When facing financial difficulty, Chapter 7 and Chapter 13 bankruptcy are the two main bankruptcy options to help consumers struggling with debt. Both allow a consumer to discharge their debts, get protection from creditors and receive a fresh start. In a Chapter 7 bankruptcy case, a debtor’s dischargeable debts are eliminated in a relatively quick proceeding. In a Chapter 13 bankruptcy, the debtor is able to repay their debt over a 36 to 60 month court-approved payment plan. The percentage of the debt to be repaid through the payment plan depends upon a number of factors in each particular case. When evaluating a debtor’s bankruptcy options, it must first be determined if a debtor is candidate for Chapter 7 or Chapter 13 bankruptcy.
If a debtor is considering filing for Chapter 7 bankruptcy, it must first be ascertained whether the debtor is subject to the Means Test, which is a budget test imposed by § 707 Bankruptcy Code. If the debtor is above the median income for a household of their size in the state in which they live, they must “pass” the Means Test to qualify to file Chapter 7 bankruptcy. For some context regarding median household incomes, according to the U.S. Department of Justice U.S. Trustee Program, as of November 1, 2019, New York median incomes are as follows: for a household of one is $56,120, a household of two is $71,349, a household of three is $86,670, a household of four is $105,636 and for households above that add $9,000 for each individual in excess of four.
Basically, the Means Test determines whether under the Bankruptcy Code, a debtor has too much income to qualify for Chapter 7 bankruptcy. As part of the Means Test calculation, the only income that is specifically excluded is Social Security Retirement, Social Security Disability, Supplemental Security Income, plus U.S. Department of Veterans Affairs and the U.S. Department of Defense disability payments (as well as payments to victims of war crimes or crimes against humanity or terrorism on account of their status as victims of such crimes). If a debtor’s income is above the median income level, then the Means Test applies. The Means Test formula measures the debtor’s income against a set of monthly expenses based on IRS living standards, along with certain other allowed actual expenses and secured debt payments. If the debtor’s disposable income after a Means Test is negative, then they may file a Chapter 7 bankruptcy. If there is a certain surplus of income after the test, then the debtor is restricted to Chapter 13 bankruptcy. Since the Means Test does not take into account all of a debtor’s actual monthly expenses, they may not have the actual disposable income to fund a Chapter 13 plan.
What happens if the debtor passes the Means Test or the Means Test does not even apply, but their household still has disposable income (i.e. a surplus of income after all reasonable expenses)? Those debtors will generally be required to file a Chapter 13 bankruptcy. However, if the surplus income is wholly comprised of Social Security income (SSI), then a debtor may be able to file a Chapter 7 bankruptcy instead. Section 1325(b) of the Bankruptcy Code requires that a Chapter 13 debtor’s plan provide the “projected disposable income” (PDI) for the household during the plan will be applied to make payments to unsecured creditors under the plan. Does SSI, which is already protected from collection by creditors, become a part of a household’s PDI? Put another way, is a debtor required to include all their household’s SSI in their Chapter 13 Plan? Bankruptcy Courts have held that this depends upon the interpretation of the “projected” in PDI.
There are two approaches to determining what a debtor’s PDI is. The first is the “mechanical” approach, which uses the formula in the Bankruptcy Code for the debtor’s current monthly income (which excludes SSI) and projects it forward for the applicable term of the Chapter 13 plan. Alternatively, there is a “starting point” approach which looks forward in time and to the debtor’s anticipated income (which can include SSI), not just their income from the six months prior to filing spread over the term of the plan.
The question of how to treat SSI when determining PDI has not been considered by the 2nd Circuit, nor by the Courts in which our firm practices, the Eastern District of NY and the Southern District of NY. However, the Bankruptcy Court for the Northern District of New York considered this question in a case called In Re Bartelini. In that case, the Chapter 13 Trustee objected to the confirmation of three different Chapter 13 plans. The debtors involved in Bartelini were each contributing to a Chapter 13 payment plan but they were not including all of their SSI in their monthly payment. The Trustee wanted all of the debtors in that case to either contribute all of their household’s disposable income, including all of their SSI, into their Chapter 13 plans or have the three cases under review dismissed.
