N.D Cal. – Applicable Commitment Period is a Multiplier, not a Time Period

One of the requirements in a Chapter 13 case is that a debtor contribute all of his “projected disposable income” to unsecured creditors during the “applicable commitment period.” The applicable commitment period is 3 years if the debtor’s income is below median or 5 years if the debtor’s income is above median. The projected disposable income is determined (primarily) by subtracting certain allowed expenses (based on IRS formulas) from the current monthly income (which is determined by looking at the last six months of income and averaging it). That gives the amount that is required to be paid. Sometimes, debtors are actually able to pay more than their projected disposable income every month and so the question arises. Let’s say an above median debtor has projected monthly income of $100/mo. However, the debtor could pay $150/mo. If the debtor pays for 5 years at $100 per month, the total amount paid in will be $6,000. May the debtor pay $150 per month for 40 months (also $6,000), instead?

In In re Swan, — B.R. —-, 2007 WL 1146485 (Bkrtcy.N.D.Cal., April 18, 2007) (Westlaw subscription required to view link), the Court said “yes.” In that case, the total projected disposable income for 60 months would have been $3,570. The debtor proposed a plan that would pay a total of $18,900 over 36 months. The court allowed the debtor to pay the higher amount and finish the plan in 36 months.

The court recognized that there is a split of authority on this issue. The court’s rationale is as follows:

Section 1325(b)(1)(B) states that a court may not confirm a plan unless it “provides that all of the debtor’s projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan.” 11 U.S.C. § 1325(b)(1)(B). According to the Code, the “applicable commitment period” that applies to Debtor is “not less than 5 years.” 11 U.S.C. § 1325(b)(4)(A)(ii). Creditor contends that Debtor’s Plan may only be shorter than 5 years if Debtor pays all allowed unsecured creditors in full, pursuant to § 1325(b)(4)(B). It is undisputed that the Plan does not provide for full payment of all allowed unsecured claims. Debtor argues that the statute does not require a fixed plan term, and that, because the Plan proposes to pay, over 36 months, an amount greater than Debtor’s projected disposable income multiplied by 60 months, the Plan should be confirmed as proposed.

This issue has been described as a distinction between a “monetary” requirement and a “temporal” requirement. In re Brady, 361 B.R. 765, 2007 WL 549359, *9 (Bankr.D.N.J. Feb.13, 2007), citing Alane A. Becket and Thomas A. Lee, III, Applicable Commitment Period: Time or Money?, 25-MAR Am. Bankr. Inst. J. 16 (2006). Creditor espouses the view that the phrase “applicable commitment period” imposes a temporal requirement that Debtor must commit to a plan for a specific amount of time–in this case, five years. Some courts have adopted this position. Slusher, 359 B.R. at —-, 2007 WL 118009 at *11; In re Casey, 356 B.R. 519, 527 (Bankr.E.D.Wash.2006); In re Cushman, 350 B.R. 207, 212 (Bankr.D.S.C.2006); In re Davis, 348 B.R. 449, 458 (Bankr.E.D.Mich.2006); Dew, 344 B.R. at 661; McGuire, 342 B.R. at 615.

*10 Debtor takes the position that “applicable commitment period” constitutes a monetary requirement such that, in order to be confirmed, Debtor’s three-year Plan must provide for payment of her projected disposable income multiplied by the applicable commitment period. In this case, the relevant calculation is $59.50 projected disposable income according to Form B22C multiplied by the 60 month applicable commitment period equals $3,570. Debtor argues that the Plan satisfies the requirements of the Code, and therefore may be confirmed, because it proposes to pay $18,900 over 36 months, which is over five times more than Debtor’s projected disposable income over the applicable commitment period of $3,570. Cases supporting Debtor’s position include Brady, and In re Fuger, 347 B.R. 94 (Bankr.D.Utah 2006). Bankruptcy Judge Keith M. Lundin takes the same view in his chapter 13 treatise. See 5 Keith M. Lundin, Chapter 13 Bankruptcy §§ 500.1 at 500-2 (3d ed. 2006)(“The applicable commitment period does not require that the debtor actually make payments for any particular period of time. Rather it is the multiplier in a formula that determines the amount of disposable income that must be paid to unsecured creditors.”)

The logic of Debtor’s position is straightforward. Unsecured creditors will receive more under the Plan than is required by the Code. Specifically, in this case, unsecured creditors will receive more than five times what the Code requires ($18,900 compared with $3,570), and they will receive it more quickly under Debtor’s three-year Plan than they would if the Court were to adopt Creditor’s position, and require a five-year plan term. This is clearly to the benefit of all creditors. The unsecured creditors are not being paid interest, so the time value of money makes the disparity between what Debtor is offering to pay under the Plan–$18,900 over three years–and what unsecured creditors would be entitled to under Creditor’s position–$3,570 over five years–even greater than it appears at first blush. Debtor’s position also furthers the Code’s fresh start policy, allowing Debtor to fulfill the obligations imposed by the Code in a shorter amount of time, receive a discharge, and move on.

