Social Security Income May Not Be Considered in Good Faith Analysis

Posted by NCBRC - March 25, 2013

The Ninth Circuit today held that “Congress’s adoption of the BAPCPA forecloses a court’s consideration of a debtor’s Social Security income or a debtor’s payments to secured creditors as part of the inquiry into good faith under 11 U.S.C. § 1325(a).” Drummond v. Welsh (In re Welsh), No. 12-60009 (9th Cir. March 25, 2013), aff’g Drummond v. Welsh (In re Welsh), 465 B.R. 843 (B.A.P. 9th Cir. 2012).

The court began its analysis with a review of the history of the good faith requirement which was added to the Bankruptcy Code in 1978. The Ninth Circuit’s historical interpretation of good faith was established in Leavitt v. Soto (In re Leavitt), 171 F.3d 1219 (9th Cir. 1999), where the court adopted a four part totality-of-the-circumstances test under which it considered: 1) whether the debtor misrepresented facts in his petition, or otherwise unfairly manipulated the Code, 2) whether the debtor had a history of filings and dismissals, 3) whether the debtor’s purpose was to defeat state court jurisdiction, or 4) whether egregious behavior was present.

Later amendments to the Bankruptcy Code did not change the test applied by the Ninth Circuit to good faith considerations though they did effect application of those considerations and limit the breadth of the court’s discretion. Specifically, the court found that in 2005, “Congress replaced a case-by-case analysis of disposable income with a rigid, mechanical means test.”

With this in mind, the court began its discussion with the trustee’s argument that the while social security may not be considered when calculating a debtor’s disposable income, once that calculation is complete a court may consider such income for purposes of analyzing whether the debtor is acting in good faith. The court joined the Fifth and Tenth Circuits in finding that it cannot. Anderson v. Cranmer (In re Cranmer), 697 F.3d 1314, 1319 (10th Cir. 2012); see also Beaulieu v. Ragos (In re Ragos), 700 F.3d 220, 227 (5th Cir. 2012). See also Baud v. Carroll, 634 F.3d 327, 347 (6th Cir. 2011) cert. denied, 132 S. Ct. 997 (2012) (when Congress enacted the Means Test it changed the historical calculation of disposable income to exclude social security income).

The court stated that:

To hold otherwise would be to allow the bankruptcy court to substitute its judgment of how much and what kind of income should be dedicated to the payment of unsecured creditors for the judgment of Congress. Such an approach would not only flout the express language of Congress, but also one of Congress’s purposes in enacting the BAPCPA, namely to “reduce[] the amount of discretion that bankruptcy courts previously had over the calculation of an above-median debtor’s income and expenses.” Coop v. Frederickson (In re Frederickson), 545 F.3d 652, 658 (8th Cir. 2008) . . . When Congress speaks directly to one of the good faith factors, the judicial good faith inquiry is narrowed accordingly.

The court found that the good faith inquiry under section 1325(b) focuses on the debtor’s “motivation and forthrightness with the court in seeking relief,” while the separate question of what constitutes disposable income under section 1325(a) “focuses on the amount of funds that Congress expects a debtor to devote to paying off unsecured creditors.” These are separate and distinct inquiries under which “consideration of disposable income—now defined in great detail by Congress—has no role in the good faith analysis.”

The same analysis defeated the trustee’s argument that the court should examine the nature of the property securing debts that the debtors were permitted to deduct from the calculation of disposable income. The Code provides that disposable income may be reduced by “amounts reasonably necessary to be expended.”  Such amounts are to be determined with specific reference to section 707(b)(2) which provides that current monthly income shall be reduced by “[t]he debtor’s average monthly payments on account of secured debts.” The nature of the secured debt is irrelevant to this provision.  The Welsh court found that “[i]n enacting the BAPCPA, Congress did not see fit to limit or qualify the kinds of secured payments that are subtracted from current monthly income to reach a disposable income figure.”

Simply stated, the Ninth Circuit held that where Congress has explicitly excluded social security income from the disposable income calculation, and permitted deductions for payments on secured debts, a court does not have discretion to find that a debtor’s adherence to those provisions constitutes bad faith.

Geoff Walsh authored NACBA’s amicus brief in this case.

Welsh opinion


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One Comment

  • Thomas Vest
    Posted December 27, 2013 at 8:29 pm | Permalink

    I am wondering if any similar appellate decison exists regarding the issue of “good faith” in the context of child support income shown on Sch I, since is it similarly excluded from the calculation of disposable income under 22-C?

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