US Supreme Court – Bankruptcy Decisions 2010 – 2011

David Fuller, a bankruptcy attorney in Seattle, provides this as a reference to changes in bankruptcy law that may be interesting or relevant to bankruptcy professionals.  This is not a complete survey of the law.   These updates reflect Mr. Fuller’s analysis and opinion on the state of bankruptcy law and are not legal advice.  You should contact a qualifed bankruptcy lawyer to determine how the law applies to you.

US Supreme Court – Bankruptcy Decisions 2010 – 2011

Ransom v. FIA Card Services, 2011 WL 66438 (only the Westlaw Citation is Available), pub. Jan 2011.

Ransom is probably one of the most anticipated Court decisions of the year.  This is because it decides the issue of whether an individual debtor may deduct a car ownership expense on the Means Test, even if they are not making a car payment.  This issue is significant, because the ownership expense deduction is large enough to qualify higher income debtors for chapter 7 or to greatly reduce chapter 13 plan payments.

The decision turned on the Court’s definition of the word “applicable” in Section 707(b0(2)(A)(ii)(I).   The Court ruled that the ownership expense deduction was only “applicable” if the debtor was making car payment.    This means that you can only take the car ownership expense deduction if you are currently making payments on your car.

Schwab v. Reilly, 130 S.Ct. 2652, pub. July 2010

Schwab is the case that launched a thousand check boxes in bankruptcy attorneys’ petition software.  This case dealt with the very serious question of what happens when property increases in value after the petition is filed.  The debtor had listed some business equipment on her bankruptcy schedules.  She valued the property at approximately $10,000 schedule B and exempted that amount on schedule C.

The trustee did not object to the exemptions, even though he believed that the property was really worth $17,000.  The trustee asked the court for permission to sell the property, give the first $10,000 in proceeds to the debtor and distribute the balance to the estate.  The debtor objected to the sale, saying that she had exempted the full value – $10,000 – and that the trustee had not objected to her exemptions in time.  The trustee countered that she had only exempted $10,000 in value, but that she had not stated an intent to exempt the full value.  Because the she did not say “I exempt the full value,” the exemption objection deadline did not matter.

The Court agreed with the trustee and held that she had only exempted $10,000 in value; and that, if she wanted to exempt the full value – even if in excess of the allowed exemption – she should have so stated.  The result is that a debtor’s attorney should now state that they are exempting the full value of a piece of property.  This is especially true if the property value is open to argument or if the property is likely to increase in value around the time of your bankruptcy filing.

Hamilton v. Lanning, 130 S.Ct. 2464, pub. June 2010

This was probably the most significant Supreme Court decision in years for chapter 13 practitioners.  Since BAPCPA there are two classes of chapter 13 debtors, those with an above median income and those with a below median income.  If a Debtor has a below median income, then BAPCPA did not change the substantive confirmation requirements for their plan.  If, however, a Debtor had an above median income, they now have to pay their 60 month projected disposable income.

The 60 month projected disposable income was supposed to be a product of the Means Test.   Unfortunately, Congress did not make it clear how to calculate a projected disposable income when the Means Test produced a negative disposable monthly income.   The circuit courts split.  One side held that projected disposable income was forward looking; and the other side – i.e. the Ninth Circuit in Kagenveama – held that it was not and therefore the plan payment was undefined by the Code.  Additionally, the courts that took the forward looking approach required a 60 month commitment period.   By contrast, the courts that took the other approach did not require a 60 month commitment period.  Clearly the Kagenveama approach was better for above median debtors, because they could basically pick their plan payment and get a discharge in 36 months.

The Supreme Court took the forward looking approach and overruled the courts following the Kagenveama approach.  This means that projected disposable income is a forward looking concept.  The Supreme Court ruled that the Means Test is the starting point for an above median debtor, but the plan must also take foreseeable changes to income into account.  So an above median debtor with a negative disposable monthly income is required to do a 60 month plan, and the plan payment is calculated using schedules I and J.  The catch for practitioners is that even if the debtor has a positive disposable monthly income, the chapter 13 trustee will look at schedules I & J and try to require the debtor to pay more than their disposable monthly income on the means test.   Before Hamilton schedules I & J had become something of a nullity for above median debtors.  But now, it is important for a chapter 13 attorney to make ensure that schedules I & J accurately reflect the debtor’s ability to fund a plan; and ideally, the disposable income on schedule J should match the disposable monthly income on the Means Test.

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