In light of the extreme monetary disparity between the two positions, it is difficult to comprehend why Creditor has taken this position. Practically speaking, Creditor must be hoping for one of two events to occur. Creditor wants the Plan term extended to five, rather than three, years because the longer time period increases the likelihood either that (1) the Plan will be modified upward; or (2) Debtor will default on the Plan and Creditor will maintain an entitlement to the full amount of its claim. In this Court’s experience of over sixteen years on the bench, the former is extremely rare. Accordingly, Creditor’s reason for supporting this position appears to be its hope that the Plan will fail. The Court finds such reasoning unpersuasive. This reasoning contravenes the Code’s fresh start policy. It also delays payment to other creditors, most of whom would likely prefer to receive payment over three years, rather than five. Moreover, if Debtor cannot keep up her Plan payments, she will likely convert to chapter 7–which would deprive creditors of a substantial portion of Debtor’s Plan payments.

*11 [7] One court has held that the phrase “applicable commitment period” does not come into play where the debtor has no disposable income, but that, where the debtor has positive disposable income, the phrase mandates a specific plan length. In re Alexander, 344 B.R. 742, 751 (Bankr.E.D.N.C.2006). However, this is a distinction without a difference. Construction of the phrase “applicable commitment period” as a monetary requirement renders this distinction meaningless. The Code requires debtors to pay their projected disposable income over the applicable commitment period into the plan. Whether that amount is zero or greater than zero makes no difference, because in the end the effect is the same. Just as it makes no sense for a debtor to remain in chapter 13 where he has no disposable income and has paid his secured, administrative and priority claims in full, it likewise makes no sense for a debtor with some disposable income to remain in chapter 13 after he has paid the full amount required by the Code to his unsecured creditors. In both cases, the absurdity is having a debtor remain in chapter 13 awaiting discharge where, after a certain point, he has fulfilled all of the Code requirements and his plan payment is reduced to zero. The purpose of the Code is to provide debtors a fresh start and to ensure that creditors are paid as much as possible as soon as possible. It is not to incentivize people to remain in bankruptcy at the continued expense of their creditors, who could have received their plan payments much earlier, and at the expense of the bankruptcy system as a whole.

Some courts adopting Creditor’s position have held that the language of § 1325(b)(1)(B) “clearly indicates” that, where there is an objection to confirmation and the debtor does not propose to pay unsecured creditors in full, above-median debtors must perform a plan of reorganization for 60 months. Cushman, 350 B.R. at 212; In re Schanuth, 342 B.R. 601, 607 (Bankr.W.D.Mo.2006). However, the statute does not specify a minimum plan term. The statute merely states that, in order to be confirmed, a plan must apply all of a debtor’s projected disposable income during the applicable commitment period to make payments under the plan. Brady, 361 B.R. at —-, 2007 WL 549359 at *9. Accordingly, the Plan meets the requirements of the statute in that it applies all of (in fact, much more than) Debtor’s projected disposable income ($59.50) during the applicable commitment period (60 months) to make payments under the Plan.

The rationales supporting the conclusion that the “applicable commitment period” is a temporal requirement are unpersuasive to this Court. In McGuire, the bankruptcy court cited three reasons for its conclusion. First, it reasoned that, because the disposable income calculation on Form B22C is “merely a starting point,” and is not dispositive such that a court need not confirm a plan that proposes to pay the amount reported on Form B22C, “it follows that a court is not required to confirm a plan because it proposes to pay a total sum equal to the Form B22C amount multiplied by the applicable number of months.” McGuire, 342 B.R. at 615. This reasoning is unhelpful because, while the Court need not reach the question of whether departure from Form B22C is permissible under the law, under the facts of this case, the amount of disposable income reported by Debtor on Form B22C in fact satisfies the requirements of the Code. [FN9] Therefore, the statement that a court “is not required to confirm a plan simply because the debtors propose a plan payment in the Form B22C amount,” does not help answer the question of whether a court may do so when the amount of the Form B22C payment is not challenged as being too low.

