Disposable Income and 100% Plans: A Different Perspective

By Beverly M. Burden, Chapter 13 Trustee for the Eastern District of Kentucky, Lexington, KY

Virtually every court that has addressed the disposable income issue begins its discussion with the premise that the disposable income test of subparagraph (B) of 11 U.S.C. § 1325(b)(1) does not apply if the debtor’s plan proposes to pay all unsecured creditors in full in accordance with subparagraph (A). The proposition has been restated so frequently it has become axiomatic and accepted as true without question.1 But by reading section 1325(b)(1) with the rules of statutory construction applied in Seafort v. Burden (In re Seafort), 669 F.3d 662 (6th Cir. 2012), it becomes clear that when the trustee objects to confirmation of a plan, the debtor cannot avoid complying with the disposable income test by proposing a 100% plan.

Seafort is known for its ultimate conclusion, that income made available once a debtor’s 401(k) loans are fully repaid must be committed to such debtor’s plan for distribution to unsecured creditors. But for purposes of determining the meaning of section 1325(b)(1)(A), Seafort is important for its analysis and application of three important rules of statutory construction:

First, “We start with the language of the relevant statutory provisions.” Seafort, 669 F. 3d at 665.

Second, the statute must be interpreted to “give[] effect to every word in the statute.” Seafort, 669 F. 3d at 673-74.

Third, “it is generally presumed that Congress acts intentionally and purposely when it includes particular language in one section of a statute but omits it in another.” Seafort, 669 F. 3d at 672.

 

  • The language of section 1325(b) should be read, not paraphrased and recited by rote.

 

 

Section 1325(b) provides in pertinent part as follows:

  1. 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 –
    1. the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or
    2. the plan provides that all of the debtor’s projected 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.C. § 1325(b)(1) (emphasis added). Courts generally have failed to consider the importance of the words “such claim.” It is in this regard that Seafort sheds light on the meaning of those words.

 

  • To give effect to every word in the statute, “such claim” that must be paid in full refers only to the claim of an objecting creditor, not all claims.

 

 

The court in Seafort was faced with interpreting a hanging paragraph in 11 U.S.C. § 541(b)(7) that says “. . . such amount under this subparagraph shall not constitute disposable income. . . .” Seafort is relevant to the present analysis of section 1325(b)(1)(A) by analogy; it instructed that the phrase “such amount” in section 541(b)(7) referred back to something in particular that had already been specified in a preceding statement.2

Apply that concept to the phrase “such claim” and re-read section 1325(b)(1): If the trustee or the holder of an allowed unsecured claim objects to confirmation, the plan may not be approved unless “(1) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or” (2) the disposable income test is satisfied.

Seafort supports the conclusion that the phrase “such claim” in 1325(b)(1)(A) has to refer to something that has already been specified. It cannot stand alone. The trustee is not the holder of any type of claim to which “such claim” refers. The trustee administers the case on behalf of all creditors and does not step into the shoes of any particular creditor. The only logical interpretation – and the only interpretation that gives meaning to every word under the statute – is that if the holder of an allowed unsecured claim objects to confirmation, such claim – the objecting creditor’s claim – must be paid in full.3

One might counter that 11 U.S.C. § 102(7), which provides as a rule of construction that “the singular includes the plural,” negates this interpretation. Applying that rule does not get around the fact that “such claim” or “such claims” plural must refer to something that has already been specified, and the only “claim” or “claims” that have been specified in 1325(b)(1) are those allowed unsecured claims held by a creditor or creditors who object to confirmation. The accepted premise that section 1325(b)(1)(A) gives the debtors an option of proposing a plan that would pay all unsecured claims in full so that they do not need to meet the disposable income test is a misconstruction of the statute that should no longer be perpetuated. Section 1325(b)(1)(A) means if a creditor holding an allowed unsecured claim objects, the debtor must either pay the objecting creditor’s claim in full or pay all disposable income to the plan. If the trustee objects, section 1325(b)(1)(A) is simply not applicable, and section 1325(b)(1)(B) controls.

