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Social Security and Bankruptcy: New Ninth Circuit Ruling

Social Security and Bankruptcy: New Ninth Circuit Ruling

The National Consumer Bankruptcy Rights Center (NCBRC), NACBA’s 501(c)(3) offshoot, scored an important win in the Ninth Circuit yesterday. In the case In re Welsh, 2013 U.S. App. LEXIS 5880 (9th Cir. 2013), the 9th Circuit Court of Appeals joined the 5th and 10th Circuits in holding that it is not bad faith for a debtor to decline to devote social security income to paying unsecured creditors in a chapter 13 plan. The court rejected the trustee’s argument that this allowed the debtor to have money left over that could be used to pay creditors.

The Court said: “Congress chose to remove from the bankruptcy court’s discretion the determination of what is or is not ‘reasonably necessary.’ It substituted a calculation that allows debtors to deduct payments on secured debts in determining disposable income. That policy choice may seem unpalatable either to some judges or to unsecured creditors. Nevertheless, that is the explicit choice that Congress has made. We are not at liberty to overrule that choice.”

The Court followed the 8th Circuit in holding that the issue of how much creditors are paid should not even be a part of the good faith analysis now that Congress has adopted the disposable income test.

Equally as important, the court rejected the trustee’s argument that the debtors should not be permitted to continue to pay for “luxury” secured debts (two ATVs and an Airstream trailer) “at the expense” of their unsecured creditors. Again, the Court based its finding on the statutory language: “The calculation of ‘disposable income’ under the BAPCPA requires debtors to subtract their payments to secured creditors from their current monthly income. In enacting the BAPCPA, Congress did not see fit to limit or qualify the kinds of secured payments that are subtracted from current monthly income to reach a disposable income figure. Given the very detailed means test that Congress adopted, we cannot conclude that this omission was the result of oversight. Moreover, even if it were, we would not be justified in imposing such a limitation under ‘the guise of interpreting good faith.'”

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