*12 The second reason cited by the McGuire court was that “a monetary interpretation of ACP renders § 1325(b)(4)(B) meaningless.” Id. That section states that the applicable commitment period “may be less than 3 or 5 years, whichever is applicable under subparagraph (A), but only if the plan provides for payment in full of all allowed unsecured claims over a shorter period.” The contention that this section is rendered superfluous by a monetary interpretation of “applicable commitment period” assumes that it is inherent in the Code that a debtor who pays unsecured claims in full may complete a chapter 13 plan in less than 36 months. See Davis, 348 B.R. at 455: “Under this interpretation of ACP, § 1325(b)(4)(B) doesn’t really state anything more than that a debtor does not have to pay more than 100% on his unsecured claims.” The fact that the Code specifically provides that if a debtor pays 100% of his claims with interest that the court must confirm the plan regardless of the plan’s length does not mean that a debtor may not do what the Debtor’s Plan does here, i.e., pay the same amount to unsecured creditors that would be required over five years, in three years. Accordingly, the Court is not persuaded by this argument.

The third and final rationale used by the McGuire court to support its conclusion was that Congress did not express any intent to alter pre-BAPCPA practice on this issue by enacting the BAPCPA. McGuire, 342 B.R. at 615. Prior to BAPCPA, § 1325(b)(1)(B) required all of the debtor’s projected disposable income received during the three-year period, beginning on the due date of the first payment, to be applied to the plan, and according to McGuire, debtors were not allowed to exit chapter 13 early unless they could establish extraordinary circumstances or creditors were paid in full. Id. Noting that the BAPCPA amendments in this regard only changed the phrase “the three year period” to “applicable commitment period”, the McGuire court, following Schanuth, 342 B.R. at 608, discerned no clear intent on the part of Congress to alter the pre-BAPCPA practice. Id. The Court disagrees with McGuire’s characterization of pre-BAPCPA law, particularly as it existed in this Circuit. Several pre-BAPCPA cases permitted debtors to payoff the plan balance and exit chapter 13 in less than 36 months without paying unsecured creditors in full. Fuger, 347 B.R. at 101, citing In re Sunahara, 326 B.R. 768 (B.A.P. 9th Cir .2005)(court may approve a plan modification allowing a debtor to complete plan in fewer than 36 months without paying unsecured claims in full); In re Richardson, 283 B.R. 783 (Bankr.D.Kan.2002); In re Forte, 341 B.R. 859 (Bankr.N.D.Ill.2005); In re Miller, 325 B.R. 539 (Bankr.W.D.Pa.2005). Accordingly, the lack of a clearly expressed Congressional intent to alter pre-BAPCPA law on this issue is at best an ambiguous rationale, since an interpretation of “applicable commitment period” as a monetary, rather than temporal, requirement is not necessarily inconsistent with pre-BAPCPA law. In the Ninth Circuit where, under Sunahara, debtors could modify their chapter 13 plans to pay off the plan balance in less than 36 months, this rationale actually lends additional support to Debtor’s position.

*13 Some of the cases take a theoretical, but impractical approach to this issue that divorces the language of the Code from the realities of the debtor/creditor relationship. See e.g., Slusher, 359 B.R. at —-, 2007 WL 118009 at *8. There can be no question that in the vast majority of cases, creditors will be far better served under the monetary, rather than the temporal, approach. Creditors will be paid sooner under the monetary approach. This is of tremendous financial advantage, especially since unsecured creditors normally receive no interest on their claims. The present value of payments over three years is much greater than payment of the same amount of money spread out over five years. Plus, the risk of plan default is lower on a shorter plan–which means the creditors are much more likely to actually get paid, rather than having the debtor convert to chapter 7, in which case creditors are unlikely to receive any further payments. In sum, everyone benefits under the monetary approach in the vast majority of cases. More debtors will receive fresh starts more quickly. Creditors will be paid more money, more quickly, on their claims, and the entire bankruptcy system will be easier to administer and much more efficient.

This Court agrees with the Fuger court that “where the debtor’s projected disposable income is consistent with the calculations on Form B22C, it makes little sense to hold the debtor hostage for 60 months where the debtor can satisfy the requirements of § 1325(b)(1)(B) in a shorter period.” Fuger, 347 B.R. at 101. Accordingly, the Court holds that the phrase “applicable commitment period” does not dictate a minimum plan term, but requires only that the Debtor’s projected disposable income be computed over that amount of time– at least where, as here, Debtor’s Plan provides for a term of at least three years. The Court finds that the Plan proposes to pay all of Debtor’s projected disposable income over the sixty-month applicable commitment period to unsecured creditors, and therefore satisfies the requirements of § 1325(b)(1)(B). Alternatively, if this Court has the discretion to confirm Debtor’s three-year Plan because it pays creditors what they would receive–in fact much more than what they would receive–under a five-year plan, the Court exercises its discretion to do so for the reasons set forth in this Memorandum Decision. Creditor’s objection on this basis is overruled.