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Bankruptcy Case Law Developments

Bankruptcy Case Law Developments

United States Supreme Court

United States Supreme Court to Determine the Proper Method of Calculating

the Amount a Debtor Should Pay Towards Their Debt

In 2005, the Bankruptcy Code was overhauled by Congress in what is known as the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"). BAPCPA brought with it many changes, aiming to make it more difficult for people to eliminate debt entirely in a Chapter 7 case and forcing many debtors to pay back a portion of their debt in a Chapter 13 reorganization. One of the biggest changes BAPCPA brought about was the inclusion of form B22, more commonly known as the "means test". This form was intended by Congress to be used to determine how much a person can afford to pay back their creditors. Specifically, the means test form is a backwards looking document that calculates the amount of gross income a debtor has earned in the six months prior to the filing date of the case and applies Internal Revenue Service expense standards to that income to determine the amount per month a particular Chapter 13 debtor should be able to afford to pay back their creditors. This form takes into account no consideration of the debtor's current financial situation or actual ability to pay as reflected in debtor's schedule I & J budget. The B22 form calculation of the debtor's ability to pay back creditors is more commonly known as the debtor's projected disposeable income. Immediately, anyone can see that this could be a problem in several circumstances such as in the circumstance of a debtor receiving less income than what they were receiving in the preceding six months, typically due to a job change/loss, retirement, sickness, or other economic reasons. This effect could preclude many people, needing the refuge of a Chapter 13 Bankruptcy case without an option to file, due to the inability to afford the payment as calculated in the means test.

Bankruptcy and Appellate Courts all across the country are split as to which should control, the B22 form or debtor's actual budget. The Eight and Tenth Circuit Appeals Courts have both held that the debtor's actual budget controls, while the Ninth Circuit Appeals Court dictated that the B22 form controls the debtor's projected disposeable income calculation. In Utah, two judges from the same judicial district have written exactly opposite opinions, one holding that the B22 form controls the amount of the payment the debtor must pay, while the other holding that the debtor's actual income and expenses control. In Maryland, the case of In re Watson mandates that the B22 form controls unless there has been a substantial change in circumstances deemed sufficient enough to allow the debtor to then refer to their actual budget. Because of this wide split in opinions not only at the Bankruptcy Court level, but more importantly at the Circuit Court level, on November 2, 2009, the Supreme Court of the United States granted certiorari in the case of Hamilton, Chapter 13 Trustee v. Lanning.

The specific question on appeal to the Supreme Court is, "whether in calculating the debtor's 'projected disposeable income during the plan period, the bankruptcy court may consider evidence suggesting that the debtor's income or expenses during that period are likely to be different from her income or expenses during the pre-filing period." The Chapter 13 Trustee's position, that the B22 form should control, however, is in direct contradiction of the accompanying legal brief filed by the Solicitor General of the United States. The United States argues that there are circumstances when the B22 form cannot be relied upon and in those circumstances, debtor's actual budget must control.

As a debtor's counsel's law firm, our Baltimore bankrutpcy attorneys at Belsky, Weinberg, & Horowitz, LLC, are hoping that a reasoned realistic approach to this issue is implemented, thus preserving the refuge of Chapter 13 to many in this Country that so desperately need it during these tough economic times. Oral argument has not yet been scheduled. Stay tuned for further developments as they occur.