Social Security Income and Chapter 13

Two United States Circuit Court of Appeals decisions in the last 10 days will be extremely helpful to debtors in chapter 13.   Congress when it rewrote the consumer bankruptcy laws in 2005 provided that social security income would not be included in the means test to determine whether an individual would qualify for chapter 7.  If a debtor had excess disposable income, the debtor would only be eligible for a chapter 13.  Congress determined that social security income would not count against the debtor as income.

However, chapter 13 trustees typically contend that based on the chapter 13 statute that debtors must exercise good faith,  and that good faith requires individuals to use all available income.  Trustees argue that debtors who receive social security income must still include this amount as income thereby increasing the monthly chapter 13 payments.  It is true that debtors could afford to pay more based on social security income, but Congress had already concluded this income should not count.

This issue has been litigated accross the country with conflicting results.  Two higher courts (the highest below the Supreme Court) have concluded that Congress meant what it said and that social security income is excluded as available income that the debtor must pay in a chapter 13.  In re Cramner,  2012 U.S. App. Lexis  22141(10th Cir.  October 24, 2012) and In re Ragos, 2012 U.S. App. Lexis 22334 (5th Cir. October 29, 2012).

Florida is in the 11th Circuit, so the above decisions are not binding here but are  highly persuasive.  One Florida district court has also found that social security income should not be included. In re Vandenbosch, 459 B.R. 140 (U.S.D. Ct.   M.D. Fla  2011).

Our local chapter 13 trustees frequently stress the good faith requirement in chapter 13.  We shall see how this issues plays out in chapter 13 bankruptcies in the Southern District of Florida.

A final note- these are chapter 13 cases.  But consider a chapter 7 where the debtor’s “real budget” as reflected on Schedule I and J shows excess income, but the excess is due to social security.  I have filed this type of Fort Lauderdale chapter 7 and Miami chapter 7 bankruptcy case  without difficulty.  Now the basis is even stronger because the social security income should not count against the debtor.

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