Chapter 13 For a Week Pulling an End-Run Around the Applicable Commitment Period

By: Christpher J. Hunker

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

The Ninth Circuit Court of Appeals has ruled that a voluntary Chapter 13 bankruptcy filed by above-median income debtor with no “projected disposable income” is not subject to the “applicable commitment period” prescribed by 11 U.S.C. § 1325.

[1]

  In so ruling, the Court agreed with the Trustee’s interpretation of “applicable commitment period” as mandating a temporal requirement.

[2]

  Nevertheless, the Court found that the “applicable commitment period” is inapplicable where the debtor can show a negative or zero “projected disposable income” as calculated on Form B22C.

[3]

  Thus, an above-median income debtor can escape the required five-year “applicable commitment period” if, at the time of filing for Chapter 13 bankruptcy, the debtor can prove that his “projected disposable income” would be zero or a negative number.

In this landmark case, the Ninth Circuit aligned itself with a majority of courts that have held the “applicable commitment period” to be a temporal requirement mandating a particular period of time during which the debtor must repay unsecured creditors.

[4]

  On the other hand, some courts have held the “applicable commitment period” to constitute a monetary multiplier, that is, a time reference by which the debtor computes the monetary amount owed to unsecured debtors.

[5]

  The Ninth Circuit, however, ruled that this mandatory five-year “applicable commitment period” is not applicable to debtors without projected disposable income.

[6]

  Consequently, a Chapter 13 debtor with no projected disposable income is not subject to the “applicable commitment period” and can propose a repayment plan of shorter duration, in this case, 36 months.

[7]

   

 

The consequences of the Ninth Circuit’s holding are aptly highlighted by Judge Bea’s forceful dissent.  Judge Bea argues, in relevant part, that the majority’s test would allow above-median income debtors to escape repayment of unsecured creditors by increasing their expenses prior to filing for bankruptcy and deferring income until after the expiration of their proposed repayment period.

[8]

  Furthermore, the express language of section 1325 provides that a period of time shorter than the “applicable commitment period” is only permitted “if the plan provides for payment in full of all allowed unsecured claims over a shorter period.”

[9]

  As a result, an above-median income debtor who can show no projected disposable income is thus free to choose a period of time for repayment that is shorter than five years, thereby circumventing the requirements of section 1325.

[10]

  While this protects the debtor from being subjected to examination by unsecured creditors for the five-year period, it also may prevent the creditor from receiving payment.

[11]

  Although the majority indicates that its ruling does not preclude an unsecured creditor from seeking a modification of the plan pursuant to § 1329, this provision essentially would be rendered useless if the debtor proposes a shorter period of repayment because the plan itself may have expired, leaving unsecured creditors with nothing to modify.  Consequently, unsecured creditors would not receive repayment.  Essentially, the Ninth Circuit’s ruling has created a loop-hole which allows an above-median income debtor to propose a repayment plan that, as the dissent notes, may be “as short a period as he wants: a day, a week or a month.”

[12]

  Such a policy, however, is contrary to the purpose of the BAPCPA amendments and contravenes Congress’ intent to provide creditors with a five-year window during which they can “keep an eye on the debtor to perhaps share in any of his new good times.”

[13]

  While Ninth Circuit’s ruling may encourage some debtors to choose Chapter 13 and voluntarily pay more to their creditors rather than little or nothing under Chapter 7, it also creates an intolerable scheme whereby above-median income debtors can hide or defer their “projected disposable income” as a means of avoiding the five year “applicable commitment period.”