Bankruptcy/Debtor-Creditor Rights Blog

WHAT IS THE PROPER CALCULATION FOR THE “PROJECTED DISPOSABLE INCOME” OF AN ABOVE-MEDIAN CHAPTER 13 DEBTOR?

Posted March 1, 2010

Author: Chris A. McNulty

There has been much debate over the proper definition of “projected disposable income” as that term is used in 11 U.S.C. §1325(b)(1)(B) of the Bankruptcy Code.  The two competing views throughout the circuits are the forward-looking approach and the mechanical approach.  Under the forward-looking approach, a Chapter 13 debtor’s six-month, pre-petition disposable income is presumed to be the  debtor’s “projected disposable income” for purposes of establishing the monthly sum that the debtor must commit to repayment of unsecured creditors in order to advance a confirmable payment plan and overcome objections to it.  Furthermore, the amount of projected disposable income may be rebutted upon a showing of special circumstances at the time of plan confirmation.  Under the mechanical approach, a Chapter 13 debtor’s projected disposable income is equated with the statutorily defined “disposable income” and then that amount is projected over the length of the applicable commitment period.  It does not permit adjustment to projected disposable income to account for special circumstances at the time of plan confirmation.  See In re Lanning, 545 F.3d 1269 (10^th Cir. 2008).  The Eighth Circuit, along with the majority of the circuits, adopted the forward-looking approach in In re Fredrickson because it “realistically determines how much a debtor can afford to pay his creditors and maximizes the amount the debtor must pay to his unsecured creditors.”  In re Fredrickson, 545 F.3d 652, 660 (8^th Cir. 2008).

The In re Lanning case referenced above is set to be heard by the United States Supreme Court this year.  The Court will decide which test is the appropriate test for calculating an above-median Chapter 13 debtor’s projected disposable income.  The debtor in In re Lanning took a buyout from her employer during the six-month period before filing for bankruptcy that increased her monthly gross income.  This increase caused the calculation of her monthly disposable income to be higher than what she would receive during the applicable commitment period.  The trustee argued for the mechanical approach, which would cause the debtor to pay more money to the unsecured creditors over the life of the plan.  On the other side, the debtor argued for the forward-looking approach because she would not receive the buyout payments over the life of the plan, and therefore, in reality, would not have as much income as calculated.  Up to this point, the courts have adopted the forward-looking approach as the proper method of determining the debtor’s projected disposable income.  The Supreme Court’s decision in this case will determine whether a Chapter 13 debtor’s payment plan should reflect the reality of the debtor’s income during the applicable commitment period, or if it should disregard any changes in the debtor’s income over the course of the plan.

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