The Lawletter Vol 39 No 9
If you have ever wondered why above-median-income Chapter 13 debtors continue to enjoy ownership of luxury items, the answer is in the 2005 amendments to the U.S. Bankruptcy Code. Prior to the significant amendments to the Code in 2005, a Chapter 13 debtor's disposable income, necessary for the viability of a Chapter 13 plan, was determined by the court reviewing an individual debtor's ability to pay a Chapter 13 plan based on the individual circumstances of the debtor. As part of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"), Congress amended 11 U.S.C. § 1325(b) and replaced the court's discretionary analysis of a debtor's disposable income and expenses with a statutory and mechanical means test.
The new objective test "requires debtors with above-median income to calculate their 'disposable income' by subtracting specific expenses from 'current monthly income' as defined by [§ 1325(b)(2)-(3)]." In re Welsh, 711 F.3d 1120, 1130 (9th Cir. 2013). The test specifies what is a Chapter 13 debtor's disposable income and what are the debtor's necessary expenses. It also distinguishes between below-median-income debtors and above-median-income debtors. Above-median-income debtors calculate disposable income by deducting limited living expenses, based on the "Collection Financial Standards" of the Internal Revenue Service ("IRS") and the other provisions of the "means test." The means test is the exclusive gauge for determining above-median-income Chapter 13 debtors' projected disposable income, and the projected disposable income must be calculated by subtracting the standard expenses as set forth in the Code. Importantly, that includes subtracting the debtor's average monthly payments to secured creditors due during the following 60 months. See 11 U.S.C. § 707(b)(2)(A)(iii)(I).
That part of the means test, however, makes no qualifications on the kinds of secured debt that a debtor can deduct from current monthly income. "The result may be that, consistent with the means test, the debtors could make secured payments on luxury or comfort items . . . with the result that little 'disposable income,' as that figure is calculated, remains to pay unsecured creditors." Welsh, 711 F.3d at 1130.
In In re Joest, 450 B.R. 381 (Bankr. N.D.N.Y. 2011), the court explained that Congress's objective in requiring that the expense side of the projected disposable income calculation be determined using the means test was to limit the bankruptcy court's discretion and to avoid inconsistent results by mandating an objective standardized test). See also In re Sparks, 360 B.R. 224 (Bankr. E.D. Tex. 2006) (the intent of incorporating the means test into a Chapter 13 above-median-income case was to preclude the allowance of any improper discretionary spending). Yet, the irony is that Congress substituted the pre-BAPCPA individual case-by-case approach with a mandatory formula that includes an unconditional allowance for deducting payments on secured debts, including blatantly unnecessary luxury items. See In re Salas, No. 12-39494-BKC-AJC, 2014 WL 92728, at *2 (Bankr. S.D. Fla. Jan. 1, 2014) ("Congress did not limit or qualify the kinds of secured payments that are subtracted from current monthly incomes to reach the amount of disposable income, and there is no justification for this Court to impose any limitations under the guise of interpreting good faith.").
Courts strictly adhere to the mandatory statutory language allowing for the deduction of payments on secured debts, notwithstanding the nature of the item upon which the secured debt is owed. In re Feiling, Case No. 11-71474 MEH, 2013 WL 2451333, at *3 (N.D. Cal June 6, 2013) ("Further, to the extent the claim is secured, the Ninth Circuit recently held . . . that a good faith challenge to payment of a non-essential secured debt is preempted by the statutory language.").