Social Security Income and Chapter 13 Plans

After the enactment of BAPCPA in 2005, there was considerable uncertainty concerning the proper method to calculate a debtor’s “projected disposable income” for purposes of funding a Chapter 13 plan.  Some bankruptcy courts used the Means Test calculation of “disposable income” and other courts used the actual income and expenses as reflected on the debtor’s Schedules I and J.

The case of Hamilton v. Lanning, 130 S. Ct. 2464, 177 L. Ed. 2d 23 (2010) resolved the basic question by holding that “projected disposable income” is determined by using the Means Test formula.  For below median income debtors, “projected disposable income” is calculated by starting with “current monthly income” from the Means Test and deducting the debtor’s actual “reasonably necessary” living expenses taken from Schedule J.  See § 1325(b)(2)(A)(i). For above median income debtors, “projected monthly income” is calculated by using “currently monthly income” from the means test and deducting certain expenses allowed by the Means Test . See §§ 707(b)(2), 1325(b)(3)(A)).  However, the Court ruled that bankruptcy courts have discretion to consider projected changes in income or expenses that are known or virtually certain at the time of confirmation.

The Fifth Circuit followed Lanning and held in In re Ragos, 700 F.3d 220 (5th Cir. 2012), that the Debtor was not required to include Social Security income in the “projected disposable income” calculation because the statutory definition of “current monthly income” explicitly “excludes benefits received under the Social Security Act.” 11 U.S.C. § 101(10A)(B).

Last month, Judge Olack distinguished Ragos and ruled that expenses of a below median income debtor used to calculate “projected disposable income” must still be “reasonably necessary” even if the Debtor included exempt Social Security income in the calculation.  In re Patrick, Case No. 12-03042 NPO (S.D. Miss. 2013).  In Patrick, the debtors’ “current monthly income” for Means Test purposes was below median for the State of Mississippi; therefore, the long form Means Test was not required and the “projected disposable income” was determined by using the debtors’ actual living expenses from Schedule J.     The debtors voluntarily contributed Social Security benefits to fund the Chapter 13 plan, and the debtors acknowledged that the plan was not feasible without the Social Security benefits.  The Trustee objected to confirmation on the basis that the proposed living expenses on Schedule J were unreasonably high which resulted in a lower “projected disposable income” to be distributed to unsecured creditors.  The Trustee argued that the plan was not filed in good faith as required by 11 U.S.C. §1325(a)(3).  The debtors asserted that since they voluntarily contributed exempt Social Security benefits to the plan, their expenses did not have to be “reasonably necessary” in order for the plan to be confirmable.  The debtors urged the Court “to extend the holding in Ragos to embrace Social Security benefits distributed inside a plan.” Patrick,  at Page 6.

The Court held that it has the authority to determine reasonableness of expenses and items in a plan even though Social Security benefits were included in the income necessary to fund the plan.  Id. at Page 9.  The Court found that the expenses were not reasonable and that the plan was not proposed in good faith.   The Court has “to balance the conflicting objectives of Congress “to save ‘men and women from the rigors of the poor house’ and ‘to endure the debtor who can pay creditors do pay them.’” Id. at Page 10 (citations omitted).

[Personal observation: The Court points out that the debtors did not earmark the Social Security benefits toward payment of any particular expense, but argued that the protection applied in toto.  Furthermore, the debtors did not make any arguments whatsoever that the expenses were reasonable under the circumstances.  Perhaps if the Social Security benefits had been earmarked for a specific expense (like a third car), and a decent argument were made as to why the expense is necessary (like the family is large), then the Court might find that the debtors acted in good faith in proposing the plan.]


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