The Bankruptcy Lawyers Blog

In a case where a non-filing spouse generates income, the BAPCPA income analysis can get complicated, in a hurry. The income analysis provided by the labyrinthine bankruptcy amendments of 2005 is far from settled. However, a bankruptcy judge in Florida has qualified the amount of the non-filing spouse's income that must used to calculate the Chapter 13 debtor's current monthly income.

In In re Quarterman, 2006 WL 1234902 (Bkrtcy.M.D.Fla.,2006), the court held that under the "disposable income" test as modified by BAPCPA, the monthly income of a debtor's non-filing spouse must be included in determining current monthly income (CMI), only to the extent that the non-filing spouse contributes his/her income to pay the household expenses of the debtor.

The court began its analysis by noting that Congress amended the definition of disposable income, in section 1325(b)(2), to state that disposable income means "current monthly income" received by the debtors...less amounts reasonably necessary to be expended for the maintenance and support of the debtor and debtor's dependants. Section 101(10)(A) defines CMI as "the average monthly income from all sources that the debtor receives (or in a joint case the debtor and the debtor's spouse receive) without regard to whether such income is taxable...derived during the six month period" prior to filing the bankruptcy petition. The court went on to say that part B of Section 101(10A) provides that CMI also "includes any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor's spouse), on a regular basis for the household expenses of the debtor..."

The Court ruled under BAPCPA that in calculating a debtor's disposable income for Chapter 13 confirmation tests, it is necessary to start with the debtor's current monthly income, which is the debtor's average (gross) monthly income for the previous six months, plus amounts others, i.e. the debtor's non-filing spouse in a single case, regularly contributed to household expenses of the debtor or the debtor's dependants, less other (non-applicable) exclusions, and reduce from it the following amounts: (1) income that is included in current monthly income that was not "received" by the debtor; (2) "amounts reasonably necessary to be expended" by the debtor, whether under § 1325(b)(2)(A) and (B) or section 707(b); (3) "child support payments, foster care payments, or disability payments for a dependant child --- to the extent reasonably necessary to be expended for such child"; (4) amounts required to repay a loan described in section 362(b)(19) (loans from qualified plans); and (5) amounts withheld from wages or received by employers as contributions to employee retirement plans.

Stay tuned, this issue will continue to be argued far and wide throughout the bankruptcy community. As with all poorly drafted legislation, BAPCPA creates more questions than answers.

*A NACBA member in Maryland is preparing to challenge the local trustees' practice of including all income of the non-filing spouse, and would be interested in hearing how that income is treated in other areas. Please share your local experiences with us!

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The Ninth Circuit in Hebbring v. U.S. Trustee, (9/11/06 04-16539), a pre BAPCPA case, ruled that a debtor may contribute to a retirement plan and not run afoul of the substantial abuse provisions of 707(b) of the Bankruptcy Code. The court upheld the bankruptcy court's determination that the thirty-three year old debtor's petition in this matter showing an annual income of $49,000.00, $11,124.00 in consumer credit card debt and monthly retirement contributions of approximately $300.00, constituted substantial abuse under section 707(b).

However, the court went on to say that the Bankruptcy Code does not, per se, disallow voluntary contributions to a retirement plan as a reasonably necessary expense in calculating a debtor's disposable income, but rather requires courts to examine the totality of the debtor's circumstances on a case-by-case basis to determine whether retirement contributions are a reasonably necessary expense for that debtor.

When determining whether a petition constitutes substantial abuse under Chapter 7, the court ought to "examine the totality of the circumstances, focusing principally on whether the debtor will have sufficient future disposable income to fund a Chapter 13 plan that would pay a substantial portion of his unsecured debt." Although the Third and Sixth Circuits have employed a per se rule that voluntary retirement contributions are never a reasonable expense, the Ninth Circuit found no evidence that Congress intended a per se rule against retirement contributions.

The Ninth Circuit has consistently found that section 707(b) does not create a "bright line test" for substantial abuse, but "commits the question of what constitutes substantial abuse to the discretion of the bankruptcy judges within the context of the Code." The court outlined several factors to consider when making this determination, including:

-The debtor's age, income, and overall budget;
-Expected date of retirement;
-Existing retirement savings and amount of contributions;
-The likelihood that stopping contributions will jeopardize the debtor's fresh start by forcing debtor make up lost contributions after emerging from bankruptcy;
-The needs of the debtor's dependents.

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George W. Bush memorably opined at the BAPCPA signing ceremony that "under the new law, Americans who have the ability to pay will be required to pay back at least a portion of their debts." Well, Mr. President, the courts are divided on the accuracy of your conclusion.

In In re Rotunda, the US Bankruptcy Court for the Northern District of New York, overruled the Chapter 13 trustee's objection and confirmed a Chapter 13 plan based on CMI as determined by Form B22C, and not on the debtor's actual disposable income provided on the bankruptcy schedules.

