I Hate it When I am Right — well, sometimes

One of the more entertaining aspects of the 2005 Bankruptcy Reform bill is that it makes so little sense. Under the terms of the Means Test a Chapter 13 debtor whose gross income is over the median for his State is required to have a 5-year commitment period. A Debtor whose gross income is below the median for his State may have a 3-year commitment period. Notice, that this says gross income; it doesn’t say disposable income.

Now, I love to harp on the fact that the Means Test really has far more to do with what you spend your money on and what kinds of debt you have then with how much money you actually make. This is one area where that is not true. If your gross income is over median you have a five-year commitment period even if your Disposable Monthly Income and your Projected Disposable Monthly Income are both negative. In other words, if you are over median income, but you pass the Means Test and are not required to make any distributions to unsecured creditors and still choose to file a Chapter 13; you still have a five-year commitment period.

This makes no sense. If someone is filing a Chapter 13 to restructure secured debt, is eligible to file a Chapter 7 and chooses to file a 13; why should they have to spend five years in their 13 plan when they aren’t required to pay anything to their unsecured creditors? Why not let them reorganize their secured debt and get out? Because that would make sense, that is why.

So, smarter lawyers than I am came up with a reading of this statute that lets above median income debtors who still pass the Means Test get in and out of a Chapter 13 in less time. They decided that the commitment period wasn’t really a time period, it was a multiplier. Chapter 13 plans are generally formulated as a base plan where you agree to pay a certain amount that is calculated as being the monthly plan payment x the plan length. When you pay a base, you just pay the base and then you are done. So, clearly that was what this language contemplated. It was creating a base amount of the monthly payment times the number of months in the commitment period. If the Debtors can pay that amount in a shorter period of time, fine. After all, that cuts down on administration expenses and increases the chances of the debtors successfully completing the plan — except not a lot of courts have agreed that this is what the Statute says — probably because a five-year commitment period sounds like five years and not like times 60.

I understand the argument, I would never have thought of it; but I do understand it. I just don’t like it. I want my clients who are over median but who pass the Means Test to be able to file as short a plan as they can pay. I want them to get in and out. I want them to succeed. I don’t want them to get to year 4 and lose a job or develop a significant illness and wind up having to convert or dismiss. Unfortunately, so far the case law inside this Circuit has gone against the Debtors. The most recent decision is out of a Bankruptcy Court in Colorado, In re: Pfeiler, Bankruptcy Case No. 07-22817 SBB, decided Sept. 12, 2008. There is, currently, a case on appeal from the BAP to the Tenth, itself, that might address this issue. Even so, I don’t hold out great hopes — and I think it stinks.

Elaine

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