SCOTUS Opts for Reality

When confronted with the question of whether Congress meant you apply the means test mechanically to determine how much a debtor can pay in Chapter 13, even when that would lead to impossible results, the Supreme Court sided with reality, finding that “projected disposable income” is a “forward-looking” term and is not equivalent to “disposable income.” The case is Hamilton v. Lanning. This is a significant landscape shift for those of us in the Ninth Circuit, because the Kagenveama case reached the opposite conclusion finding that disposable income (derived mechanically from the means test) was equivalent to “projected disposable income” (the amount that has to be paid to unsecured creditors in a Chapter 13 bankruptcy case).

In Lanning, the Supreme Court found that the means test (and disposable income) is a starting point for determining how much debtors have to pay in Chapter 13. But, however, if there are known or virtually certain changes to a Debtor’s income or expenses, the court has discretion to take that into account in figuring the amount that can be paid to unsecured creditors. Many of the bankruptcy cases that have gone up to the Ninth Circuit since Kagenveama have been attempts to reconcile the mechanical approach adopted by the Ninth Circuit with the reality of bankruptcy practice. Many of those cases are not quite so important after Lanning, because reality will now be determined as of the confirmation of the plan, not as of the date of filing, and if there are known changes as of confirmation, the court will take those changes into account at the time of confirmation.

As a side note, Justice Scalia is the only justice who dissented. In his view, disposable income is equivalent to projected disposable income. While Justice Scalia may have made the most intellectual defensible position, I think the decision reached by the Court will work out best in the long run for all parties to Chapter 13 cases. Bankruptcy judges need discretion to consider significant changes in each case and they now have that with the Lanning decision.

Categories: