By: Gary A. Ritacco
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
The Fifth Circuit, in Nowlin v. Peake (In re Nowlin),[1] recently held that reasonably certain future events that will have an effect on a chapter 13 debtor’s financial state should be taken into account in confirming a debtor’s proposed payment plan.[2] The Fifth Circuit reached this conclusion by determining the phrase “projected disposable income” in section 1325(b)(1)(B) can have a different meaning than “disposable income” under 1325(b)(2).[3]
Section 1325(b)(2) defines “disposable income” as current monthly income minus reasonable necessary expenses.[4] Chapter 13 debtors are required to pay creditors from their total “disposable income” over the relevant commitment period, either three or five years. In calculating her disposable income, Nowlin deducted loan repayments to her 401(k) savings plan as a necessary expense.[5] The chapter 13 trustee objected to the chapter 13 plan on the grounds that the 401(k) loan would be fully repaid within two years, freeing up money that should be considered part of Nowlin’s disposable income going forward and should therefore be paid to creditors. If a trustee or creditor objects to a proposed plan, the plan cannot be confirmed unless all of the debtor’s “projected disposable income” will be paid to the unsecured creditors.[6]
The trustee argued that “projected disposable income” in section 1325(b)(1)(B) has a different meaning than “disposable income” under 1325(b)(2). The trustee asserted that the term “projected” in “projected disposable income” meant that the proposed plan should take into account future changes in the debtor’s financial circumstances and not be based solely on the “disposable income” calculation under 1325(b)(2) at the time of filing. Thus, the trustee argued, the money formerly directed to loan repayment should be included in the debtor’s “projected disposable income” and available to creditors for the remainder of the “applicable commitment period.” This interpretation has been deemed the “forward-looking” approach.[7]
Conversely, Nowlin argued that the “projected disposable income” of her plan should simply consist of the previously calculated “disposable income,” under section 1325(b)(2), being paid out over the five years and should not take into account evidence of future events that will affect the debtor’s financial state.[8] This interpretation has been deemed the “mechanical approach.”[9]
Adopting the trustee’s view, the Fifth Circuit held that a chapter 13 debtor’s “projected disposable income” is presumptively the debtor’s “disposable income,” as calculated under section 1325(b)(2),[10] multiplied by the applicable commitment period.[11] This presumption, however, may be rebutted by any party through evidence of present or “reasonably certain” future events that will have a significant effect on the debtor’s financial condition.[12] The Fifth Circuit’s interpretation allows for a flexible “forward-looking” approach, which the court said is necessary to avoid the potentially absurd results of a plan that does not account for the debtor’s actual financial state.[13] The court, in aligning with the majority of other circuits to apply the “forward-looking approach,” held that since Nowlin was reasonable certain to fully repay her 401(k) loan within two years, that fact should be considered by the bankruptcy judge in deciding whether to confirm the plan.[14]
In contrast, in Maney v. Kagenveama (In re Kagenveama),[15] the Ninth Circuit has interpreted “projected disposable income” according to the “mechanical approach,” such that a debtor’s “disposable income” should be “projected” out (multiplied) over the applicable commitment period and that the resulting calculation cannot be rebutted by evidence of future events that will affect debtor’s financial state.[16] The Ninth Circuit reasoned that if “projected disposable income” under section 1325(b)(1) is read independent of “disposable income” under section 1325(b)(2), then “disposable income” would just be a floating definition with no purpose or meaning.[17]
The differing interpretations are significant for both debtors and creditors because the calculation of “disposable income” as of the time of filing does not always accurately reflect the chapter 13 debtor’s financial condition going forward.[18] Changes can occur after the initial calculation, which could result in a plan that leaves the debtor without enough money to cover his or her necessary expenses or, alternatively, return to the debtor a significant amount of money that would otherwise go to creditors. Interestingly, further clarification should be coming soon. On November 2, 2009, the Supreme Court granted certiorari in In re Lanning[19] to determine “whether in calculating the debtor’s ‘projected disposable income’ during the plan period, the bankruptcy court may consider evidence suggesting that the debtor’s income or expenses during that period are likely to be different from her income or expenses during the pre-filing period.”[20] Practitioners, litigants, and courts dealing with this difficult question no doubt await the Court’s guidance.
[1] 576 F.3d 258 (5th Cir. 2009).
[2] Id. at 266.
[3] Id.
[4] 11 U.S.C. § 1325(b)(2) (2006) (“[T]he term ‘disposable income’ means current monthly income received by the debtor . . . less amounts reasonably necessary to be expended.”).
[5] In re Nowlin, 576 F.3d at 260.
[6] 11 U.S.C. § 1325(b)(1).
[7] In re Nowlin, 576 F.3d at 263.
[8] Id.at 261.
[9] Id. at 263.
[10] 11 U.S.C. § 1325(b)(2) (2006). Current monthly income “means the average monthly income . . . derived during the 6-month period ending on the last day of the calendar month immediately preceding the date of the commencement of the case if the debtor files the schedule of current income . . . or the date on which current income is determined by the court for purposes of this title if the debtor does not file the schedule of current income.” 11 U.S.C. § 101(10A) (2006).
[11] In re Nowlin, 576 F.3d at 266.
[12] Id.
[13] Id.at 264.
[14] Id. at 267.
[15] 541 F.3d 868 (9th Cir. 2008).
[16] See id. at 874 (citing In re Alexander, 344 B.R. 742, 749 (Bankr. E.D.N.C. 2006)).
[17] Id.at 873.
[18] See In re Nowlin, 576 F.3d at 264.
[19] 545 F.3d 1269 (10th Cir. 2008).
[20] Hamilton v. Lanning (In re Lanning), 545 F.3d 1269 (10th Cir. 2008), petition for cert. granted, No. 08-998 (U.S. Nov. 2, 2009), http://www.supremecourtus.gov/qp/08-00998qp.pdf.
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