Supreme Court Adopts the Forward-Looking Approach to Projected Disposable Income in Chapter 13

When a debtor files a Chapter 13 bankruptcy, the Debtor agrees to repay creditors a certain amount through a court-approved plan. If there is an objection to the plan, the Bankruptcy Court may not approve the plan unless it provides for the full repayment of the unsecured claims or “provides that all of the debtor’s projected disposable income to be received” over the plan’s duration “will be applied to make payments in accordance with plan terms.” 11 U.S.C. 1325(b)(1). Because the bankruptcy code does not define the term “projected disposable income,” bankruptcy courts have struggled with the term’s meaning. Some courts have utilized a “mechanical approach” which strictly interpreted a debtor’s projected disposable income according to his or her income during the six months prior to filing for bankruptcy.[1] Other courts have used a “forward-looking approach” which considered the debtor’s financial situation more broadly and allowed for greater flexibility in determining the debtor’s projected disposable income.

 

The Supreme Court agreed to resolve the differences between the courts when it granted certiorari to decide how a bankruptcy court should calculate a debtor’s “projected disposable income.” Hamilton v. Lanning, 2010 WL 2243704 (U.S. Jun 07, 2010) In deciding the case, the Supreme Court adopted the “forward looking approach” and held that when a bankruptcy court calculates a Chapter 13 debtor’s projected disposable income, the court may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation. Id. at 12.

In Hamilton v. Lanning, the Chapter 13 trustee objected to confirmation of the Debtor’s proposed plan on the grounds that the Debtor was not committing all of her “projected disposable income” to the repayment of creditors. Just prior to filing for bankruptcy, the Debtor received a buyout from her previous employer which therefore inflated her “current monthly income.” As a result of an inflated “current monthly income,” the debtor’s “projected disposable income” was also inflated. When the mechanical approach was strictly applied to her case, the Debtor’s inflated projected monthly income caused her plan payments to far exceed her actual projected disposable income. Accordingly, the Supreme Court recognized that the strict mechanical approach was unreasonable when applied to the Debtor’s case.

As a result of the Supreme Court’s adoption of a “forward looking approach,” bankruptcy judges now have more discretion in determining a Debtor’s “projected disposable income” thereby ensuring that Chapter 13 plans more accurately reflect a Debtor’s ability to repay their creditors.

[1] “Disposable income” is defined as “current monthly income received by the debtor” less “amounts reasonably necessary to be expended.” § 1325(b)(2)(A)(i). “Current monthly income,” in turn, is calculated by averaging the debtor’s monthly income during a 6-month look-back period preceding the petition’s filing. §101(10A)(A)(i).

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