« Is U.S. Bank Collecting Illegal Interest Rates? | Main | Rigbi on Usury on Prosper »

Supreme Court Rules in Lanning

posted by Katie Porter

The Supreme Court has just issued its opinion in Hamilton v. Lanning, a case interpreting the "means test" that the 2005 bankruptcy amendments added to chapter 13. The issue was chapter 13's requirement that the debtor commit his or her "projected disposable income" to a plan, and whether projected disposable income should be determined in a mechanical way (based on the debtor's income for the past six months as defined in the means test) or whether projected disposable income should include reliance on some estimate of the debtor's income in the future during the plan period. The Supreme Court rejected the mechanical approach, which was argued for by the debtor trustee and the National Association of Consumer Bankruptcy Attorneys, and adopted the forward-looking approach. The decision, authored by Justice Alito, was 8-1, with a dissent by Justice Scalia arguing the plain meaning of the text supported the mechanical approach.

I'm certain there will be loads of technical commentary forthcoming on this case, debating whether the Supreme Court's interpretation of the statute was correct. I have some non-technical observations.

First, it isn't clear that debtors are "hurt" or "helped" by this decision in terms of what they will be required to pay. Some debtors will have incomes that have picked up right on the eve of filing, so their forward-looking income is higher. But other debtors will have earned more in the past six months, filing in an income trough with bleak prospects. We could empirically test which system is better, but of course, to the best of my knowledge, nobody did this. (Query whether such data would have been persuasive to the Court if it had existed).

Second, I am quite sure this decision hurts debtors. How can I reconcile that with my first observation? Because it's not just the law that matters. In many contexts, including this one, the cost of the law will determine the justice received. The mechanical approach is easier to apply and is less likely to spawn litigation, which consumers filing bankruptcy can ill afford. Faced with a choice of filing a plan that is likely to begin a lawsuit, some consumers will just give up and drop out of chapter 13 or not bother to file at all. By holding that "only in 'unusual' cases, a court may go further and take into account other 'known or virtually certain information' about the debtor's future income or expenses," the Court will add a layer of complexity to lawyers' and debtors' decisionmaking in chapter 13. And legal decisions don't come free.

Comments

"The Supreme Court rejected the mechanical approach, which was argued for by the debtor"

Your statement of the case is wrong - the debtor did NOT argue for the mechanical approach. The Chapter 13 Trustee made that argument.

The debtor wanted a flexible approach - as reflected in the confirmation of her Plan with a much lower payment than that required under the Means Test. The debtor had an inflated "Line 59" number because of a one time buyout from her employer received during the 6 months prior to filing.

I can think of 5-10 cases right now that this dec. would be a positive for. As for the litigation we see almost nothing coming from unsecured creditors in 13s. The key is the 13 Trustee (the gatekeeper of unsecured debt treatment). Given this precedent, my hope is that we would get less flack from the 13 Trustee on plan payments and duration if we can show the change in circumstance. I do agree with the Trustees argument that the debtors could wait to file a 13 just for unsecured debt in (Texas and similar States ONLY). In other states where an unsecured creditor may be able to garnish wages or attach a home, it may be impractical or even dangerous to wait.

It leaves open the question of a spouse who is about to graduate from college. Will they get a job? Can you price on potential?..... UST seems to think so... We have got all kinds of hell from the UST on that issue.

I can see the point though of having to account for a consistent increase or "cost of living" raise. Maybe accounting for that tax refund. We usually though try to spread that out to per month income. It also kind of puts us under the gun when it comes to paying off vehicles outside of a 13 plan. Sometimes we have to weigh getting the title early to a potential increase in plan payments on a date certain in the future...anything can happen between now and then.

I think your conclusion that this decision somehow adds to the cost of Chapter 13 and therefore hurts debtors is also wrong.

There has been very little certainty with the Means Test in the Chapter 13 context. The idea that the test is easy and mechanically applied ignores the reality found in the practice.

There has been no general agreement regarding how to determine the number of members of the household, how the income of a non-filing spouse is counted, how vehicle loans and free and clear vehicles are treated, what happens with 401(k) loans, the extent to which debtors can manipulate their retirement deductions, how the tax withholding number is treated, difficulties getting the proper gross income figure to start with, the proper use of the telecom deductions, the Line 19B deduction for health costs - a gift or deducted from actual health costs?, the deductibility of monthly payments for debts secured by property being surrendered or liens that are being avoided - and the corresponding arrearages, etc.

In my view, there has never been certainty in the vast majority of Chapter 13 Means Tests. The uncertainties about what would count prevented any sort of firm reliance on the number the B22C produced.

Further, there was a lack of uniformity, not just throughout the country, but judge to judge. That lack of uniformity will at least be reduced by one issue - mechanical versus forward-looking - based on Lanning.

Moreover, the mechanical approach has - in this economy - hurt far more than it has helped. Lanning would have been denied Chapter 13 relief under the mechanical approach. So would all of the debtors where one spouse lost their decent paying job, forcing them to file - the six month look back period would have killed them, given their new "great recession" reality.

And, if Chapter 13 doesn't have the flexibility to help people when they have a loss of income, what good is it?

AMC points out that there are lots of other ambiguities in the means test. So what? Now we have one more. It's an odd argument--to lament the ambiguitites but then to say that I'm wrong to lament the additional ambiguity created by Lanning to determine if this is an unusual case where the forward-looking circumstances apply.

And of course the decision bring uniformity across the country. But that would be equally true if the Supreme Court had gone with the mechanical approach. I think you are wrong to raise that issue, which would be relative to cert. perhaps but not to the merits.