 

  • Congress acted intentionally when it required payment in full in section 1325(b)(1)(A) only of an objecting creditor’s claim; elsewhere in section 1325 Congress shows how to require payment in full of all unsecured claims.

 

 

Congress added what is now designated as subsection (b) to section 1325 in 1984. At the time, subsection (a)(4) of section 1325 was in existence (having been enacted in 1978). Section 1325(a)(4) is commonly referred to as the “best interests of creditors” test or the “liquidation” test and provides that the court shall confirm a plan if, among other things:

(4) the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 . . . .

11 U.S.C. § 1325(a)(4) (emphasis added).

In context, “such claim” in section 1325(a)(4) refers to “each allowed unsecured claim,” and the use of “each” necessarily includes all allowed unsecured claims4, so to satisfy the liquidation test, all unsecured claims must be paid at least as much as they would be paid in a chapter 7 liquidation.

Had Congress intended to give debtors the option of paying all unsecured creditors in full in section 1325(b)(1)(A), Congress easily could have used language it had already used in section 1325(a)(4) and have said that if the trustee or an unsecured creditor objects, the plan must provide that the value of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount of such claim.5 Congress did not do so, and its differentiation between section 1325(a)(4) and section 1325(b)(1) is presumed to be intentional and deliberate.

Also, when Congress enacted BAPCPA, it demonstrated elsewhere in section 1325(b) that it knew how to give the debtor the opportunity to provide for “payment in full of all allowed unsecured claims.” Section 1325(b)(4) provides that the applicable commitment period –

(B) may be less than 3 or 5 years, whichever is applicable under subparagraph (A), but only if the plan provides for payment in full of all allowed unsecured claims over a shorter period.

11 U.S.C. § 1325(b)(4)(B) (emphasis added). Consequently, section 1325(b)(1)(A) must mean something other than paying each claim or all claims in full.

 

  • Section 1325(b)(1)(A) does not give debtors the ability to ignore the disposable income test by proposing a plan that would pay unsecured claims in full.

 

 

This interpretation has not been recognized by courts.6 Nevertheless, the language of section 1325(b)(1)(A) is clear when it is re-evaluated in light of the Seafort decision. If the trustee or the holder of an unsecured claim objects, the debtor must pay “such claim” in full or must meet the disposable income test. In order to give meaning to every word in the statute, “such claim” means the claim of the objecting creditor. If Congress intended that the debtor has an option of paying all unsecured claims in full or paying all disposable income into the plan, Congress had the opportunity to state that the plan must pay each claim in full or must provide for payment in full of all unsecured claims. The disparate phrasing in section 1325(b)(1)(A) is meaningful and intentional and cannot be interpreted to mean that a debtor need not comply with the disposable income test if the plan proposes to pay all creditors in full.

When a trustee objects to confirmation, debtors must provide for the payment of all disposable income into the plan, even if the plan is a 100% plan. Section 1325(b)(1)(A) does not insulate the debtors from satisfying the disposable income test even though their plan proposes to pay unsecured claims in full.

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[1] In numerous published opinions, courts assume, without analysis, that a debtor may choose either to pay unsecured creditors in full pursuant to section 1325(b)(1)(A) or to pay all of their disposable income pursuant to section 1325(b)(1)(B). Even the Supreme Court repeated the paraphrased assumption, without discussion or analysis, in Hamilton v. Lanning, 130 S. Ct. 2464, at 2469 (2010) (“If an unsecured creditor or the bankruptcy trustee objects to confirmation, § 1325(b)(1) requires the debtor either to pay unsecured creditors in full or to pay all ‘projected disposable income’ to be received by the debtor over the duration of the plan.”).

