Fifth Circuit Holds That Projected Disposable Income Should Reflect Reality

In a new opinion, the Fifth Circuit ruled that the calculation of "projected disposable income" in a chapter 13 plan is not merely a mechanical calculation and may take note of events "reasonably certain" to occur. Matter of Nowlin, Non. 08-20066 (5th Cir. 7/17/09). In doing so, the Fifth Circuit sided with the Eighth and Tenth Circuits and rejected a decision from the Ninth Circuit.

Nowlin involved an above median income debtor whose means test form indicated that she could pay $38.67 per month, but whose schedules I and J indicated that she could pay $195.64. The Debtor proposed a plan to pay $195.00 per month for 60 months. The only problem was that the Debtor had a 401k loan which would pay off in two years, which would free up $947.30 per month. The Trustee objected on the basis that the Debtor was not including all of her "projected disposable income" based on the money which would be freed up in the future. The Debtor responded that all she had to do was take the number listed on the means test and multiply by 60.

The Fifth Circuit held that "projected disposable income" was something more than just a mechanical computation and could take other events into account.

We are persuaded that the independent definition of “projected” adds to the phrase’s overall meaning. The term “projected,” not defined in the statute, means “[t]o calculate, estimate, or predict (something in the future),based on present data or trends.” (citation omitted). In view of this definition, with which Nowlin agrees, we interpret the phrase “projected disposable income” to embrace a forward-looking view grounded in the present via the statutory definition of “disposable income” premised on historical data. The statutorily defined “disposable income” is the starting point—it is presumptively correct—from which the bankruptcy court projects that income over the course of the plan. Under this interpretation, the statutory definition of “disposable income” is integral to the bankruptcy court’s decision to confirm or reject a Chapter 13 debtor’s proposed plan.

Opinion, pp. 6-7.

The Court's two holdings were as follows:

Thus, we hold that a debtor’s “disposable income” calculated under § 1325(b)(2)and multiplied by the applicable commitment period is presumptively the debtor’s “projected disposable income” under § 1325(b)(1)(B), but that any party may rebut this presumption by presenting evidence of present or reasonably certain future events that substantially change the debtor’s financial situation.

Opinion, p. 12.

We hold that a bankruptcy court may consider reasonably certain future events when evaluating a Chapter 13 plan for confirmation under § 1325. Some events may be too speculative, such as the fluctuation of an investment market during the plan’s term and its impact on the debtor’s budget. Other events are much more certain, as in this case where the debtor will pay off a debt at a date certain. If the event is less than reasonably certain to occur, amendment under 11 U.S.C. § 1329 is the appropriate way to proceed if a party wishes to change the plan.

Opinion, p. 14.

While Nowlin was a defeat for the debtor in the specific case, it also offers the possibility of mitigating an unusually harsh result from the means test. In its opinion, the Fifth Circuit noted that if the debtor's six month average income was higher than his current income due to a change in job, this was something which could be factored in. Additionally, if it was reasonably certain that an expense would increase, for example, if the debtor had received notice that his rent would increase in six months, the means test could be adjusted there as well.

The Fifth Circuit has established a workable framework for making the means test conform to reality. The means test provides the presumptive starting point. If changes have already occurred or are "reasonably certain" to take place, they may be accounted for in confirmation of the initial plan. On the other hand, if the effect of a future occurrence cannot be predicted with reasonably certainty, the remedy is to file for a modification of the plan under section 1329.