Applicable Commitment Period Applies where No Disposable Income

Posted by NCBRC - March 29, 2014

Adding to a growing trend among the circuits courts, the Fourth Circuit found that above-median debtors with negative disposable income must commit to a 60 month plan under section 1325(b)(1). Pliler v. Stearns (In re Pliler), No. 13-1445 (4th Cir. March 28, 2014), on direct appeal from, In re Pliler, 487 B.R. 682 (Bankr. E.D. N.C. Feb. 21, 2013). See also In re Flores, 735 F.3d 855 (9th Cir. 2013) (en banc); Baud v. Carroll, 634 F.3d 327 (6th Cir. 2011); Whaley v. Tennyson, 611 F.3d 873 (11th Cir. 2010); Coop v. Frederickson, 545 F.3d 652 (8th Cir. 2008). Although the means test showed the debtors to have negative disposable income, the debtors’ Schedules I and J showed an income surplus of approximately $1,500.00. (Neither the bankruptcy court nor the circuit court specified the income included in schedule I to account for the disparity). The debtors’ plan proposed to pay approximately $1,700/mo. for fifteen months and $1,500/mo. for forty months, exiting the plan after 55 months. The bankruptcy court found that the applicable commitment period applied to debtors’ plan requiring them to extend it for 60 months. In an egregious misapplication of the language in Hamilton v. Lanning, 560 U.S. 505 (2010), the bankruptcy court went on to find that because the debtors committed income to their proposed 55 month plan it was “virtually certain” that they would have sufficient income to continue those payments for 60 months.

On appeal, the circuit court looked to section 1325(b)(1)(B) which provides that, in the face of a trustee objection, a plan that does not pay unsecured creditors in full may only be confirmed where “the plan 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.” The court rejected the debtors’ argument that where there is no disposable income to project, the commitment period requirement is inapplicable, stating: “Nothing in Section 1325(b)(4) suggests that the applicable commitment period is somehow related to, much less dictated by, the debtor’s projected disposable income.” The court went on to find that “the lack of projected disposable income at the time a plan is confirmed does not necessarily mean that additional funds with which to satisfy claims will not later surface.” Citing Carroll v. Logan, 735 F.3d 147, 152 (4th Cir. 2013) (bankruptcy code “blocks the [debtors] from depriving their creditors a part of their windfall [an inheritance] acquired before their Chapter 13 case was closed”), and Baud, 634 F.3d at 356 (“[T]here are numerous circumstances in which disposable income might become available to the Appellees and to other debtors after confirmation, even those who have zero or negative projected disposable income as of confirmation.”).The court was persuaded in part by section 1329 which permits modification of a plan in the event of a change in circumstances within the applicable commitment period. The court found that by permitting early conclusion of a plan, creditors lose the benefit of this provision in the event of a “windfall” to the debtors (the court did not address the reverse circumstance of a change for the worse that could result in failure of the plan).

Turning to the issue of the bankruptcy court’s finding that “[i]f disposable income is zero or less, the court must look to projected disposable income based on income minus expenses from Schedules I and J to determine what actual income or expenses are known or virtually certain at the time of confirmation.” Because the debtors volunteered to pay a specified amount for 55 months, the bankruptcy court reasoned that it was “virtually certain” that they could pay that amount for an additional 5 months to complete the applicable commitment period. The Fourth Circuit began with the promising statement that “[o]n the one hand, we find problematic the bankruptcy court’s broad statement suggesting that it is at liberty to abandon completely the Bankruptcy Code’s disposable income formula in favor of Schedules I and J, at least when debtors have no disposable income.” Noting that the schedules might include income such as social security that has been explicitly excluded from calculation of “income,” the circuit court found it “troubling” that the bankruptcy court would permit calculation in a way that might include such income. It went on to say that “[o]n the other hand, however, we recognize that projected disposable income and disposable income are, even simply on their face, not identical, with disposable income based on a debtor’s past and projected disposable income being a ‘forward-looking’ concept that may account for ‘known or virtually certain’ changes to a debtor’s income or expenses . . . And we do not doubt a bankruptcy court’s ability to consider Schedule I, Schedule J, or other pertinent evidence to capture ‘known or virtually certain’ changes to disposable income: After all, the Supreme Court itself did so in Lanning.” While the circuit court appeared to be aware that the “known or virtually certain” language from Lanning relates to post-petition changes to income rather than to a debtor’s income as it exists at the time of filing, the court concluded that the bankruptcy court’s stretching the debtors’ own contribution amount over an additional five months was not error, even though the basis for the bankruptcy court’s reasoning was its mangling of this very holding in Lanning. Because the hearing before the bankruptcy court included other related cases and did not address the specifics of the debtors’ plan, the court remanded to allow the debtors to argue the issue of feasibility of a 60 month plan at the original amount.

Pliler opinion

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One Comment

  • Ruby
    Posted September 12, 2014 at 3:08 am | Permalink

    not all creditors file a claim-claim could be discharged early…why penalize the debtor and modify the plan to extend payments?

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