Decided: July 1, 2013
The Fourth Circuit held that a bankruptcy court’s denial of confirmation of a debtor’s debt adjustment plan under Chapter 13 of the Bankruptcy Code (“Chapter 13”), 11 U.S.C. §§ 1301–30, and a district court’s affirmance of that denial, can constitute final orders for purposes of appeal; that Social Security income is excluded from the calculation of “projected disposable income” under 11 U.S.C. § 1325(b)(1)(B); and that, when a debtor intends to use Social Security income to fund a debt adjustment plan, the bankruptcy court must include this income in its feasibility analysis under 11 U.S.C. § 1325(a)(6). The Fourth Circuit therefore vacated the order of the United States District Court for the Eastern District of Virginia and remanded the case with instructions to remand to the bankruptcy court.
Robert D. Mort Ranta (“Mort Ranta”) voluntarily petitioned for bankruptcy under Chapter 13, seeking the adjustment of certain debts. When Mort Ranta proposed a debt adjustment plan (“plan”), the Trustee objected to it. The Trustee asserted that Mort Ranta’s recorded expenses were overstated, and that Mort Ranta therefore had not dedicated all of his “projected disposable income” to unsecured creditors as mandated by 11 U.S.C. § 1325(b)(1)(B)—which applies when, inter alia, a Trustee objects to a debt adjustment plan. In a bankruptcy court hearing, Mort Ranta conceded some overstatement of expenses. However, Mort Ranta asserted that that Social Security income is excluded from “disposable income” calculations, and that his disposable income would therefore still be negative after downward adjustment of his expenses; thus, Mort Ranta contended that he should not have to make payments to unsecured creditors. Despite Mort Ranta’s arguments, the bankruptcy court took the Social Security income into account and found that Mort Ranta could make larger payments. However, because Mort Ranta did not include his Social Security benefits as income, the bankruptcy court did not take the Social Security benefits into account when evaluating the feasibility of his plan. The court therefore concluded that his plan was not feasible. The bankruptcy court then issued an order denying confirmation of Mort Ranta’s plan, ordering dismissal of the case in 21 days unless Mort Ranta took an enumerated action under the court’s local bankruptcy rules. The district court affirmed the denial of confirmation. Mort Ranta appealed, arguing that the Bankruptcy Code excludes Social Security income from projected disposable income calculations, and that—taking his Social Security income into account—his plan was a feasible one.
The Fourth Circuit first determined that bankruptcy proceedings entail a “relaxed rule of appealability,” in which the concept of finality is applied in a more pragmatic way. Thus, for purposes of appeal, the Fourth Circuit concluded that a denial of confirmation can constitute a final order even though the case has not been dismissed. Second, the Fourth Circuit noted that, under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109–8, 119 Stat. 23 (2005), the definition of “current monthly income” used to calculate disposable income explicitly excludes Social Security benefits. Furthermore, per the United States Supreme Court’s decision in Hamilton v. Lanning, 130 S. Ct. 2464, “projected disposable income” is based on “disposable income,” plus any alterations necessary to account for foreseeable income changes. Thus, because Social Security income is excluded from calculations of disposable income, it must also be excluded from calculations of projected disposable income. Lastly, the Fourth Circuit found that income not counted under the definition of “disposable income” can still be considered as income for purposes of a Chapter 13 debt adjustment plan. Thus, when it is included in a debtor’s debt adjustment plan, Social Security income must be considered by bankruptcy courts for purposes of analyzing feasibility.
– Stephen Sutherland