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Because of these absurd results, judges all across the country have been wrestling with
the question of whether the Means Test is the Alpha and the Omega of determining a debtor’s
projected disposable income, or if it should just merely be a starting point – allowing
other evidence to sway the court. Judges have been fairly evenly split on this issue, and
it is expected that a decision in Hamilton v. Lanning will create unified law across
the United States.
I have a personal stake in this case, because I litigated a similar one in 2008 called Hilton.
In my case, like Lanning, my clients had a sharp decrease in income during the month
that their bankruptcy case was filed, and we knew for certain that income was not coming
back. The judge assigned to the case adopted the forward looking approach, which I’m
going to explain in a moment, and so my clients were victorious, and we sort of set the law
in the Eastern District of Wisconsin – although I should note that another judge
in the same district has made mechanical approach rulings, primarily on the expense side of
the equation. It doesn’t directly conflict with my case, but debtors assigned to that
judge could receive an unfavorable ruling, since the decisions of one bankruptcy judge
are not binding on the other judges in that district. A ruling from the Supreme Court,
however, will be binding on all bankruptcy judges. So the law my case represents will
soon either be affirmed or reversed.
Two main schools of thought have emerged on this issue. The first is the mechanical approach.
This theory is predicated on the notion that Congress intended to reduce or eliminate judicial
discretion by having a set formula in place to determine projected disposable income.
There is little doubt that Congress did - in fact - intend to reduce discretion. Subscribers
to the mechanical approach do not necessarily think that the Means Test produces good results,
but they believe that Congress was very clear in how they wanted bankruptcy to be administered,
that there is no room for judicial discretion, and for better or for worse, the Means test
is the sole basis for calculating income.
The second school of thought is the forward-looking approach. This theory is based on the notion
that the absurd results inherent in the mechanical approach are unacceptable and unjust. Forward-lookers
note that Congress also intended to force more debtors into Chapter 13 and pay as much
as possible, whereas strict application of the Means Test actually causes debtors to
convert or find other legal loopholes to ultimately pay less to unsecured creditors.
Further, there is debate as to the definition of the type of income required to be dedicated
to a Chapter 13 Plan. In Chapter 13, the debtor is required to submit “projected disposable
income”. But the Means Test calculates “disposable income”. People who take the forward looking
approach believe that the word “projected” is not superfluous, and would not have been
added unless it has significance which extends beyond the Means Test definition of disposable
income. People who subscribe to the mechanical approach tend to believe that the word “projected”
is simply a modifier, and does not create a new term of art. They point to the fact
that Congress, in Chapter 1 of the bankruptcy code, defined “disposable income” but
did not make a separate definition for “projected disposable income”. Although I’m sure
that the absence or presence of a word seems like splitting hairs to non-attorneys, the
fact of the matter is that these kinds of textual analyses are important in judicial
procedure, and no matter which approach you take – mechanical or forward looking –
most attorneys agree that Congress did a sloppy job drafting BAPCPA. Reasonable and
very intelligent minds are reading the same text and interpreting it differently. It’s
not that one interpretation is right and one interpretation is wrong – it’s that the
statutes are ambiguous.
The arguments against the mechanical approach are – obviously – the inherently absurd
results it produces. As I said earlier, the absurd results can work for or against the
debtor, and for or against the creditors, depending on the direction of change, and
whether the change occurs in income or expenses. The arguments in favor are that the mechanical
approach produces consistent, predictable results, and cannot be altered by the whims
of a pro-creditor or pro-debtor judge. Arguments in favor of the forward looking approach are
that they produce more just results, and allow debtors to pay as much as possible to creditors
while still being affordable.
Trustee Hamilton offered several alternatives for a debtor to find relief should the debtor
find him or herself on the absurd end of a Means Test result. One is a rarely-invoked
provision under section 101(10A) which allows the court to shift the six month period that
the Means Test analyzes. As the respondent pointed out, however, this provision requires
the debtor to not file a schedule of income and expenses, which the debtor is required
to file, and so to use this provision requires a lot of excessive procedural maneuvering.
Further, there are limits on these procedures – time limits – which restrict how much
the means test can be shifted. And, as the justices pointed out, it seems that in trying
to avoid judicial discretion, this provision merely shifts that discretion from calculating
income to the determination of which six month period to use.
Another option is to convert under Chapter 7. Ironically, this option puts creditors
in a worse position than in a compromised Chapter 13 plan, so you would think that this
is exactly what Congress had wanted to avoid. But the standard of proof for showing a change
in circumstances is lower in Chapter 7 than it is in Chapter 13. This option sounds like
a perfect “gotcha!” option for debtors, but on the other hand – to qualify under
Chapter 7, debtors generally have to show an inability to pay any portion of their unsecured
debts. Failing that, they’re still stuck in Chapter 13, and still stuck with trying
to reconcile the means test result with their future income.
Another option is to postpone filing the case until the debtor’s past six months of income
is stable and more representative of their future income. However, this is not a viable
option for debtors who are facing imminent foreclosure, repossession, utility shut-offs,
or wage garnishments.
The final option is for the debtor to “bite the bullet” and live with the Means Test
result until the case is confirmed, and then to modify the plan post-confirmation under
sec. 1329. Unlike sec. 1325 which employs the rigid means test, the standards in 1329
are much more relaxed – similar to the standards for showing special circumstances in Chapter
7. However, the caveat to this option is that the plan actually has to get to confirmation.
Most trustees are not going to confirm a plan that is not feasible, and if the current income
and expenses show the debtor cannot afford the payments resulting from the means test
calculation, then the plan is not feasible.
If I had to guess, I would think that the Supreme Court will rule in favor of the Trustee
and go with the mechanical approach. I think they would honor Congress’ clear intent
(no matter how misguided) to eliminate judicial discretion. And if reform is needed – I
think they would leave such reform in Congress’ hands in the form of new legislation. Supreme
Court justices tend to be more conservative, textualist, and I don’t see them issuing
a decision that gives a lot of latitude to judges below them.
On the other hand, based on what Trustee Hamilton shared with me, and the transcript of the
oral arguments, I might be wrong. The justices interrupted Trustee Hamilton quite a bit during
his arguments. That could be a sign that they are in favor of his position and desperately
trying to reconcile some problems in their own minds to justify that ruling, but I think
it is more likely that they disagree with the Trustee’s position. They got very hung
up on the alternative in sec. 101(10A), which I did not expect, as well as the problem that
many of the alternatives offered by the Trustee seemed to require judges having no discretion
in one area, only to wield all sorts of discretion in other areas, which doesn’t seem to mesh
with Congress’ intent. There was also a lot of discussion about procedural wastes-of-time,
which would indicate that the justices might lean toward a more common-sense approach.
However, basing projected disposable income on the budget schedules is a highly speculative
process, and I don’t think we will see it go that far. If the justices rule against
the mechanical approach in favor of a forward looking approach, I think we’re going to
see a very high burden of proof. The Means Test will probably remain the starting point
for calculating projected disposable income. Other evidence may be considered in adjusting
that result, but I expect we will see a very rigid definition of what constitutes a change
in circumstances. Meaning the change must be known or certain. The likelihood of a change
is not going to be enough.
I’ll keep an eye out for the Supreme Court’s decision, and when it is published, I will
share that decision with you.