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High Income Chapter 13 Debtors Stay in Bankruptcy Five Years (Maybe)

December 16, 2013

When Congress amended the Bankruptcy Code in 2005, it introduced a means test to compel high income debtors to repay a greater portion of debts. Debtors with average incomes higher than their state’s median income were disqualified from filing Chapter 7 bankruptcy, and any Chapter 13 case filed by these high income debtors must repay creditors over a full five years

But what if an above-median debtor files a Chapter 13 bankruptcy, but there is no disposable income to pay unsecured creditors?

This issue has been debated by various courts with different results. Most recently, the Ninth Circuit Court of Appeals in the case of In Re Flores (9th Cir. Aug. 29, 2013) decided that above-median debtors must remain in Chapter 13 repayment for a full five years, despite not paying anything to unsecured creditors. In other words, the debtor pays any secured creditors, priority debts, administrative claims, etc., and pays nothing to unsecured creditors over five years – even if that means making a payment of zero to the bankruptcy trustee. The rationale for this strange ruling was grounded in a U.S. Supreme Court case, Lanning v. Hamilton, 130 S. Ct. 2464 (2010). In Lanning, the Court rejected a mechanical approach when calculating a debtor’s projected disposable income, and instead adopted a forward-looking approach to account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation. The Supreme Court decided that forward-looking approach was a common sense way to calculate a debtor’s payments to unsecured creditors in Chapter 13 bankruptcy.

The Flores court struggled with whether an above-median debtor, who was not obligated to pay anything to unsecured creditors during a Chapter 13 bankruptcy case, was still obligated under the Bankruptcy Code to remain in bankruptcy for a full 60 months. In its initial ruling in 2012, the Ninth Circuit Court held that a debtor in this position was only obligated to remain in bankruptcy for 36 months. Then, after the case was re-examined by the court of appeals judges sitting en banc, the Ninth Circuit reversed itself and joined the Sixth, Eighth, and Eleventh circuits in finding that the Bankruptcy Code requires that an above-median bankruptcy debtor must remain in Chapter 13 bankruptcy for a full 60 months. The Flores court reasoned that under the forward-looking, non-mechanical approach dictated by Lanning, the debtor must remain in bankruptcy for five years because there could be an increase in income, which would increase the amount recoverable by creditors.

The Flores decision rests on the dynamic tension between the debtor’s income at the time of confirmation and what may happen in the future. And a lot may happen. In some cases the debtor’s income increases, which means that unsecured creditors may be paid something. But other times the debtor’s income decreases. Interestingly, many courts around the country are now permitting debtors, who were above-median at the time of the case filing and placed into 60 month plans, to modify their bankruptcy cases to reduce the time of repayment to a minimum 36 months when the debtor’s income drops below the state median income level. So stay tuned, this debate isn’t over yet!

If you need bankruptcy relief, but earn a high income, speak with an experience bankruptcy attorney and discuss your options. The federal bankruptcy laws are constantly changing and you need an experienced guide to help you navigate your case to a successful conclusion. Call the experienced bankruptcy attorneys at Fears Nachawati Law Firm for more information and a free consultation. Contact us by calling 1.866.705.7584 or sending an email to


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