In 2010, the United States Supreme Court, in Hamilton v. Lanning, ruled on the issue of how much do those filing for Chapter 13 have to pay towards their plan. Under the Bankruptcy Code, a debtor in Chapter 13 generally has to provide either (a) full repayment of all unsecured debts or (b) that all of the debtor’s “disposable income” will be applied to payments under the Chapter 13 plan. The key here is how do courts determine what is disposable income.
Congress, in 2005, created a new set of rules to govern bankruptcy (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, also known as BAPCPA). In that new Act, Congress created a rigid test for both Chapter 7 (Means Test) and Chapter 13 (Disposable Income Test) to determine what constitutes disposable income. This test generally looks at the debtor’s past six (6) months’ income to determine a projected disposable income. However, the problem comes when someone either makes a lot more, or a lot less than what the individual made in the past.
The Lanning case was one where a person filing for Chapter 13 received a one-time buyout from a former employer within six months of filing her bankruptcy case. Looking strictly at the historical income, and using a mechanical test to predict projected disposable income, the debtor would be required to pay much more than she could feasibly pay under a Chapter 13 plan. The Chapter 13 trustee overseeing the case argued that the mechanical test was the proper way of measuring disposable income. The debtor believed that her projected income should not include the one-time payment because she would not reasonably earn that income in the future.
Justice Alito, on behalf of the Court, reviewed how bankruptcy courts should analyze and determine what is “projected disposable income” for Chapter 13 purposes. Justice Alito ruled that a “forward looking” approach versus the “mechanical approach” is better suited in Chapter 13 cases. He cites three separate reasons for the Court’s decision. First, the plain meaning of the word “projected” signifies that there has to take into account adjustments that can be made. Second, in federal statutes, the word “projected” does not generally mean simple arithmetic formulas. Third, cases prior to the enacting of BAPCPA in 2005 favored the forward looking approach to disposable income.
Justice Alito did hold that the mechanical test should be what bankruptcy courts utilize on a regular basis. Adjustments to the disposable income test should be the exception rather than the rule.
This ruling means that, for example, if someone’s income has drastically increased or decreased, this can be evaluated in the Chapter 13 case.