy Judge Diane Davis decided that an exempt asset is not included in the calculation of “projected disposable income” in chapter 13 if it does not produce income.
The opinion by Judge Davis, of Utica, N.Y., implies that income from exempt assets belongs to creditors.
The couple in chapter 13 were below median income. The wife was scheduled to receive a cash inheritance of about $10,000 after filing. She claimed an exemption for the inheritance, using the so-called wildcard exemption under Section 522(d)(5).
The chapter 13 trustee objected to the exemption. Even if the inheritance were exempt, the trustee argued that the $10,000 must be included in the calculation of “projected disposable income” to be paid to creditors under the plan.
The wife-debtor came out on top in Judge Davis’ June 24 opinion.
Without citation of authority, the trustee contended that the wife was not entitled to exempt the inheritance.
Because the case was in chapter 13 rather than chapter 7, the debtor admitted that the after-acquired inheritance would be estate property under Section 1306(a)(1). Still, Judge Davis overruled the objection because the inheritance would be less than $13,900 available to the debtors as a wildcard exemption.
Judge Davis turned to a question on which there is a split among the lower courts: Is the value of an exempt asset included in the calculation of projected disposable income belonging to creditors under a chapter 13 plan? She said that the majority give the value of exempt property to creditors despite an exemption.
Two statutes are in play. With exceptions not applicable to the case at hand, Section 522(c) provides that exempt property “is not liable during or after the case for any debt of the debtor that arose . . . before the commencement of the case.”
If there is an objection to the plan, Section 1325(b)(1)(B) requires the debtor to devote all “projected disposable income” to the payment of unsecured claims. For Judge Davis, the question was this: Does the debtor’s projected disposable income include the cash inheritance?
To divine the answer, Judge Davis began by parsing Section 1325. Although the Code does not define “projected disposable income,” Section 1325(b)(2)(A)(i) defines “disposable income.” The defined term begins with “currently monthly income,” then specifically excludes certain types of income from the definition, such as child support and foster care payments. Inheritances are not among the exclusions.
“Current monthly income” is defined in Section 101 as the average monthly income from all sources in the six months before bankruptcy. Curiously, “current monthly income” is “expressly backward looking,” Judge Davis said.
In concluding that inherited assets are part of disposable income, Judge Davis said that the majority of courts employ the plain meaning of Section 1325(b), chapter 13’s forward-looking definition of estate assets, the different role played by exemptions in chapter 13, and the policy consideration in chapter 13 that broader discharge means that disposable income should include exempt income.
Judge Davis described the minority of courts as holding “that prepetition exempt property is excluded from the disposable income calculation.” For those courts, she said that “the disposable income analysis under Section 1325(b) ends” when the asset is declared exempt. In that vein, she cited the Fourth and Eleventh Circuits for holding that exempt assets are not disposable income.
A subset of the minority, according to Judge Davis, “focus on whether the pre-petition asset claimed as exempt produces income or provides a stream of revenue.” If an exempt prepetition asset “does not produce income or revenue,” she said that those courts hold that “it is not part of the disposable income analysis.”
Deciding which side to take as a general proposition, Judge Davis declined to follow the majority because an inheritance is not income the debtor will receive “on a regular basis.” Similarly, she said that Section 1322(a)(1) refers to “future earnings” or “future income” but does not refer to prepetition assets, “exempt or otherwise.”
Judge Davis said that the “practical effect” of the trustee’s position would be to “surcharge” the inheritance. The “practical effect of morphing the Inheritance into a source of revenue or income” would be the same as surcharging the exemption, a practice proscribed by Law v. Siegel, 571 U.S. 415 (2014), she said.
Put tersely, Judge Davis said that the “Inheritance simply does not relate, conceptually or otherwise, to income, much less future income.” Citing the Ninth Circuit Bankruptcy Appellate Panel, she said that an exempt asset is not projected disposable income if it is not it is not “a stream of payments.”
Judge Davis held that the inheritance was not income to be included in monthly disposable income. She said that her holding “strikes a balance between Congress’s intent to allow exempt property to remain exempt and its intent to include a debtor’s post-petition income in [current monthly income] that otherwise is not excluded.”
Taking the middle ground between the majority and minority on a split, Chief Bankruptcy Judge Diane Davis decided that an exempt asset is not included in the calculation of “projected disposable income” in chapter 13 if it does not produce income.
The opinion by Judge Davis, of Utica, N.Y., implies that income from exempt assets belongs to creditors.
The couple in chapter 13 were below median income. The wife was scheduled to receive a cash inheritance of about $10,000 after filing. She claimed an exemption for the inheritance, using the so-called wildcard exemption under Section 522(d)(5).
The chapter 13 trustee objected to the exemption. Even if the inheritance were exempt, the trustee argued that the $10,000 must be included in the calculation of “projected disposable income” to be paid to creditors under the plan.
The wife-debtor came out on top in Judge Davis’ June 24 opinion.