On behalf of Law Offices of Mark M. Kratter, LLC on October 16, 2012
The 10th U.S. Circuit Court of Appeals has solidified the ruling that Social Security income is safe from the "disposable income'" rule in a Chapter 13 bankruptcy filing. Currently, the Bankruptcy Code states the same thing, but one debtor ended up having to litigate the issue. This ruling could be reason for a sigh of relief for Connecticut residents and those who were watching this case to see the outcome.
The debtor was making an above average income but filed for Chapter 13 bankruptcy. He was receiving almost $2,000 a month in Social Security income. The man did not include that income when he calculated his disposable income but did list it on Schedule I paperwork. He also deducted a portion of the income on Schedule J paperwork because the law stated the income was exempt.
However, a bankruptcy court stated the man acted in bad faith by failing to claim the income as disposable. The man protested the ruling but was forced to amend his bankruptcy plan to adhere to the ruling of the court. Unfortunately, the man could not sustain his payments in the case, so his bankruptcy action was dismissed. He appealed and claimed the court was in error because his original case was not confirmed.
A federal district court sided with the debtor, and an appeals court affirmed the verdict. The man's Chapter 13 bankruptcy petition was reinstated. In the ruling, the appeals court stated the debtor did exactly what was allowed by the Bankruptcy Code and the Social Security Act. As such, his action to exclude his Social Security Income was not an act of bad faith. The issue does not appear to be completely resolved because the same issue is still being appealed in the 4th and 5th Circuits.
Connecticut residents involved in a legal quagmire similar to this may have options available to them. Although the man was following the law in his Chapter 13 bankruptcy petition, he still ended up fighting what was likely a lengthy legal battle to keep his income. Anyone in this situation may benefit by gaining an understanding of the applicable law in order to decide on the best course of action to achieve the desired goals.
Source: Thomson Reuters News & Insight, "Chapter 13 debtors may keep Social Security Income," Oct. 26, 2012
