Supreme Court Decision on Means Test: Hamilton v Lanning

The Supreme Court entered a major decision interpreting the means test.  In an 8-1 decision, the Supreme Court  in Hamilton v Lanning settled conflicting case law as to the proper interpretation of construing projected disposable income during a chapter 13 case.  The court adopted the forward looking approach instead of the historical approach,  but it appears that  the historical income and expenses remain the starting point on how to analyze available income to pay in a chapter 13 plan.

What I am talking about?  As you may have read on my website about the means test, we first  look at the income for the 6 month period of time ending in the month prior to filing bankruptcy.  Suppose the income average was $6,000 per month, and the allowed expenses are $5,000 per month.  Based on the historical approach, the debtor would pay $1,000 per month to the trustee to pay creditors for 60 months.  One interpretation of the new bankruptcy law essentially says this figure controls despite a change of circumstances whether or not the debtor can actually pay that much or could actually pay more.

A forward looking approach looks at expected future income and expenses and is not bound by the prior 6 months.  What if the debtor received a one time $ 7,000 bonus during the prior 6 months?  Then the debtor’s ongoing income will be lower and the debtor will not be able to afford the $1,000 per month payment.  Suppose both husband and wife were working,  but the month before the bankruptcy, one spouse was laid off.  Again, the debtors will not be able to pay the $1.000 per month and the chapter 13 plan is doomed to failure.

On the other hand, what if the debtor was unemployed, and then 2 months prior to filing bankruptcy, received a job making  $100,000 per year?  Now the debtor can make a far higher payment than the historical means test would require.

Courts throughout the country disagreed on the appropriate statutory construction of BAPCPA, the new bankruptcy act passed in 2005.  I will not discuss the legal arguments here.  The US Supreme Court concluded that known or virtually certain changes as of the date of confirmation of the chapter 13 plan would enable an adjustment to the amount that the means test would have required to be paid.  Some might consider that the historical approach is no longer relevant, but the Supreme Court essentially kept the historical approach as the starting point. 

The key issue will be how local bankruptcy judges and chapter 13 trustees determine what is an acceptable known change.   Issues will  arise with increased or decreased overtime, seasonal pay,  second jobs, isolated or routine bonuses, and many other fact patterns.  Legal issues remain as to what expenses can be used to offset income. In practice,  it remains to be seen as to how much weight is actually given to the means test and whether what I describe as the real income and expenses on bankruptcy forms Schedule I and J will determine the monthly payment.

As a Fort Lauderdale bankruptcy attorney, I will be applying the Lanning case to assist clients in Ft. Lauderdale chapter 13 bankruptcy cases.  Many open questions remain as to how to apply changes in income and changes in expenses on a case by case basis.  The Supreme Court did not actually settle all issues of  legal interpretation of the means test.

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