FOBB: U.S. Supreme Court to decide Means Test Issue, In re: Lanning by Gregory A. Holbus, Esq.
"So I says to Greg..."
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Gregory A. Holbus, Esq. is a Green Bay, Wisconsin-based bankruptcy attorney licensed to practice in both Wisconsin and Michigan. To learn more about Greg, you can visit his website (www.holbuslaw.com) or his blog (wisconsinbankruptcy.blogspot.com).
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Greg Holbus, Esq.
U.S. Supreme Court to decide Means Test Issue, In re: Lanning
Before I get to the heart of the story, allow me to give you a quick refresher about the Means Test and what it means for a bankruptcy petitioner.
To grossly over-simplify the Means Test, it is basically Congress’ attempt to create a mathematical formula to objectively determine how much money, if any, a debtor can afford to pay to creditors holding unsecured claims. It (Form B22) determines whether you qualify for a Chapter 7, in which all of your unsecured creditors are discharged. And if you don’t qualify for Chapter 7, the same form determines how much income is available to those creditors.
A number of statutory deficiencies exist which have given rise to disputes and some bizarre interpretations to several aspects of the Means Test, often resulting in gross inequities. One example is whether a Chapter 13 debtor can take deductions on the Means Test for payments on a secured debt which the debtor intends to surrender because the payments are contractually due at the time of filing. In re: Dionne, in the Eastern District of Wisconsin says they can. I feel awkward writing about that decision because for one thing – this decision is favorable to debtors, and I am a debtors’ counsel. Also, I have nothing but respect for the judge who rendered the decision.
But I respectfully disagree that a debtor should be allowed to deduct payments on a loan that the debtor knows full well they will not pay again in the future. Fortunately for me, the 7th Circuit took the conflict out of my control with In re: Turner and ruled the opposite.
But, the bigger issue we have had with the Means Test is that – in Chapter 13, the Means Test spells out what the debtor can afford to pay over the next sixty months after the case is filed. And it does so by calculating the debtor’s income from the six months prior to filing. Relying solely on the Means Test results in inequities. Debtors pay less than they can afford if they experience a decrease in expenses or an increase in income. Debtors pay more than they can afford if they experience an increase in expenses or a decrease in income.
Fortunately, the bankruptcy code allows for post-confirmation amendments based on these changes in circumstances. However in my case (In re: Hilton; 08-25540), the debtors’ change in circumstances occurred simultaneously with the filing of the bankruptcy petition, and so they were not eligible for a post-confirmation amendment, because we hadn’t gotten the case to confirmation. Furthermore, the plan could not be confirmed because it was not feasible, since the debtor’s budget did not show they could afford what the Means Test required.
We took this to hearing, and after briefs were filed, the Judge rendered a decision indicating that the Means Test is merely the starting point, and that other factors may be determined in computing disposable monthly income. However, courts across the country have been split over whether the Means Test should be strictly applied or whether other factors may be considered. And again, this generally arises from lack of clear definition of disposable income in the bankruptcy code.
On Monday, November 2, 2009, the United States Supreme Court granted certiorari in the case of Jan Hamilton v. Stephanie Kay Lanning (08-998). So, come next June, we might finally have a universal answer as to whether we should be strictly applying the Means Test or if other factors may be considered.
How the court will rule, I have no clue. But I will make the following observations and predictions:
Any ruling that indicates that Form B22C is the alpha and omega of calculating plan payments – will sometimes work in the debtor’s favor and sometimes work against the debtor. In only a very small fraction of cases will the debtor be paying what they can afford – no more and no less, because it is very rare that the six months prior to filing will mirror or otherwise be indicative of the debtor’s income in the sixty months after filing.
Furthermore, continued strict adherence to the forms will continue to result in a lopsided amount of Chapter 13 failures, which seems contrary to what Congress hoped for when it passed BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005), as it was quite clear that they wanted to encourage people to file Chapter 13 over Chapter 7.I advocate, as I did in Hilton, for the Means Test to be a starting point, but allowing other factors to be considered in computing disposable monthly income. This will help increase the success rate of Chapter 13s, and ensure that debtors are paying what they can afford – not more, and not less.
However, one must acknowledge the inherent danger that deviating from Form B22C will open the door to creative budgeting by debtors and their lawyers, which will lead to certain abusive practices.
Tags: Bankruptcy blog, Bankruptcy law, Bankruptcy practice, BAPCPA, Consumer Bankruptcy