October 20, 2018

Supreme Court Issues Important Ruling About Chapter 13

Supreme Court of the United StatesOn June 7, 2010, the United States Supreme Court released its decision in the case of Hamilton, Chapter 13 Trustee v. Lanning.   The Supreme Court rarely hears argument in consumer bankruptcy cases so the Lanning decision is big news to consumer bankruptcy lawyers.

The issue in Lanning is one that has troubled bankruptcy lawyers since 2005, when the “means test” was added to the Bankruptcy Code.   The means test functions as a test – do you have the “means” or disposable income to fund a Chapter 13 repayment plan?  If the means test shows that you do not have sufficient disposable income to make a Chapter 13 work, then you qualify for Chapter 7.

As one of the assistant United States trustees once told me – the purpose of the means test is to disqualify as many people as possible from Chapter 7, and to force them into Chapter 13.

In practice, the means test does not work very well in predicting who can make a Chapter 13 work.  One of the biggest complaints has to do with the mechanical nature of means testing.   To run a means test, I have to gather pay stubs from the past 6 months.  I then create a monthly average, which represents available income.  Next I prepare a means test budget, but I do not use actual expense amounts.  Instead, the means test tells me how much my clients are allowed to spend for food, medicine, utilities, etc.  And where do these budget numbers come from?  Means test numbers are based on IRS budgets used in delinquent tax repayment plans.  In other words, the means test budget allocations are not especially generous. [Read more…]

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