Bankruptcy Courts Directed to Adopt Forward-Looking Approach
The Supreme Court recently ruled that bankruptcy courts should be flexible when considering significant changes in a debtor's income or expenses during Chapter 13 proceedings.

July 09, 2010 /24-7PressRelease/ -- The economic downturn has challenged many to the point where filing for bankruptcy has become a financial necessity. Bankruptcy is organized to be a generally consistent process. However, when an applicant's situation is not quite as straightforward as the majority of filings, portions of the bankruptcy code allow for judicial discretion in constructing a settlement that is both fair and reasonable. The Supreme Court recently upheld the value of such judicial discretion when it determined that certain Chapter 13 filings should be scrutinized using a "forward-looking approach" rather than a strict "mechanical approach."

Chapter 13

When a debtor files for Chapter 13 bankruptcy, he or she agrees to pay creditors back over time, as opposed to those who liquidate their debt through Chapter 7 bankruptcy. When repayment plans are constructed under Chapter 13, debtors become committed to payments for a period of 36 or 60 months in an amount that is deemed reasonable given their "projected disposable income" at the time that the repayment plan is constructed.

Until recently however, bankruptcy courts struggled with the meaning of "projected disposable income", and their interpretations of this standard varied wildly. Some courts utilized a "means test" or "mechanical approach" which strictly interpreted a debtor's projected disposable income according to his or her income during the six months prior to filing for bankruptcy. Other courts favored a "forward-looking approach" which considered the debtor's financial situation more broadly and allowed for greater flexibility in determining the debtor's projected disposable income. The Hamilton case provided the Supreme Court with the opportunity to clarify the bankruptcy code and encourage uniformity of decision-making processes among the courts.

Hamilton v. Lanning

Just prior to filing for bankruptcy, Stephanie Kay Lanning received a buyout from her previous employer which artificially inflated her "current monthly income" which is an important factor in determining projected disposable income. One's current monthly income is generally calculated by averaging the debtor's income over the six months immediately prior to filing for bankruptcy. Lanning's buyout inflated this average significantly. When the mechanical approach was strictly applied to her case, Lanning's inflated projected monthly income caused her to become saddled with bankruptcy payments which far exceeded her actual projected disposable income; when it was adjusted to reflect that she would not be receiving future buyouts from her former employer. Thus, by favoring a strict mechanical approach, the lower court imposed a payment schedule beyond what Lanning could hope to afford.

Forward-looking Approach

The Supreme Court recognized that the strict mechanical approach was unreasonable when applied to Lanning's case. The Court therefore 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." This means that in the rare cases when a debtor's income or expenses have or will certainly change radically, judges will be able to take these drastic changes in circumstance into account when formulating a fair and reasonable payment plan. This forward-looking approach will allow judges to uphold repayment plans which will more accurately reflect the ability of debtor's to repay their creditors. In turn, the approach will allow debtors greater peace of mind as they move forward with rebuilding their financial futures.

The Hamilton decision will ensure bankruptcy courts more flexible discretion in determining a debtor's projected monthly income and will thus help to ensure that repayment plans are constructed within the debtor's means. Such flexibility will aid both creditors in being properly repaid and debtors in committing to reasonable payments which will ultimately allow them to regain their financial footing.

For Further Reference

Bankruptcy is a nuanced process. If you are struggling with debt, please contact an experienced bankruptcy attorney who can inform you of your options.

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