By Columbia – Lexington Bankruptcy Attorney Lex Rogerson
If you live in the Columbia area and receive any kind of social security benefits, you can’t be forced to pay that income to creditors when you file bankruptcy under chapter 13.
In a rare Fourth Circuit victory for consumers, the U.S. Court of Appeals for the region including South Carolina has held that social security does not represent disposable income that debtors must use to pay creditors through their debt reorganization plans. And the court, rejecting a back-door argument frequently made by trustees, added that debtors can’t be accused of bad faith just because they plan to keep their social security. Mort Ranta v. Gorman, No. 12-2017, slip op. (4th Cir. filed July 1, 2013).
Is social security income disposable?
The recent case turned on the definition of “disposable income.” Under chapter 13, debtors are usually not required to pay their unsecured debts in full but nevertheless must pay in all their projected disposable income for a specified time — three to five years, depending on their income level.
Robert Mort Ranta, whose surname is two words, filed a chapter 13 case in Virginia in December 2011. He proposed a plan to pay over $500 a month to creditors, but because of other debts to be paid through the plan, his individual credit card issuers would receive less than 1% of their balances. His bankruptcy trustee objected on behalf of the creditors, arguing that Mort Ranta could pay his credit cards in full if he devoted his social security income to the plan. The bankruptcy court agreed that because of his social security income, Mort Ranta could afford to pay more, and it therefore refused to approve the plan.
On an intermediate appeal, the district court affirmed. Mort Ranta then appealed to the Fourth Circuit, located in Richmond and covering states from South Carolina through Maryland. Along with 11 other regional courts of appeal, the Fourth Circuit represents the second-highest level of federal courts, below only the U.S. Supreme Court.
Dan Press, a highly regarded bankruptcy lawyer from McLean, Virginia, represented Mort Ranta at all stages. He pointed out to the appellate court that the Bankruptcy Code defines disposable income as the debtor’s current monthly income minus the amount of his reasonably necessary living expenses. In turn, as a result of substantial changes to the Code in 2005, “current monthly income” is defined as the debtor’s average income for the last 6 months, but excluding any social security benefits. The conclusion, said Press, is simple: social security is not included in disposable income, and debtors therefore can’t be required to contribute such benefits to their repayment plans.
After discussing at length whether a debtor could appeal an order denying confirmation of a chapter 13 plan (and deciding the debtor could appeal), the appeals court readily agreed with Press. This result was not surprising, as the language of the Code seems quite clear, and four other circuit courts had already reached that conclusion.
How can doing what’s legal be bad faith?
Probably more important, the court shut down a commonly attempted end-run. In addition to meeting the disposable income requirement, a plan must be proposed in good faith in order to be confirmed. Trustees and creditors around the country have tried to use this additional requirement as another way to force debtors to pay in social security. They argue that, even if these benefits don’t technically count as disposable income, it’s unfair for debtors to pay a tiny percentage of their unsecured debts while keeping social security income to themselves.
Following the lead of other appeals courts, the Fourth Circuit put that argument to rest. In a footnote, it stated that keeping social security benefits out of a plan, by itself, is not bad faith. Quoting a Tenth Circuit opinion, it reasoned that a debtor can’t be in bad faith simply because he calculates disposable income as the Code permits.
The larger view
The 2005 Bankruptcy Code amendments, known as BAPCPA, did much to benefit banks and other creditors, to the detriment of consumers. The exclusion of social security from disposable income may be the most important of the few pro-debtor provisions. The courts are still sorting out many issues raised by the 2005 amendments. This latest opinion strengthens the argument that these law changes mean exactly what they say — even when, contrary to the general thrust of that legislation, they help consumers and not creditors.