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Ninth Circuit Requires Debtors to Include Railroad Retirement Income in Disposable Income - In re Scholz

November 26, 2012

Vincent Howard and our Corona individual bankruptcy lawyers were interested to see a decision about a source of retirement income that rarely becomes an issue: railroad retirement. In In re Scholz, Robert and Carolyn Scholz of Sacramento filed for Chapter 13 bankruptcy, but excluded an annuity they receive under the Railroad Retirement Act when they calculated their projected disposable income. The Scholzes argued that the RRA provides that payment of annuities shall not be anticipated, and thus they should not anticipate the payments in their calculations. The Bankruptcy Appellate Panel of the Ninth U.S. Circuit Court of Appeals found that they should be permitted to exclude the income, but the trustee appealed and the Ninth Circuit itself reversed, finding that the clause refers to premature receipt of payment.

Robert Scholz is a retired railroad employee; he gets several thousand dollars a month in annuity income under the RRA. Like all Chapter 13 filers, he and his wife were required to calculate their current monthly income when they filed for bankruptcy. This is an average of the filers' last six months of income from most sources; the RRA is not expressly addressed by the bankruptcy laws. The Scholzes excluded the railroad annuity from their calculations. Their bankruptcy trustee objected to this, because current monthly income is used to calculate projected disposable income, which the trustee uses to make payments to creditors. The bankruptcy court agreed that the annuity should be excluded, however.

The trustee appealed to the Ninth Circuit's BAP. That panel found no Congressional intent to exclude RRA income and therefore no reason to create a new exemption. However, it upheld the bankruptcy court because of the RRA's anti-anticipation clause, which says annuity payments may not be taxed, garnished or anticipated.

The trustee again appealed. After finding that the decision was reviewable, the Ninth Circuit reversed on the anti-anticipation issue. Though the Scholzes argued for an interpretation using the ordinary meaning of "anticipated," the Ninth found that the U.S. Supreme Court had provided a definition in Hisquierdo v. Hisquierdo, a 1979 divorce case in which the wife sought payments from the husband's future RRA income. In that case, the court borrowed the definition from trust law, where a prohibition on anticipation means interest will not be paid to a beneficiary before the due date. The Supreme Court ruled that allowing a premature assignment of the RRA money would improperly anticipate payment by allowing the wife to collect interest before interest was set to accrue. Using the same definition, the Ninth found that including the RRA income in a bankruptcy does not anticipate it because it doesn't permit anyone to receive the money before the date the interest accrues. Thus, it reversed and remanded the case.

Vincent Howard and our Lake Forest consumer bankruptcy attorneys rarely run across a railroad income case. But because RRA income is treated like Social Security income elsewhere in federal law, we believe it would have been more equitable to treat it as excluded. Indeed, the bankruptcy code expressly excludes SSI from current and projected disposable income, as the Tenth Circuit recently affirmed. Thus, it is a bit unfair to treat railroad workers (who get RRA income instead of SSI) differently from their similarly situated peers. At Howard Law, P.C., our Highland personal bankruptcy lawyers do our best to maximize the flexibility our clients have while they are completing Chapter 13 repayment plans, while ensuring that their plans are legal and will get them the fullest possible discharge.

Based in Orange County, Vincent Howard and the team at Howard Law represent clients from across California who are ready to do the hard but rewarding work of a bankruptcy. To learn more or tell us about your situation, send us a message online or call 1-800-872-5925.

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