Case Analysis: Fifth Circuit excludes Social Security income from Chapter 13 PDI

The Fifth Circuit Court of Appeals has held that a Chapter 13 debtor’s Social Security income is not included in calculating the debtor’s projected disposable income.  See In re Ragos, — F.3d —-, 2012 WL 5292949 (5th Cir., Oct. 29, 2012).   This decision was similar in holding and in reason to an earlier Tenth Circuit Court of Appeals case on the same issue.   See In re Cranmer, — F.3d —, 2012 WL 5235365 (10th Cir., Oct. 24, 2012).

The Court reasoned that since Congress excluded Social Security income from “current monthly income” in Code § 101(10A) and “disposable income” in Code § 1325(b)(2), it made little sense to circumvent that prohibition by allowing Social Security income to be included in projected disposable income. The fact that a debtor’s disposable income was negative did not constitute a “special circumstance” that would permit complete abandonment of the disposable income figure for purposes of establishing projected disposable income.

Nor does a Chapter 13 debtor’s exclusion of Social Security income from the debtor’s projected disposable income demonstrate a lack of good faith in proposing the debtor’s Chapter 13 plan for the purpose of Code § 1325(a)(3).  A debtor does not act in bad faith, the court reasoned, merely for doing what the Bankruptcy Code permits. Nor was there any evidence that the debtors here had acted in bad faith or sought any improper result.

While there has been no specific treatment of this issue by the Third Circuit or in any New Jersey Bankruptcy case, it leads one to believe that the issue is there to be discussed.   A New Jersey Chapter 13 Bankruptcy debtor can now propose to exclude his or her social security income from the calculation of income that would be otherwise available to unsecured creditors.

This Special thanks to Robin Miller’s excellent continued work in circulating decisions in consumer bankruptcy cases around the country.   Strongly recommend her Consumer Bankruptcy Abstracts subscription to any practitioner.


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