Archive for the '2005 BAPCPA' Category

Supreme Court Adopts “Forward-Looking” Approach to Define Projected Disposable Income When Calculating Chapter 13 Repayment Plans

Published
by
David Yunghans
on July 1, 2010
in 2005 BAPCPA and Chapter 13
. 0 Comments

When Congress amended the Bankruptcy Code in 2005, they implemented the means test.  The purpose of the means test was to provide a higher return of funds to unsecured creditors.  The test requires debtors filing chapter 13 bankruptcy to pay all “projected disposable income” into the plan.  Projected disposable income is a calculation of all income received by the debtor preceding the six months prior to filing minus allowed expenses.  After calculating the means test, a debtor in chapter 13 is required to pay a fixed amount to unsecured creditors.  The calculation is defined as the “mechanical-approach”.  Eventually problems arose with using the mechanical approach because it failed to deal with situations where debtor’s income actually decreased or increased during the life of the plan.  As a result, bankruptcy trustees and courts began to use a “forward-looking” test to calculate the debtor’s plan payments. 

Under the “forward-looking” approach, the debtor’s chapter 13 payment amount is based on the income they received during the life of the chapter 13 plan.  So if income increased over the life of the plan the debtor would be required to pay more of their income just as they would pay less to creditors if their income decreased.

In the case of Hamilton v. Lanning, the Supreme Court decided which approach was correct.  The court adopted the “forward -looking” approach.  The court reasoned that the ordinary meaning of the word “projected” supports looking to debtor’s current income.  The court also realized that following the “mechanical-approach” could lead to absurd results as debtor’s income could increase or decrease over the life of the plan, and thus some debtors would actually pay less than they were required under the Bankruptcy Code.

The ruling has both positive and negative affects for creditors.  A positive is that if a debtor’s income increases during the life of the plan, the debtor will be required to pay more into the plan, which could lead to increased distribution to unsecured creditors. The negative result occurs along the same line, as a debtor’s income may decrease during the length of the plan, and thus distribution to unsecured creditors may decrease.  Creditors will also need to keep on their toes as to monitor for possible increases in debtors’ incomes, as debtors are not likely to volunteer this information.  Some chapter 13 trustees require debtors to submit yearly tax returns so that creditors can check with the court for filed returns, indicating any change in income.

If you have any questions, please contact David Yunghans directly at 513.723.2211 or via email at dyunghans@weltman.com.

Debtors Not Allowed to Retain If Current

Published
by
Beth Schenz
on October 7, 2009
in 2005 BAPCPA, Chapter 7 and Motor Vehicle
. 0 Comments

Most creditors are familiar with the phrase, “retain and pay”.  The bankruptcy code provides for certain treatment of debt, which is secured by personal property in Chapter 7 bankruptcies.  Specifically, the bankruptcy code provides that debtors must either reaffirm the existing debt, redeem the collateral or surrender the collateral (or assume or reject the lease.)  Prior to the amendments of the bankruptcy code in 2005, most debtors opted for the unwritten fourth option, “retain and pay.” 

However the 2005 amendment, “clearly provides that the debtor shall not only file a statement of intentions but also follow through with her express intent.”  If the intent is not followed through by the debtor in the statutory number of days, the automatic stay terminates and the property is no longer property of the estate. 

The Ninth Circuit Court of Appeals recently ruled that the “retain and pay” option is no longer viable.  If a debtor opts for this unwritten alternative then the debtor will fail to meet his/her statutory obligation and the automatic stay will be terminated.  The mere termination of the automatic stay, however, is not enough to authorize the Creditor to repossess the collateral. 

In the case before the Ninth Circuit, the debtor’s failure to adhere to the code allowed for the stay’s termination.  Once the stay is terminated, the right to repossess the collateral then goes to the parties’ contract, in conjunction with state law to determine when the debtor has a default on the automobile loan and if that default allows repossession.  The debtor’s contract in the Ninth Circuit case contained an ipso facto clause that provided a default if the debtor filed for bankruptcy.

There is a bankruptcy code provision that, “generally renders unenforceable any contractual term which purports to create a default solely based on the commencement of a of a bankruptcy case.”(1)  However, the 2005 amendment overrides the provision that renders ipso facto clauses unenforceable when debtors fail to state an applicable intention and also fail to perform that intention.

Learning Points

  • Offer reaffirmation agreements (If a reaffirmation is offered but denied by the Bankruptcy Court then the creditor cannot repossess if debtors are current after bankruptcy)
  • Contracts should contain ipso facto clauses
  • Know your state law to make sure you can repossess the collateral
  • The above statutory provisions only apply to personal property

(1) Dumont v. Ford Motor Credit Company, Appellate Case No. 08-60002 (September 15, 2009 9th Cir.)