In re Wise

476 B.R. 653

In re Raymond WISE, Jr., Debtor.

No. 12–00262.

United States Bankruptcy Court, District of Columbia.

Aug. 16, 2012.

David W. Kestner, Camp Springs, MD, for Debtor.

Cynthia A. Niklas, Washington, DC, Trustee.

MEMORANDUM DECISION RE DEBTOR'S SECOND AMENDED PLAN

S. MARTIN TEEL, JR., Bankruptcy Judge.

The debtor, Raymond Wise, Jr. has filed a second amended plan. The trustee has objected to confirmation of the plan. Wise calculated that over the plan's applicable commitment period of 36 months, “projected disposable income,” as that term is used in 11 U.S.C. § 1325(b)(1)(B), and amounts necessary to effectuate a cure of the prepetition arrears he owes Wells Fargo Bank, N.A. on his home mortgage would total $11,988. Wise proposes in the plan to pay that $11,988 amount via paying the trustee $333 per month for 36 months. The court will confirm the plan with a modification of the timing of the payment of the $11,988 (in order to effectuate a cure within a reasonable time of the prepetition arrears owed on Wells Fargo's prepetition arrears claim that is secured by a mortgage on Wise's principal residence).

I

The chapter 13 trustee has objected to confirmation of the plan, first, by invoking 11 U.S.C. § 1325(b)(1).¹ By reason of the trustee having invoked § 1325(b)(1), the plan, which does not call for unsecured claims to be paid in full, cannot be confirmed “unless, as of the effective date of the plan ... the plan provides that all of the debtor's projected disposable income to be received in the applicable commitment ... will be applied to make payments to unsecured creditors under the plan.” Specifically, the trustee contends that Wise's calculation that “projected disposable income” is $11,988, less amounts necessary to cure his prepetition mortgage arrears, must be adjusted in two ways:

(1) Wise's Social Security income of $366 per month must be included as income, and

(2) the amounts required to accomplish a cure of Wells Fargo's prepetition arrears claim under the plan must not be included as an expense.

Part III of this decision overrules that objection.

The chapter 13 trustee has also objected that the plan does not comply with 11 U.S.C. § 1322(b)(5) because the cure of Wells Fargo's prepetition arrears claim would not be made within “a reasonable time.” In response, Wise has agreed to modify the plan to accelerate the payment of his “projected disposable income” of $11,988 by increasing payments to $699 per month for the first 15 months of the plan, which will suffice to pay the Wells Fargo arrears claim in full,² with the balance of the $11,988 to be paid via payments of $71.58 per month for the duration of the 36–month plan. That modification provides for a cure of Wells Fargo's prepetition arrears claim within a reasonable time as required by § 1322(b)(5). The modification also benefits unsecured creditors because it necessarily results in the amounts that will be paid to them being paid sooner.

Nevertheless, Wise's modification of his plan presents an additional § 1325(b)(1)(B) issue. The trustee objected at the confirmation hearing that if Wise is correct in his calculation that, before curing the prepetition mortgage arrears, he has projected disposable income of $333 per month, then after paying $699 per month for the first 15 months of the plan to wipe out the prepetition mortgage arrears, Wise would then have $333 in monthly disposable income. Accordingly, she argues, Wise is required by § 1325(b)(1)(B) to pay $333 for the remaining 21 months of the plan. Part IV of this decision overrules that objection.

The trustee raises one other objection beyond her objections based on § 1325(b)(1)(B). She objects that 11 U.S.C. § 1325(a)(3) imposes a separate requirement that a plan be proposed in good faith, and that because Wise has an ability, by reason of his Social Security income, to pay more in plan payments than the $11,988 he is proposing, the plan is not proposed in good faith. Part V of this decision overrules that objection.

II

The parties are in agreement that if, in calculating projected disposable income over the life of the plan:

(1) Wise's Social Security income is excluded as income, and

(2) the amounts needed to cure Wise's prepetition mortgage arrears debt to Wells Fargo (plus the 10% trustee commission thereon) were not included as deductions against income,

then Wise's projected disposable income would be, on average, $333 per month, resulting in $11,988 in projected disposable income over the life of the plan.