The final question of AMC is also puzzling. Chapter 13 has never been a good vehicle for dealing with lost income. Indeed, it requires income to be a chapter 13 debtor, and the 2 in 3 non-discharge rate in chapter 13 suggests that many people who have a partial drop in income before filing aren't making it in chapter 13 trying to keep their property on a reduced income. That's the reality of the data on chapter 13.

Your point was:

"The mechanical approach is easier to apply and is less likely to spawn litigation, which consumers filing bankruptcy can ill afford."

My point is - there is already tremendous uncertainty associated with every means test case. Even assuming your point is correct, and that there will be some incremental increase in uncertainty based on Lanning, is that really going to keep debtors from filing Chapter 13?

I don't think that comports with reality.

Plus, look at what the response to Kagenveama was in many 9th Circuit courts - confirm based on the Means Test, and then the trustee files a motion to modify under Section 1329, based on I and J. How is that two step process any simpler, or less of a litigation burden?

All this is not to mention the perception problem created by 6 month, attorney fee only Chapter 13 cases. Lanning may not have put a stake through the heart of those "negative DMI" cases, but Lanning has given them a good splash of holy water and a garlic necklace.

Your point about debtors not being able to keep their property on reduced income - I don't see it. Yes, if someone loses their job and has no income, they are not eligible for a Chapter 13 (although the date on which you have to have income has been held to be "flexible" in the case law).

However, there is a huge spread between keeping your bills current, at 19% - 30%+ credit card interest rates, and paying, say, 20% to creditors without interest over a three to five year period.

Moreover, in many instances, Chapter 13s are proposed by couples where only one spouse has lost their job - and that was my specific example. But, even single people on unemployment can, and do, propose confirmable Chapter 13 plans that complete successfully.

You cite the 2 of 3 Chapter 13s failing - however, that isn't starting with confirmed Chapter 13 plans. That is based on everyone who files, includes all the pro se cases, the cases where the filing is just for a temporary use of the stay - including cases where the debtor is just trying to keep creditors off their backs until the 8 year bar to a discharge in a second Chapter 7 passes, cases where the debtors probably want to do a Chapter 7 but starts in a 13 to preserve the right to dismiss, etc.

Your "2 of 3" statistic also doesn't take into account the debtors who come into Chapter 13 the first time, don't take it seriously enough or suffer a setback, and then come back and complete their second Chapter 13.

Finally, taking nothing I said above into account and just using your "2 of 3" argument - compare that success rate with the inability of mortgage companies to get just timely mortgage payments for three months in a row. Not 36 months, or 60 months - three months. Tell me the government wouldn't love to be doing permanent HAMP mods on 33% of those who fill out the preliminary paperwork.

Yes, when one subtracts away all the cases that don't turn out great, then chapter 13 fares pretty well! The data that I've seen suggest that even as a percentage of confirmed cases, about 58% of chapter 13s do not get to discharge. (The filing of those cases may still substantially benefit the debtors, but they make it hard to argue credibly that our system is so great (unless perhaps you are profiting from it as a trustee)).

And heaven help us all if the standard of comparison for a repayment system is HAMP. The rate of completion for HAMP would go up substantially if people were paying a lawyer $500 to get in the door to get the temporary modification, as with chapter 13.

Yes, if you added all the good things about Chapter 13 to HAMP, like having a lawyer and a trustee, then HAMP might turn out pretty well!

I agree that this case definitely makes things a lot easier on this end. It all boils down to making our system efficient and most of all making plan payments affordable for the debtor(which is what it should be...naturally). They know a good deal when they see it. Great decision on preserving the BK judges job on weighing the equities. Good for him. The system worked....sort of.

13 Trustees are salaried employees right? I mean they take a cut of disbursements but that goes into a pot right?

We have the perfect system to stop the slide in property values via modifications in bankruptcy. It can handle the volume. Reforming reform by just a few paragraphs, commas and conjunctions. Municipalities stand the most to lose and they are losing big right now. Give people hope and they would complete those 13s if it meant keeping their homes. You have to give them that hope though. 13s right now only promise a stay (ultimately though, if they lose their homes or not it gets rid a ton of different classifications of debt. Not just unsecured credit card debt). Give debtors that light with a forced mod and they would walk through fire but they wont if their efforts will still lead to them being backwards on that home. It's a toxic asset so long as they are backwards.

I like Justice Scalia's "you made your bed now sleep in it... congress!" attitude in his dissent. I guess his deal was if congress makes laws that would have an absurd result then the courts should give it to them. lol...

This guy Steve has a great post on the subject also he focuses on the descent a bit which I think is supper interesting

http://stevesathersbankruptcynews.blogspot.com/2010/06/supreme-court-rules-that-projected.html

I keep waiting for a reference back to Todd Zywicki's comment in 2005 that the Means Test would "eliminating the subjective judicial navel-gazing of the current system."

Clearly the Supreme Court thought otherwise: "We decline to infer from § 1325’s incorporation of § 707 that Congress intended to eliminate, sub silentio, the discretion that courts previously exercised when projecting disposable income to account for known or virtually certain changes."

The Court clearly has respect for the skill, expertise, experience and ability of bankruptcy judges, rather than IRS forms, to determine what is reasonable and necessary.

Judicial navel-gazing indeed.

The comments to this entry are closed.

Contributors

Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.

News Feed

Categories

Bankr-L

  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

OTHER STUFF

Powered by TypePad