IMAGINE that you are a Chapter 13 debtor. You owe $100,000 of credit card debt. You receive a pension of $1,000, $1,500 from a part time job, and $1,500 from social security. You propose a plan payment of $500 a month for 60 months which will pay 30% of your credit card debt. Your plan payment of $500 is based on your calculation of disposable income that EXCLUDES your social security income. If you include your social security income your disposable income will be $2,000, instead of $500. The trustee objects to confirmation of your plan and requires you to increase your plan payment to $2,000 because you actually receive $1,500 more from social security. The trustee argues that you are shielding your social security income to the detriment of your creditors, therefore, your plan is proposed in bad faith. You argue that SSI is not part of disposable income, therefore, should not be included in the calculation of disposable income. Who is correct?
In Re Cranmer, the above median income Chapter 13 debtor received $1,940 monthly in social security income. He did not include this income in the calculation of his disposable income because Section 101(10A)(B) provides “current monthly income”…includes any amount paid by any entity…,but excludes benefits received un the Social Security Act…” The bankruptcy court sustained the trustee’s objection to the debtor’s proposed plan, which allowed him to keep his Social Security Income. This is one smart debtor who wanted to have his cake and eat it too, like many of us. We want our entitlements and we do not ever want to pay any tax. This is America, the land of the freeloaders. The court found that the SSI payments should have been included in the debtor’s projected disposable income, and that the debtor’s failure to do so was bad faith.
So, the debtor amended his plan to conform to the court’s ruling, albeit under protest. The amended plan was confirmed but debtor was not able to maintain payments and the case was dismissed. Debtor appealed the dismissal order asserting that the bankruptcy court erred by not confirming his original plan.
The trustee asserted that it was certain that debtor would receive more than $87,000 in SSI over the life his plan, and argued that above median income debtors should not be allowed to shield such surplus income from the repayment of their unsecured debts. The trustee said his arguments were supported by the Supreme Court’s ruling in Hamilton v. Lanning (2010) and mandated by Section 1324(a)(3)’s good faith requirements.
The 10th Circuit Court of Appeals agreed with the debtor! “Moreover, nothing in Lanning suggest a court may disregard the Code’s definition of disposable income in calculating income,” the court said. “To the contrary, Lanning made clear a debtor’s disposable income is not only the starting point in calculating projected disposable income, but in most cases it is determinative.” The 10th Circuit found additional support for its conclusion in the Social Security Act, which shields payments made pursuant to the Act from “execution, levy, attachment, garnishment, or other legal process” or from “the operation of any bankruptcy or insolvency law.” For debtors who are not yet receiving SSI, let not your heart be troubled. You won’t have to make this hard decision of including or excluding SSI from your disposable income calculation because by the time you retire, social security will no longer exist because it is bankrupt.
Further, on the issue of bad faith, the court also disagreed. “When a Chapter 13 debtor calculates his repayment plan payments exactly as the Bankruptcy Code and the Social Security Act allow him to, and thereby excludes SSI, that exclusion cannot constitute a lack of good faith,” the court said. “A contrary holding would render the Code’s express exclusion of SSI from the calculation of the debtor’s disposable income, and thereby, its exclusion of SSI from the calculation of the debtor’s projected disposable income, meaningless.”
This issue is still undecided in many courts.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.