The plan calls for the trustee to use the $11,988 in plan payments to cure the $9,147.29 in prepetition arrears owed to Wells Fargo, with the cure payments to not include postpetition interest on the arrears, and to use the remainder to pay unsecured claims. With the trustee receiving a commission of 10%, that would leave only $1,925.98 in plan payments after satisfying Wells Fargo's prepetition arrears claim.³ Wise contends that his projected disposable income amounts to that $1,925.98 because he is allowed to deduct the amounts necessary to effectuate his prepetition mortgage arrears cure in calculating projected disposable income. That $1,925.98 will fall far short of paying allowed unsecured claims in full.

III

The trustee raises two objections regarding Wise's calculation of “projected disposable income.” Neither is a sound objection.

A

First, the trustee contends that Wise's Social Security income of $366 per month must be included in calculating “projected disposable income” to be received in the 36–month commitment period. The trustee concedes that the term “disposable income” does not include Social Security income. The term “disposable income” means “current monthly income received by the debtor” less amounts “reasonably necessary to be expended” for, among other things, the debtor's maintenance and support.⁴ In turn, § 101(10A) defines “current monthly income” as average monthly income the debtor receives over a specified six-month look-back period but excludes “benefits received under the Social Security Act” (and excludes certain other income of no relevance here). ⁵

The term “projected disposable income” is not defined, but Hamilton v. Lanning, ––– U.S. ––––, 130 S.Ct. 2464, 2478, 177 L.Ed.2d 23, 39–40 (2010), held that “when a bankruptcy court calculates a debtor's projected disposable income, the court may account for changes in the debtor's income or expenses that are known or virtually certain at the time of confirmation.” In other words, when there are known changes that will occur in a debtor's income, “projected disposable income” is not calculated using income in the six-month look-back period specified in the § 101(10A)(A) definition of “current monthly income” and the changed income may be utilized in arriving at a projection of “disposable income” in order to determine “projected disposable income.” ⁶

When a debtor has no “known or virtually certain” changes in her income or expenses, the income side of her “disposable income” is based on “current monthly income,” an average monthly amount which, by reason of the definition of that term, excludes Social Security income, and when she projects that “disposable income,” it necessarily does not include Social Security income. When a debtor has “known or virtually certain” changes in income that Hamilton v. Lanning permits a court to take into account in projecting “disposable income,” the projection still must exclude types of income excluded from the definition of “disposable income” and, thus, “projected disposable income” never includes Social Security income. Hamilton v. Lanning viewed the word “projected” as permitting courts, in projecting “disposable income,” to not restrict income to the six-month look-back period specified by § 101(10A) when changes in income are known or virtually certain at the time of confirmation, but it did not unmoor the projection of “disposable income” from that term's definition (which incorporates the income exclusions of § 101(10A)). Accordingly, Social Security income, which is one of the income exclusions in § 101(10A), must always be excluded in projecting “disposable income” to arrive at “projected disposable income.” See Baud v. Carroll, 634 F.3d 327, 345 (6th Cir.2011). ⁷

That the debtor in Baud v. Carroll had current monthly income above the comparable median family income does not make its holding inapplicable to a below median family income debtor (like Wise) who has current monthly income well below the comparable median family income. For both types of debtors, § 1325(b)(2) commands that “disposable income” means “current monthly income” (excluding certain child payments of no relevance to the analysis of the instant issue) less certain expenses. For both types of debtors, amounts received as Social Security benefits must be excluded as income in calculating “disposable income.” Whether the debtor has “current monthly income” above or below the comparable median family income matters for only two purposes, neither of which affects the items of income to be excluded in calculating “disposable income”:

• First, for certain debtors with “current monthly income” above the comparable median family income, 11 U.S.C. § 1325(b)(3) provides that in calculating “amounts reasonably necessary to be expended” under § 1325(b)(2) in determining “disposable income,” such expenses “shall be determined in accordance with subparagraphs (A) and (B) of section 707(b)(2).” ⁸

• Second, the “applicable commitment period” referred to in § 1325(b)(1)(B) is determined under 11 U.S.C. § 1325(b)(4), and that provision looks to whether the debtor has “current monthly income” above the comparable median family income in making that determination.⁹

Accordingly, the holding in Baud v. Carroll, that Social Security income is excluded in determining “projected disposable income,” applies here even though Wise was a below median family income debtor.

This is borne out...