Vincent Howard and our Moreno Valley personal bankruptcy attorneys have not often had nice things to say about the 2005 changes to the bankruptcy laws. Formally known as the Bankruptcy Abuse Prevention and Consumer Protection Act, BAPCPA has limited bankruptcy filers' options by imposing a financial means test to qualify for Chapter 7 bankruptcy , the quicker but more financially disruptive type of consumer bankruptcy. It has also been criticized by judges as unhelpfully vague. But in In re Welsh, the Ninth U.S. Circuit Court of Appeals held that BAPCPA does benefit a bankruptcy filer in at least one way: it does not permit courts to look into debtors' Social Security incomes or payments to secured creditors--such as mortgage holders--when considering whether a plan was proposed in good faith. In this case, the decision benefited David and Sharon Welsh of Missoula, Mont.
The Welshes filed for Chapter 13 bankruptcy in 2010. Their secured claims included payments on a $400,000 home, three vehicles, a trailer and two ATVs, all recent models. They also had large unsecured claims for a line of credit and their daughter's student loans. When they listed their current monthly income, they subtracted $1,165 a month in David Welsh's Social Security income, because by law, it is not counted. After deducting expected future payments on the secured claims, they calculated they had $218 a month in disposable income and proposed a plan providing $125 a month to unsecured creditors until vehicle loans were paid off. This would have paid off less than 10% of their unsecured debt. Their trustee argued that this plan was not proposed in good faith, pointing out that it called for tiny payments while the Welshes lived in an expensive home and kept luxury items.
The bankruptcy court disagreed, noting that payments to secured creditors are authorized by BAPCPA's means test and not examined for reasonableness when the payments are current. Similarly, it found that Social Security income, by law, cannot be included in disposable income and therefore should not be considered in the good faith analysis. A divided BAP for the Ninth Circuit affirmed, and the trustee appealed to the full Ninth Circuit.
The Ninth Circuit first noted that the question is whether Social Security income and secured creditor payments should be included in the good-faith analysis; there is no dispute that they were properly analyzed in the disposable income calculations. This has been a matter of debate in the appellate courts. BAPCPA consciously sought to limit judges' discretion by making the means test. By expressly excluding Social Security payments, the court said, Congress signaled an intention to depart from bankruptcy courts' prior willingness to include it. Indeed, the Ninth said, to agree with the trustee would be to allow bankruptcy judges to use their judgment, undermining Congress's language and purpose. Joining all of its sister circuits to consider the issue, it ruled that excluding Social Security from a plan cannot create a lack of good faith. Using the same reasoning, it ruled that BAPCPA's disposable income calculations foreclose consideration of secured creditor payments. Thus, it affirmed all the prior rulings.
Vincent Howard and our Santa Ana consumer bankruptcy lawyers are pleased to see a debtor-friendly ruling on BAPCPA. Some of the basis for this ruling rests on aspects of BAPCPA we didn't care for--particularly the Congressional intention to deprive bankruptcy judges of discretion in individual cases. But depriving them of discretion can be to the advantage of either the debtor or the creditors, and in this case, it appears that it benefits the debtors most by giving them an opportunity to hold onto luxury goods they might otherwise have been forced to surrender. Unfortunately, just as often, depriving judges of discretion robs them of an opportunity to do something that might help the debtor--for example, lifting the burden of student loan payments without meeting the difficult standard of "undue hardship." Vincent Howard and our Ontario individual bankruptcy attorneys would ultimately still prefer a return to the pre-BAPCPA system.
If you feel overwhelmed by your debts and you'd like to talk to an experienced attorney about bankruptcy, don't wait to call Howard Law, P.C. You can reach us toll-free at 1-800-872-5925 or send us a message online.