Cengage Advantage Books: Fundamentals of Business Law Today 10th Edition by Roger LeRoy Miller

Exercise 18

FACTS David and Sharon Welsh filed a Chapter 13 petition. The bankruptcy trustee objected to their proposed plan on the ground that it was not proposed in good faith. Specifically, the Welshes were making "minuscule" payments on unsecured claims while living in a $400,000 home and paying for various luxury items. In addition, they were failing to commit 100 percent of their disposable income to the plan. As a result, the plan would pay off only about $14,700 of $180,500 of their unsecured debt.
Excluded from the plan was David's Social Security income because the Bankruptcy Code excludes Social Security income from the current monthly disposable income calculation. The court ruled in the Welshes' favor. The Bankruptcy Appellate Panel for the Ninth Circuit affirmed the ruling. The trustee appealed to the U.S. Court of Appeals for the Ninth Circuit.
ISSUE Did the Welshes propose their plan in good faith despite their failure to include David's Social Security income in their disposable income?
DECISION Yes. The U.S. Court of Appeals for the Ninth Circuit affirmed the Bankruptcy Appellate Panel's judgment in the Welshes' favor. The federal appellate court concluded that the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) "forecloses a court's consideration of a In re Welsh United States Court of Appeals, Ninth Circuit, 711 F.3d 1120 (2013). debtor's Social Security income … as part of the inquiry into good faith."
REASON Before the BAPCPA, bankruptcy judges had the authority to determine a debtor's ability to pay based on the individual circumstances of each debtor. Congress replaced this discretion with a detailed test that requires debtors with a certain amount of "current monthly income" to calculate their disposable income by subtracting specific expenses. Social Security benefits are expressly excluded from current monthly income. Thus, the calculation of disposable monthly income may not accurately reveal the actual funds that a debtor has available to pay creditors.
So for Social Security recipients, as in the Welshes' case, the result may indicate that there is little disposable income to pay debts. But a court cannot recalculate the amount by substituting its judgment for what Congress stipulated. And a court "cannot conclude … that a plan prepared completely in accordance with the very detailed calculations that Congress set forth is not proposed in good faith."
FOR CRITICAL ANALYSIS-Legal Consideration In evaluating a debtor's petition, what factors should be part of a good faith analysis? Should consideration of disposable income play a role? Why or why not?