Macdonald | Fernandez LLP

MACDONALD | FERNANDEZ LLP


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Thursday, November 13, 2008

Five Year Commitment Period In Chapter 13 Bankruptcy Not Applicable If Debtor Has No Projected Disposable Income

In In re Kagenvaema, 541 F.3d 868 (9th Cir. 2008), the Ninth Circuit ruled that a voluntary Chapter 13 bankruptcy filed by a debtor with no “projected disposable income” is not subject to the “applicable commitment period” under Bankruptcy Code Section 1325, which requires debtors with above-median income to repay unsecured creditors over a minimum period of five years. In other words, a chapter 13 debtor can confirm a plan with a repayment period shorter than five years if the debtor’s “projected disposable income” is zero or a negative at the time the petition is filed. In this case, the proposed repayment period was 36 months.

In 2005 Congress added the five-year commitment period for chapter 13 debtors with above-median income as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). Under BAPCA, “disposable income” is calculated by adding up past income and subtracting certain standard and actual expenses, including mortgage payments. This calculation is relatively straightforward, but courts disagree over the meaning of “projected disposable income.”

The Kagenvaema decision puts the Ninth Circuit at odds with some other federal circuit courts. Some courts take a flexible approach, holding that a bankruptcy judge can take into account the debtor’s actual income (as opposed to the debtor’s statutory “disposable income”) and circumstances arising subsequent to the bankruptcy filing, such as an increase in income. See In re Frederickson, No. 07-3391, — F.3d —-, 2008 WL 4693132 (8th Cir. Oct. 27, 2008); In re Lanning, — F.3d —-, 2008 WL 4879134 (10th Cir. 2008). This flexible approach has been subject to the criticism that it allows bankruptcy courts to ignore the “disposable income” calculation, which allows debtors to deduct certain expenses. The Ninth Circuit’s approach in Kagenvaema provides more certainty in calculating “projected disposable income,” and greater flexibility in crafting a chapter 13 plan.

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