In 2008, the U.S. Supreme Court issued its decision on an important issue of chapter 13 bankruptcy law in the case of Hamilton, Chapter 13 Trustee v. Lanning. The issue involved was how "a bankruptcy court should calculate a debtor's 'projected disposable income'" which is one of the factors upon which the amount of a chapter 13 debtor's monthly plan payment is based. The Court rejected the "mechanical approach" and adopted the "forward-looking approach" pursuant to which the Bankruptcy Court may, in the "the most unusual cases," go beyond the statutory formula for determining "disposable income" and "take into account other known or virtually known certain information about the debtor's future income or expenses."
The Court first reviewed the pre-BAPCPA (which was enacted in 2005) situation in which the Bankruptcy Code only "loosely defined 'disposable income'" and did "not define term 'projected disposable income.'" The Court stated that "in most cases, bankruptcy courts used a 'mechanical approach' in calculating projected disposable income" pursuant to which monthly income was multiplied by the number of the months of the plan and then the portion of the result that was "excess" or "disposable" was determined for dedication to the chapter 13 plan. "In exceptional cases, the bankruptcy courts took into account foreseeable changes in a debtor's income or expenses."
The Court noted that the BAPCPA "left the term 'projected disposable income' undefined but specified in some detail" the manner in which it is to be calculated. In general "disposable income" is based upon "current monthly income" less certain "amounts reasonably necessary to be expended" for maintenance and support and other items. The term current monthly income is statutorily defined and generally based on the 6-month period prior to the date preceding the filing of the bankrkuptcy case. "Amounts reasonably necessary to be expended" is calculated in a different manner for those below and those above the State median income amount.
The Court adopted the "forward-looking approach" which would allow for the consideration of the debtor's actual projected income in addition to the historically based "current monthly income." The court held that this approach is supported by the "ordinary meaning of the term 'projected.'" The Court noted that the term "projected" is not defined in the statute and that in "ordinary usage future occurrences are not 'projected' based on the assumption that the past will necessarily repeat itself.
The Court also noted the usage of the word "projected" in other federal statutes and stated that "Congress rarely used it [the phrase "projected"] to mean simple multiplication." In contrast, the Court referred to certain provisions in the Bankruptcy Code and noted that when Congress wished to mandate "simple multiplication, it does so unambiguously-most commonly by using the term 'multiplied'".
The Court remarked that pre-BAPCPA case law favors the "forward-looking" approach in that the general rule was that "courts would multiply a debtor's current monthly income by the number of months" of the plan as the first step in determining projected disposable income. But the Court also observed that the courts also "had discretion to account for known or virtually certain changes in the debtor's income." The Court noted that pre-BAPCPA practice is telling based on the principal that it "will not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure."
The Court also observed that the mechanical approach "clashed" with the terms of 11 U.S.C. section 1325 in that it would read out of the statute the phrase "to be received in the applicable commitment period" and the direction to determine projected disposable income "as of the effective date of the plan" (as opposed to the filing date).
But the Court noted that the statutory formula for determining "disposable income" still plays an important function under the forward-looking approach in that in "most cases, nothing further is required" and that only "in the most unusual cases" may a court "go further and take into account other known or virtually certain information about the debtor's future income or expenses." In short, the Court adopted the Tenth Circuit's analysis that "a person making a projection uses past occurrences as a starting point."
The Court further noted that the mechanical approach would "produce senseless results that we do not think Congress intended" where the debtor's income has changed since the historical six month period.
Justice Scalia dissented and held that the Court's conclusion is "contrary the Code's text" and "refus[es] to hold that Congress meant what it said."
Impact of Lanning
The Lanning decision is one of the most important chapter 13 case made since the 2005 Bankruptcy Code amendments. It has had a major impact on the need for chapter 13 bankruptcy attorneys to monitor changes in the debtor's budget at the time of filing and after filing.