On a question where courts disagree, Bankruptcy Judge Denise E. Barnett of Memphis, Tenn., has held that a chapter 13 debtor may retain exempt proceeds from a personal injury settlement because proceeds from a claim are not “income.”
The debtor was in an auto accident before filing her chapter 13 petition. She scheduled the personal injury claim among her assets and claimed $7,500 as the maximum exemption for a personal injury claim under Tennessee law. Tennessee has opted out of federal exemptions.
Neither the trustee nor anyone else objected to the exemption claim.
Three months after confirming a plan, the debtor filed a motion to approve settlement of the claim. The debtor also amended her schedules to show that her portion of the settlement was about $5,500, or less than the state exemption.
At the ensuing hearing, the chapter 13 trustee contended that all of the settlement proceeds were “disposable income” despite the exemption and should be paid to creditors. The trustee did not object to the debtor’s exemption claim, however.
Judge Barnett said that “whether personal injury proceeds are part of the debtor’s disposable income has not been addressed in this Circuit post-BAPCPA.” She cited “some pre-BAPCPA courts [that] found that personal injury settlement proceeds should be considered disposable income, [while] other courts found that personal injury settlement proceeds were not projected disposable income because they were not regular payments.”
Judge Barnett found “little caselaw addressing this issue post-BAPCPA” but observed that “the split of interpretation continues.”
The governing statute changed with the BAPCPA amendments in 2005. Before amendment, Section 1325(b)(2)(A) defined “disposable income” as “income which is received by the debtor and which is not reasonably necessary to be expended . . . for the maintenance and support of the debtor or a dependent of the debtor.”
After BAPCPA, Section 1325(b)(2)(A) defines “disposable income” as “current monthly income received by the debtor . . . less amounts reasonably necessary to be expended” for enumerated items and those specified in Subsection 1325(b)(3).
Applying the statute, Judge Barnett first held that personal injury settlements are not “income.” Since the IRS Code explicitly says that personal injury settlements are not gross income “because they make the taxpayer whole from a previous loss of personal rights, they should not be considered as ‘projected disposable income’ under the Bankruptcy Code for the same reason.”
Judge Barnett buttressed her conclusion by noting how pending lawsuits are scheduled as property or assets, not as income, and therefore do “not present an opportunity for an inquiry as to whether Debtor really needs the validly claimed exempt asset.” She therefore rejected the trustee’s argument that the settlement proceeds are income payable to creditors under the plan.
Although the settlement proceeds were not income, the asset was still subject to the best interests test but were less than the state exemption of $7,500. Judge Barnett therefore ruled that “the Debtor is entitled to retain the entire amount of the personal injury settlement proceeds.”
On a question where courts disagree, Bankruptcy Judge Denise E. Barnett of Memphis, Tenn., has held that a chapter 13 debtor may retain exempt proceeds from a personal injury settlement because proceeds from a claim are not “income.”
The debtor was in an auto accident before filing her chapter 13 petition. She scheduled the personal injury claim among her assets and claimed $7,500 as the maximum exemption for a personal injury claim under Tennessee law. Tennessee has opted out of federal exemptions.
Neither the trustee nor anyone else objected to the exemption claim.
Three months after confirming a plan, the debtor filed a motion to approve settlement of the claim. The debtor also amended her schedules to show that her portion of the settlement was about $5,500, or less than the state exemption.