The Chapter 13 plan must include all of the debtor’s projected “disposable income” in order for the plan to be approved by the court. In order to calculate the debtor’s disposable income, the Chapter 13 debtor determines the income that the he or she has received from all sources during the six-month period ending in the last calendar month preceding the date of filing and dividing by six. Certain items are excluded by statute from income. After the debtor’s gross income has been determined, then the debtor’s gross income is reduced by those amounts “reasonably necessary to be expended” for the maintenance and support of a debtor or that debtor’s dependents.
The devil is in the detail, however. The recent Bankruptcy Court decision of In re Canniff was faced with the question of whether Social Security benefit payments are to be included within the debtor’s disposable income, a novel question within the Seventh Circuit. There, the debtors did not include a $700 monthly Social Security payment to their oldest child; the bankruptcy trustee objected to the plan, arguing that the failure to include this $700 monthly payment should have been available to creditors and the failure to include it was bad faith.
Chapter 13’s “disposable income,” as further defined by “current monthly income”
While the Fifth, Sixth, Eighth, and Ninth Circuit Courts of Appeal have all held that Social Security benefits are not to be included within a Chapter 13 debtor’s monthly income, the Bankruptcy Court looked to the Bankruptcy Code to analyze for itself whether to include Social Security benefits. Chapter 13 requires a debtor to contribute all of his or her “disposable income” to the plan, and continues to define “disposable income” as the debtor’s “current monthly income … less amounts reasonably necessary for support of the debtor and family, as well as qualified charitable contributions.” Chapter 13 then refers to the Code’s general definition section to calculate “current monthly income.” There, currently monthly income “excludes benefits received under the Social Security Act.”
Failure to include was not bad faith
Turning to the question of bad faith, the Bankruptcy Court unambiguously stated that since Congress unambiguously clarified the amount a debtor is required to pay in under Chapter 13, any good-faith analysis should not be considered when determining a payment amount. In any event, the fact that Congress specifically excluded benefits under the Social Security Act from the definition of “current monthly income” precludes any arguments that a debtor is not proposing a plan in good faith; the manifest purpose of Congress in excluding Social Security benefits from income, like the purpose of exempting them from process, was to protect those benefits.
As one can see from this discussion of the Canniff case, even threshold questions of what is to be included in “income” in bankruptcy can become a thorny mess, perhaps involving long and complicated litigation. Whether you may even qualify for bankruptcy, much less which of the several bankruptcy chapters would be best suited for you and your financial circumstances is a matter which you consult an attorney qualified in bankruptcy and financial matters.