[2] In Seafort and its companion consolidated case In re Schuler, the debtors wanted to increase their 401(k) contributions postpetition when their 401(k) loans were paid off. The trustee objected on the grounds that the amount they could contribute to their 401(k) accounts was fixed in section 541(b)(7) to the amount the debtors were contributing on the petition date, and only the amount contributed as of the date of the petition was excluded from disposable income. The debtors argued that all 401(k) contributions are excluded from disposable income. The Sixth Circuit was faced with the task of analyzing which, if any, 401(k) contributions are excluded from disposable income by the clause “except that such amount under this subparagraph shall not constitute disposable income.” A critical factor in the court’s analysis was identifying what “such amount” referred to. “[Section] 541(b)(7) must provide some sort of protection for voluntary retirement contributions in Chapter 13 cases, because it says that such contributions ‘shall not constitute disposable income . . . .’” Seafort, 669 F.3d at 672 (emphasis added); “[W]e think that ‘the most natural reading of section 541(b)(7) is that it excludes from property of the estate only those contributions made before the petition date’ as ‘indicated by its specifying the contributions excluded from property of the estate and then stating that ‘such amount’ shall not constitute disposable income.’” Seafort, 669 F.3d at 673 (citations omitted) (emphasis added); “If all contributions to qualified retirement plans were excluded from disposable income, regardless of whether they were in effect as of the commencement of the bankruptcy case, the phrase ‘under this subparagraph’ would be superfluous, and section 541(b)(7) would simply read ‘such amount [qualified retirement plan contributions] shall not constitute disposable income . . . .’” Seafort, 669 F.3d at 673 (bracketed clause in original).

[3] It would seem the objecting creditor’s claim could be separately classified and paid in full under 11 U.S.C. § 1322(b)(1), but that is an issue for another day.

[4] “Each” means “every one of two or more people or things considered separately.” http://www.merriam-webster.com/dictionary/each.

[5] See also section 1322(a)(2)’s reference to payment of priority claims in full:

(a) The plan – . . .
(2) shall provide for the full payment, in deferred cash payments, of all claims entitled to priority under section 507 of this title, unless the holder of a particular claim agrees to a different treatment of such claim.”

11 U.S.C. § 1322(a)(2) (emphasis added).

[6] Only a handful of courts have iterated this author’s interpretation of section 1325(b)(1)(A). See, e.g., In re McCollum, 363 B.R. 769 (E.D. La. 2007) (dicta) (“Chapter 13 prohibits confirmation of a plan over the objection of the trustee or of the holder of an allowed unsecured claim, unless the objecting creditor is paid in full through the plan, or the plan provides that the debtor will contribute all projected disposable income . . . .”); In re Green, 378 B.R. 30 (Bankr. N.D.N.Y. 2007) (dicta) (“Pre-BAPCPA, the statute provided that upon an objection by the trustee or the holder of an allowed unsecured claim, a plan could not be approved unless the objecting creditor’s claim would be paid in full or all of the debtor’s projected disposable income would be committed to the plan . . .”) .

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burdenBeverly M. Burden, Lexington, Kentucky, has served as the Chapter 13 Trustee for the Eastern District of Kentucky since 1999. From 1987 to 1999, she served as Law Clerk to Bankruptcy Judge Joe Lee. Prior to her tenure with the Bankruptcy Court, she was an Assistant Attorney General for the Commonwealth of Kentucky, where she concentrated on consumer fraud litigation. She earned her J.D. degree from the University of Kentucky College of Law in 1983 and holds a B.B.A. degree in Accounting. Ms. Burden has served on the faculty of the annual meeting of the National Conference of Bankruptcy Judges, the annual convention of the National Association of Chapter Thirteen Trustees, the Midwest Regional Bankruptcy Seminar, the Judge Joe Lee Biennial Bankruptcy Institute, and numerous other regional and local CLE programs. She was the 1997 recipient of the Kentucky Bar Association’s Justice Thomas B. Spain Award For Outstanding Service in Continuing Legal Education.

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