Social Security Income in Bankruptcy

January 23, 2014

 The treatment of Social Security benefits in Chapter 13 cases is a hot button issue in bankruptcy courts around the country. The courts ask three questions concerning Social Security income:

One: Are payments from Social Security excluded from Current Monthly Income?
Two: Are payments from Social Security excluded from Projected Disposable Monthly Income?
Three: Is excluding Social Security benefits from the Disposable Monthly Income in a Chapter 13 plan an act of bad faith?

The answers are: yes; probably; and it depends on who you ask.

Current Monthly Income
Congress included a definition of the term “Current Monthly Income” in the Bankruptcy Code. In this definition (found in the awkwardly cited Section 101(10A)(B)), Congress specifically excludes Social Security benefits from the definition of Current Monthly Income. Social Security benefits are not part of the debtor’s Current Monthly Income in bankruptcy.

Projected Disposable Monthly Income
Section 1325(b)(1)(B) of the Bankruptcy Code requires that all of the debtor’s “Projected Disposable Monthly Income” must be pledged to the plan during the applicable commitment period. The Bankruptcy Code does not define “Projected Disposable Monthly Income”; however, five Circuit Courts (the Fifth, Sixth, Eighth, Ninth and Tenth Circuits) have concluded that social security income is not a factor in calculating “current monthly income” and therefore plays no role in calculating “projected disposable income.” See Drummond v. Welsh (In re Welsh), 711 F.3d 1120 (9th Cir. March 25, 2013); Anderson v. Cranmer (In re Cranmer), 697 F.3d 1314 (10th Cir. October 24, 2012); Beaulieu v. Ragos (In re Ragos), 700 F.3d 220 (5th Cir. October 29, 2012); Baud v. Carroll, 634 F.3d 327, 345 (6th Cir. 2011) cert. denied, 132 S. Ct. 997, 181 L. Ed. 2d 732 (U.S. 2012); Fink v. Thompson (In re Thompson), 439 B.R. 140 (8th Cir. BAP 2010).

Bad Faith
While the first two questions are largely settled, the remaining issue is in hot dispute: whether the exclusion of Social Security income from Current Monthly Income means that it should also be exempt from the “good faith” analysis under Section 1325(a)(3). Good faith is not defined in the Bankruptcy Code, but is considered by the bankruptcy court on a case-by-case basis. The court will look to the totality of circumstances and generally examine the following factors:

  • whether the debtor “misrepresented facts in his petition or plan, unfairly manipulated the Bankruptcy Code, or otherwise filed his Chapter 13 petition or plan in an inequitable manner”;
  • the debtor’s history of filings and dismissals;
  • whether the debtor only intended to defeat state court litigation; and
  • whether egregious behavior is present.

Bankruptcy courts are split on whether it is bad faith to not use Social Security benefits to fund a Chapter 13 plan.

Think of it this way: suppose an above the median debtor also receives $2,000 each month. Suppose that by using Social Security in the plan 100% of the debtor’s unsecured creditors are paid. By excluding Social Security, unsecured creditors get paid nothing. Is it “fair” to allow the debtor to exclude Social Security payments from the plan?

While many bankruptcy courts have found that it is bad faith to not contribute Social Security income to a Chapter 13 plan, the trend at the Circuit Court level is going the other way. See In re Welsh, 711 F.3d 1132 (“We thus join every court of appeals that has decided the issue in concluding that, “[w]hen a Chapter 13 debtor calculates his repayment plan payments exactly as the Bankruptcy Code and the Social Security Act allow him to, and thereby excludes [Social Security income], that exclusion cannot constitute a lack of good faith.”

Chapter 7 debtors have a similar good faith requirement found in Section 707(b)(3). At least one Bankruptcy Court has addressed this issue. In re Suttice, 487 B.R. 245 (Bankr. C.D. Cal., January 9, 2013). This court found that a finding of bad faith “would in effect force the Debtors to file Chapter 13; [however,] conversion to Chapter 13 would be futile and wasteful result because the Debtors’ social security income is protected from compelled remittance to a Chapter 13 plan.”

For further questions or a free consultation please contact the experienced attorneys at Fears | Nachawati Law Firm. Call us at 1.866.705.7584 or send an email to fears@fnlawfirm.com

 

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