Debtors can continue paying “luxury” secured debts in Chapter 13 plan

It is not bad faith for debtors to exclude their Social Security income in their Chapter 13 plan, nor to continue payments on “luxury” secured debts (an Airstream trailer and two ATVs), even though the debtors’ proposed repayment plan provides relatively little payment to unsecured creditors, ruled the U.S. Court of Appeals for the Ninth Circuit in the case of In re Welsh, decided March 25, 2013.

Background of the case

The debtors filed a voluntary Chapter 13 petition. They owned a home in Montana valued at $400,000, which was encumbered by a secured claim of $330,593.66. In addition, the debtors owned six vehicles: a pickup truck, two automobiles, an Airstream trailer and two ATVs. The combined value of the vehicles was $50,100, and all of them were encumbered by secured claims, which totaled $69,731. The debtors’ unsecured claims totaled approximately $180,500, the largest being $60,000 for their daughter’s student loan and a joint line-of-credit debt owed to Bank of America in the amount of $50,000.

The debtors listed their current monthly income as $8,116.31, which excluded Social Security income of $1,165 per month. After deducting payments on the secured claims, the debtors’ computation left them with only $218.12 per month in disposable income.

The debtors proposed a plan that provided for payments of $125 per month to unsecured creditors for the first 30 months of the plan. After the secured debts on the vehicles were paid in full, the payments to unsecured creditors would increase to $500 per month for the final 30 months of the plan. The proposed plan would pay off approximately $14,700 of the debtors’ $180,500 of unsecured debt (roughly eight percent).

Trustee’s objection and Ninth Circuit’s ruling

The Bankruptcy Trustee objected to the debtors’ plan, arguing that it was not proposed in good faith, since it did not devote 100 percent of the debtor’s income to paying the unsecured creditors, and instead provided for “miniscule” payments to the unsecured claims while permitting the debtors to live in a $400,000 home and retain various “luxury” items.

The Bankruptcy Court overruled the trustee’s objection and entered an order confirming the debtor’s proposed repayment plan. In a divided opinion, the Bankruptcy Appellate Panel affirmed the bankruptcy court’s decision. The trustee appealed to the Ninth Circuit Court of Appeals.

The Ninth Circuit affirmed the Bankruptcy Appellate Panel’s decision. The Ninth Circuit ruled that the Bankruptcy Code provision defining “current monthly income” excludes Social Security income in the calculation of disposable income, and, since the Chapter 13 debtors calculated their plan payments completely in accordance with the very detailed calculations that Congress has set forth, the exclusion of the debtors’ Social Security income from the plan cannot constitute a lack of good faith.

With regard to the debtors’ decision to keep and continue paying on their “luxury” secured debts, the Ninth Circuit ruled that the Bankruptcy Code does not place a limit on the amount of secured debt payments, nor qualify the kinds of secured payments, that may be subtracted from current monthly income to reach a disposable income figure.

Laws are constantly changing and may vary by jurisdiction. Individuals facing bankruptcy proceedings are urged to consult with a competent attorney experienced in these matters to ensure that their legal rights are protected.