The debtor's Amended Chapter 13 plan proposed to pay $800.00 for the first 4 months and $1200.00 per month for the remaining 56 months of their plan. The trustee objected claiming that the plan failed to provide all of the Debtor's "disposable income" to the payment of unsecured creditors pursuant to section 1325 (b)(1)(B).

The debtor's monthly income as provided on Form B22C was $5674.02, annualized at the rate of $68,088.00 which is over the applicable median income. Accordingly, the debtor's income was subject to the BAPCPA means test. After applying the IRS deductions and additional allowed expense deductions, the debtor's monthly "disposable income" under section 1325 (b)(2) was $157.77.

Schedules I & J stand in sharp relief to the disposable income under section 1325(b)(2). Schedules I & J provided a monthly net surplus of $3299.03. The schedules, unlike Form B22C, included the debtor's social security income. The Trustee argued that the court ought to examine Schedules I & J to determine the amount of income "projected" to be available for distribution to the unsecured creditors. The Court disagreed.

The issue boils down to whether a debtor's "projected disposable monthly income," which must be devoted to a Chapter 13 plan, is the same thing as the "disposable income" calculated based on the current monthly income.

The court held that CMI under Form B22C controls the Chapter 13 plan payments to be made to unsecured creditors. The Court parsed the statutory language and determined that "instead of using a figure based on income and expenses that existed at the time the debtor completed his/her schedules...Congress opted to use an average of a debtor's income over the six months prepetition in calculating CMI..." The court went to say that CMI, which forms the bases for calculating "disposable income" as provided in section 1325(b)(2) is defined as "the average monthly income from all sources that the debtor receives without regard to whether such income is taxable, derived during the six month period" prior to filing. BAPCPA expressly excludes social security benefits from CMI.

Section 1325(b)(1)(B) references "projected disposable income" and the BAPCPA amendments define "disposable income." The court reasoned that section 1325(b)(2) "goes on to explain what was being projected, namely, CMI received by the debtor...to the extent reasonably necessary to be expended...." The court does not agree that the projected disposable income must refer to the surplus on Schedules I & J. The court concluded that "projecting disposable income based on an average of six months' income after certain deductions and payment on secured and priority claims is no less realistic than the figures in Schedules I & J for proposing a feasible plan."

In a final parting shot, the court acknowledged that the discretion to review "the reasonableness of a debtor's expenses in calculating disposable has been curtailed, in some instances, by the new provisions that allow, whether or not intentionally, a debtor to propose a plan which provides zero payments to unsecured creditors despite having the financial wherewithal to make some payments to them." The court goes on to say that if this was not Congress' intent, then it is up Congress to resolve the situation.

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Three cases decided in different jurisdictions in August allowed bankruptcy trustees to avoid mortgages because of imperfections in execution or recording.

The Bankruptcy Court for the Eastern District of Kentucky ruled in In re Helvey that a mortgage wherein the notary acknowledgment did not show the borrower's name, name of county, or date of acknowledgment failed to provide constructive notice to the trustee as a hypothetical bona fide purchaser as of the date of the commencement of the bankruptcy case.

The U.S. District Court for the Northern District of Indiana upheld a similar ruling in In re Stubbs, despite Indiana statutes creating a presumption of compliance and dictating that a properly recorded document provides constructive notice of its contents. In Stubbs, the notary acknowledgment failed to show the borrower's name.

In re Bross involved a mortgage document that was unsigned. Although the document bore the borrower's initials in numerous fields and was accompanied by signed riders, the Bankruptcy Court and the U.S. District Court for the Southern District of Ohio ruled that the requirement that the mortgage be executed was not satisfied and allowed the trustee to avoid the mortgage.

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The national median income rose slightly last year, according to a U.S. Census Bureau report, but that's probably scant comfort to consumers in Washington, D.C., where the median income has declined by about $10,000 for 2, 3 and 4 person households. Although the District of Columbia saw the largest decline, the median income for a family of four in Idaho dropped by about $5,000, and the same size family in Mississippi saw a $4,000 decline. New Hampshire median incomes declined for 2, 3 and 4 person households, with 2 person households losing about $4,000 annually.

While these states suffered the largest drops, they're far isolated. 37 states saw a decline in median income in at least one family-size category, and five states showed losses across the board for 2, 3 and 4 person households.

The declining economies in those states undoubtedly create hardships for the consumers who live and work in them. The picture of an improving economy painted by the federal government undoubtedly adds to that stress. But soon--probably as early as October 1--the government will add injury to insult when the U.S. Trustee adopts these new median income figures for use in Chapter 7 means testing.

Then, debtors already impacted by declining income will find themselves subjected to more rigorous testing before Chapter 7 filing, and in some cases be disqualified altogether.

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