The Bartelini Court considered how prior Bankruptcy Courts had treated the question of including SSI and found that many got bogged down in an analysis of the meaning or calculation of PDI. The Court looked instead to § 101(10)(A) of the Bankruptcy Code and its “explicit exclusion of SSI,” and hold that “debtors cannot be compelled to include those [SSI] benefits in the computation of…their PDI.” While SSI is “afforded sacrosanct” status in the Bankruptcy Code, the Court may still look to whether the debtor’s plan is feasible if all SSI is excluded. Furthermore, if the amounts excluded are significant enough, the Court may also consider the amount of SSI pledged toward the plan as being proposed in bad faith.
Given the holding in Bartelini that a debtor cannot be required to include all of their SSI in a Chapter 13 plan, what about a Chapter 7 matter where there is a surplus of disposable income that is entirely attributable to SSI? Can a trustee force the debtors to fund a Chapter 13 plan with those funds? There is no controlling caselaw on this question here in the 2nd Circuit. This question did arise in a 2013 bankruptcy case in the Central District of California. In the matter of In re Suttice, the United States Trustee moved to dismiss a Chapter 7 case § 707(b)(3)(B), “under the totality of the circumstances” on the grounds that the debtors’ SSI could fund a Chapter 13 payment plan with their disposable income.
The debtors in Suttice were 85 and 69 years old respectively and together had a monthly household surplus of income totaling $896. Their counsel argued that since under the controlling case law in their Circuit, the debtors could not be compelled to include their SSI in a Chapter 13 plan (much like the holding in Bartelini) nor should they be compelled to convert their case from a Chapter 7 to a Chapter 13. Furthermore, given the debtors age, health and medical conditions, it was argued that the case should not be dismissed due to the totality of the circumstances.
The Court in Suttice held that a “conversion to Chapter 13 would be futile and wasteful result because the Debtors’ Social Security income is protected from compelled remittance to a Chapter 13 plan.” The Court rejected the Trustee’s argument that the debtors should be “assigned to a shut-in life for the remaining few years, while spending all of the Social Security benefits toward a Chapter 13 plan.”
In order to dismiss a Chapter 7 case in the 2nd Circuit under the totality of the circumstances standard, a Bankruptcy Court will use a two-part test summarized in In re Campbell, “first look to whether the debtor has the ability to pay a substantial dollar amount or percentage of her unsecured debts, and then to any other relevant circumstances to determine whether there are any mitigating or aggravating factors.” Accordingly, if a Chapter 7 debtor filed a case in which they had some ability to pay a Chapter 13 plan with disposable income comprised of SSI, they should only do so if there are a compelling set of mitigating facts. If a debtor in such a circumstance chooses to file a Chapter 7 bankruptcy, they should be prepared to defend against a motion to dismiss the case from the United States Trustee.
Based upon the caselaw above, a debtor whose budget has disposable income which is wholly attributable to Social Security income cannot be forced to file a Chapter 13 bankruptcy, nor should they be denied the opportunity to file a Chapter 7 bankruptcy case provided that they pass the Means Test. However, these conclusions may change if Bartelini or Suttice are overturned on appeal or until this issue is definitely decided in our districts.
Debtors should always review their specific circumstances with an experienced bankruptcy attorney when considering filing for bankruptcy. The answer to the question of whether to file a Chapter 7 or a Chapter 13 bankruptcy for a debtor in these circumstances may not be obvious to an inexperienced lawyer who only occasionally handle bankruptcy matters. We have been helping debtors file for bankruptcy in New York for over 20 years. If you have any questions regarding Chapter 13 bankruptcy, please feel free to contact the Law Offices of David I. Pankin, P.C. at 888-529-9600 or by using our easy online contact form. The Law Offices of David I. Pankin, P.C. have been helping debtors since 1996.
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Further reading (case law):
In re Suttice, 487 B.R. 245 (Bankr. C.D. Cal. 2013)
In re Campbell, No. 11-70038-ast (Bankr. E.D.N.Y. 2012)
In re Bartelini, 434 B.R. 285 (Bankr. N.D.N.Y. 2010)
In re Upton, 363 B.R. 528 (Bankr. S.D. Ohio 2007)
In re Barfknecht, 378 B.R. 154 (Bankr. W.D. Tex. 2007)
In re Rotunda, 349 B.R. 324, 327 (Bankr. N.D.N.Y. 2006)