Expanding Bankruptcy Rights of Social Security Recipients

By: Sarah Roe

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 Recently, in Ranta v. Gorman (In re Ranta), the United States Court of Appeals for the Fourth Circuit held “that the plain language of the Bankruptcy Code excludes Social Security income from the calculation of ‘disposable income,’ but that such income nevertheless must be considered in the evaluation of a [chapter 13] plan’s feasibility.”[1]   In Ranta, the chapter 13 trustee objected to the debtor’s proposed plan, arguing that the debtor failed to properly calculate his “projected disposable income” under section 1325(b)(1)(B) of the Bankruptcy Code because he inflated his expenses, improperly reducing his disposable income.[2]  While the debtor acknowledged that his expenses were overstated, he argued that his plan nevertheless complied with section 1325(b)(1)(B) since his Social Security income was excluded from his “disposable income,” and therefore, he argued that his disposable income was negative even after adjusting his expenses downward because his expenses still exceeded his non-Social Security income.[3]  As such, the debtor argued that he was not required to make any payments to his unsecured creditors under section 1325(b)(1)(B).[4] The bankruptcy court ruled in favor of the chapter 13 trustee, holding that the debtor’s plan was not feasible.  The bankruptcy court reasoned that if the debtor’s Social Security income was not included in the projected disposable income calculation, then the court could not consider those funds when determining whether the plan was feasibile.[5]  The district court affirmed.[6]  The Fourth Circuit, however, reversed, holding that although the Social Security income was excluded from the “projected disposable income” calculation, if the chapter 13 debtor proposed to use Social Security income to finance a plan, the bankruptcy court must consider the debtor’s Social Security income when examining a plan’s feasibility.[7]

The Fourth Circuit adopted the view held by a majority of circuits, explaining that a debtor may use Social Security monies and other forms of excluded income from disposable income to make payments under a plan.[8] The Sixth Circuit in Baud v. Carroll similarly concluded that “a debtor with zero or negative projected disposable income may propose a confirmable plan by making available income that falls outside of the definition of disposable income . . . .”[9]  The majority view takes a functional approach; oftentimes the only way debtors can to propose and fulfill feasible plans would be through the use of their Social Security benefits.[10] A minority of courts have adopted the argument made by the Trustee in Ranta, which the Fourth Circuit did not find persuasive.[11]  For example, the bankruptcy court in In re Schanuth accepted the formalist rule that a plan is not feasible and cannot be confirmed if the monthly payment plans exceed the debtor’s monthly disposable income.[12]  In reaching that conclusion, the Schanuth court cited cases considered before the 2005 BAPCPA.[13]  Yet, these courts did not weigh the revised definition of “disposable income,” nor did they consider Congressional intent of pushing debtors away from chapter 7 toward chapter 13 filings where the debtors work to pay back at least a portion of the debt incurred.[14]  Ranta and the majority view, however, weigh the purpose of the BAPCPA and Congress’ reasoning behind the reforms while determining a plan’s feasibility and relation to sources of disposable income.

The Fourth Circuit’s decision in Ranta is significant for two reasons.  First, it demonstrates that a debtor does not need to include his Social Security income when calculating his projected disposable income.[15]  Therefore, a Social Security recipient who withholds his Social Security income will have a lower projected disposable income, which in turn allows him to confirm a plan that provides for lower payments to unsecured creditors, thereby saving him money.[16] Second, the Fourth Circuit’s holding increases the likelihood that a debtor who proposes to use Social Security income to fund a plan will be able confirm that plan because the bankruptcy court must consider that income, which is not included in the projected disposable income calculation, in evaluating the plan’s feasibility under section 1325(a)(6).  

[16] See id.