The Chapter 13 trustee objected to the debtors’ repayment plan because they did not plan to devote their Social Security income to repaying creditors.
And, he complained, they proposed to keep and pay for vehicles that are luxury items.
The plan is not proposed in good faith, he claimed, as required by the Bankruptcy Code.
The trustee fought for inclusion of the debtors’ Social Security payments through three different courtrooms. The 9th Circuit Court of Appeals decided in the debtors’ favor.
The good faith test for confirmation is not a back door around the statutory calculation of disposable income to be paid to creditors nor does it entitle courts to second guess which pre bankruptcy secured creditors the debtor pays through his plan.
Chapter 13 plans that meet the statutory tests for confirmation cannot be rejected under the catch all provision that they lack “good faith”. Drummond v. Welsh.
Good faith doesn’t require Social Security
The trustee in Welsh argued that the debtors’ plan was not confirmable because it excluded Mr. Welsh’s Social Security benefits from the plan. The plan was not proposed in good faith, the trustee claimed.
Not so, said the 9th Circuit.
With the 1984 amendments to the Bankruptcy Code, Congress created the best efforts test for confirmation of a plan.
With the formulation of that test, the amount of the payment to unsecured creditors was no longer a basis to challenge the debtor’s good faith.
The 9th Circuit held that BAPCPA and the means test introduced in those 2005 amendments refined the best efforts test. The law did not permit opposition to a plan that argued for larger payments than the Form b-22 calculations, at least where those larger payments would have to be funded by Social Security.
Good faith could not be stretched to gather into the Chapter 13 plan the debtors’ Social Security.
Luxury items OK
More unpredictable was the 9th Circuit’s treatment of secured debts for items the Chapter 13 trustee deemed “luxury” items.
The debtors proposed to continue to live in a $400,000 house (in Montana), and to pay for not only the loans on the cars they drove but on a car for their daughter, as well. Also slated for payment in the plan were loans on two ATV’s and an Airstream trailer.
At issue was whether courts could use the good faith requirement to compel the debtors to surrender collateral such as their house, their daughter’s car, or the recreational items because the court deemed those items either too expensive or not necessary.
The court again rebuffed the trustee and held that the means test calculations made no distinction between debts secured by items a court might find to be reasonably necessary and those that were discretionary.
Good news in bankruptcy
This decision is good news for debtors and their counsel. First, we have certainty, unless and until the Supreme Court decides these issues otherwise. Social Security need not be used to fund a plan: may, but does not have to.
Second, it seems to close the door on a “lifestyle review” as a condition to Chapter 13.
Now, my last post here made the argument that debtors with large non dischargeable debts to be paid through their Chapter 13 plan ought to consider surrendering discretionary items to assure repayment of debts that weren’t otherwise going to go away.
But as a matter of law, debtors in the 9th circuit with large house payments, second homes, or recreational toys bought on credit can use Chapter 13 to reorganize.
Image courtesy of DonkeyHotey & FLickr under license
This is a huge decision and win for Debtors. I have seen in the First Circuit, where a Trustee has argued that the disposable income listed on Schedule J, should control and not the B22, since Schedule J does add social security into the calculation.
You’re so right. If the trustee can pick and choose whether B-22 or the income and expense statement drive the bus, the debtor will lose every time.