We hate to see people who have worked hard all their lives use their Social Security earnings to try to pay down high-interest credit card debt. So we’re pleased that another appellate court has weighed in favorably for retirees on the question of whether Social Security income must be included in calculating the monthly payments that chapter 13 filers must make in their debt consolidation plans.
The Fifth Circuit Court of Appeals is the latest to hold that a chapter 13 debtor’s Social Security income is not included in determining the debtor’s “projected disposable income” available for repayment of credit card and other unsecured debts. In re Ragos, — F.3d —, 2012 WL 5292949 (5th Cir. Oct. 29, 2012). The Tenth Circuit Court of Appeals had issued a similar ruling just a few days prior. In re Crammer, — F.3d —, 2012 WL 5235365 (10th Cir. Oct. 24, 2012). Both courts also held that a chapter 13 debtor’s exclusion of Social Security income from the debtor’s projected disposable income in proposing a chapter 13 plan does not demonstrate a lack of good faith.
Our own Ninth Circuit Bankruptcy Appellate Panel has also held that a chapter 13 plan could not be determined to be in bad faith solely on the basis of the debtors’ exclusion of Social Security income from the calculation of disposable income. In re Welsh, 465 B.R. 843 (B.A.P. 9th Cir. Feb. 17, 2012).
We think the plain language of the Bankruptcy Code makes this an easy question to settle. The Code provides that a chapter 13 plan cannot be confirmed over the objection of an unsecured creditor or the bankruptcy trustee if the debtor does not devote all “projected disposable income” over the life of the plan to payment of unsecured creditors. 11 U.S.C. § 1325(b)(1)(B). The Code in turn defines “disposable income” as “current monthly income” minus reasonable expenses. 11 U.S.C. § 1325(b)(2). “Current monthly income” is the average income a debtor received in the six months before filing for bankruptcy. 11 U.S.C. § 101 (10A)(A). The Code expressly provides that “benefits received from the Social Security Act” are excluded from the calculation of “current monthly income.” 11 U.S.C. § 101(10A)(B).
Congress has demonstrated a clear policy preference for encouraging retirement savings over repayment of credit cards and other general unsecured debt. The Bankruptcy Code protects tax-exempt retirement savings up to $1 million from the reach of creditors. 11 U.S.C. § 522(d)(12), 522(n). Repayment of 401(k) loans is also excluded from the disposable income calculation in chapter 13. 11 U.S.C. § 1322(f). And the “means test” that determines eligibility for chapter 7 expressly excludes Social Security payments from income calculations. 11 U.S.C. S 707(b)(2).
These policy choices make economic sense. Society as a whole is worse off if a retiree has to get extra support from friends, family or the government because of unwieldy credit card or other debt. Congress has made a calculated decision to give our kupuna a break, through the Bankruptcy Code. For those on the edge of eligibility for chapter 7, this can make a critical difference and allow for a payment-free fresh start. For those whose household earnings rule out chapter 7 relief, the exclusion of Social Security income can mean an affordable debt consolidation plan that ensures a comfortable retirement.
If debt is interfering with your ability to enjoy your twilight years, call us today at 808-585-1000 for a free no obligation consultation. The Law Office of Edward D. Magauran serves clients on all Hawaiian Islands, including Oahu, Maui, the Big Island, Kauai, Lanai and Molokai.