Hamilton v. Lanning: The Economic Implications of Forecasting a Debtor’s Disposable Income
In the case of Hamilton v. Lanning, The Supreme Court of the United States considered
whether bankruptcy courts should determine a Chapter 13 debtor’s “projected disposable
income” according to the disposable income prior to filing bankruptcy or the disposable income
after filing bankruptcy. Tracy L. Leyba, Hamilton v. Lanning: The Economic Implications of
Forecasting a Debtor’s Disposable Income, 7 J. Bus. & Tech. L. 181 (2012). The court held that
a forward-looking approach of a debtors projected disposable income would be the most
beneficial. According to the court, “a forward-looking approach minimizes the need for creditors
to apply for plan modification for the purposes of harassing debtors for a greater return and
exhausting valuable resources over normal litigation.” Id. at 181. One of the main arguments in
this case was surrounding the definition of disposable income and how it applies to bankruptcy.
Stephanie Lanning filed Chapter 13 bankruptcy on October 16, 2006, to address her
$36,793.36 of unsecured debt. In the preceding 6 months to filing bankruptcy, Stephanie
received a buyout from her employer which increased her income for a short time. During those
previous 6 months, the debtor calculated a monthly disposable income of $1, 114.98. Since filing
bankruptcy, Stephanie’s disposable income has dropped to $149.03 per month. Stephanie
proposed to pay her creditors $144.00 a month for 36 months. Hamilton, the Chapter 13 Trustee,
acknowledged the financial situation of Stephanie but still filed an objection to the plan’s
confirmation based on the debtor’s failure to commit all “projected disposable income” to the
plan based on her earlier determination of monthly disposable income of $1, 114.98. Id.at 182.
The Trustee referenced 1325(b) (1) (b) which states “If the trustee or the holder of an allowed
unsecured claim objects to the confirmation of the plan, then the court may not approve the plan
unless, as of the effective date of the plan, the plan provides that all of the debtors projected
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disposable income to be received in the applicable commitment period beginning on the date that
the first payment is due under the plan will be applied to make payments to unsecured creditors
under the plan.” 11 U.S. Code § 1325. But the United States Bankruptcy Court for the District of
Kansas interpreted this differently. They believed it was talking about a “forward-looking
concept to encompass a debtor’s actual income at the plan’s confirmation by characterizing the
rigid calculation of disposable income as a presumption that can be rebutted by evidence of
substantial changes in income that will impact the debtor’s forecasted budget during the life of
the plan.” Id. at 183. The Bankruptcy Appellate Panel for the Tenth circuit of the United States
Court of Appeals affirmed the bankruptcy court’s decision that “projected disposable income”
may require consideration beyond a strict calculation of disposable income in order to accurately
forecast a debtors’ ability to fund the plan. Id.
Once an individual or business files bankruptcy, there are bankruptcy laws that go into
effect that govern the debtor-creditor payment process. There are many several different chapters
of bankruptcy that address different types of situations. Congress created Chapter 13 Bankruptcy
in 1978 so that debtors could have an appealing repayment alternative to Chapter 7. Chapter 13
allows debtors to keep their property and work out an affordable repayment plan. A Chapter 13
bankruptcy is better for the debtor and creditor because it promises the creditors get their money
back and the debtor gets to keep their possessions. Congress did have to implement the
Bankruptcy Abuse Prevention and Consumer Protection Act in 2005 to keep Chapter 13
bankruptcy from being abused. Disposable income was now calculated by subtracting reasonably
necessary expenses in accordance with a means test from a debtor’s current monthly income.
Since, bankruptcy courts have adopted their own interpretation of the proper amount to be
reserved for payment plans due to the new definition of disposable income. One of those
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“interpretations” is known as the mechanical approach. This approach holds that disposable
income and projected disposable income must be linked to remain consistent with the plain
reading of the statute. Id. If we were to separate those phrases, it would make the definition of
disposable income superfluous. But in 2006, a bankruptcy court abandoned the mechanical
approach and was the first court to interpret projected disposable income as a forward-looking
concept. Since then, majority of courts have followed in their footsteps.
One critique of this article I would like to mention is the author states plan modification
under §1329 should be restricted because §1329 fails to set standards for circumstances in which
a request for modification should be granted. I do believe that the §1329 statute should list
standards for why someone files bankruptcy, but I truly believe no one wants to file bankruptcy.
Debtors file bankruptcy because they are drowning financially and need a way out. They must
prove to the Court that their debt outweighs their income in order to seek any relief. Therefore, I
do not believe this statue should be very restricted because everyone has different circumstances.
Some people lose their jobs, have a decrease in income, get divorced, etc. The list can go on and
on. Bankruptcy cases need to be on a case-by-case basis. There are so many different
circumstances that can take place and push someone to file that it is ultimately impossible to list
them. It is important to remember that when someone files Chapter 13 bankruptcy, they are still
committing to paying back the debt owed. They just need a payment plan that works for their
current financial income. “The wicked borrows but does not pay back, but the righteous is
generous and gives.” Psalm 37:21 (ESV). Often times it seems the court is making the debtor out
to be the villain, but they are just asking for grace when it comes to paying back a debt.
The author of this article mentioned a forward-looking approach is going to help restore
stability in the financial markets by strengthening the relationship between debtors and creditors.
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It is hard for me to believe that observation because I am just like millions of other who have
fallen behind on payments before. I have been one of those debtors to call the bank and ask for a
different payment arrangement because of financial issues and the bank always turns it down.
They seem to never be willing to work with anyone on repaying debt. Unfortunately, this leaves
the debtor to either file bankruptcy or let the account go to collections so they may try to settle it
for a lower amount. If the banks would be more open to having a conversation with the debtor
about the current financial situation of the debtor and be willing to re-work a payment
arrangement, then maybe I could foresee the relationship between a debtor and creditor
strengthening. But the fact is, after you file bankruptcy, it is impossible to receive financing from
any financial institution which means the relationship is ruined.
The court’s decision in Hamilton v. Lanning will create a significant impact but I believe
more for the debtor and not the creditor. The only benefit the creditor will receive is being paid
back the money they are owed. The court’s ruling ultimately benefits the debtor and offers them
protection from the creditor. When you fall behind on payments, creditors will all but harass you
until you are caught back up. Bankruptcy protects debtors from this treatment. Creditors lack
compassion for debtors and the God touches on this in the bible. “If you lend money to any of
my people with you who is poor, you shall not be like a moneylender to him, and you shall not
exact interest from him. If ever you take your neighbor’s cloak in pledge, you shall return it to
him before the sun goes down, for that is his only covering, and it is his cloak for his body; in
which else shall he sleep? And if he cried to me, I will hear, for I am compassionate.” Exodus
22:25-27 (ESV). The court held that a debtor’s disposable income is not indicative of his or her.
Income at the commencement of the plan and that the bankruptcy court reserves the right to
account for known or virtually certain substantial’s changes that will impact a debtor’s financial
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situation. The author states a forward-looking approach will begin a policy of open
communication between debtors and creditors by renewing lending relationships and restoring
economic growth. In my opinion, the forward-looking approach will certainly restore economic
growth, but I am not sure about renewing lending relationships. In order to achieve that, I believe
there will need to be a big change on the outlook from financial institutions. If creditors will look
at debtors in a more compassionate way and remember they are human beings who have
unforeseen things happen to them, then maybe that relationship will grow. Unfortunately, they
see debtors as a dollar sign. Until that changes, I see no hope to strengthen the relationship
between a debtor and creditor.
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