Fifth Circuit Says Social Security Income Excluded In Bankruptcy

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) enacted by Congress in 2005 imposed a Means Test calculation that is used to determine whether a consumer debtor must file a Chapter 13 bankruptcy, or whether the individual can proceed in a Chapter 7.

However, there are times where even if a consumer is not required to file a 13, there are still reasons why a debtor will want to file a 13.

Often, a Chapter 13 will be  filed in order to save an item such as a house that is subject to foreclosure.  In cases such as these, the debtor will usually want to pay little, if any amount to his unsecured creditors, but under the means test the debtor is required to pay his projected disposable income during his Plan.

The issue of whether a Debtor in a Chapter 13 must commit his Social Security payments to his Chapter 13 Plan was addressed by the United States Fitfh Circuit Court of Appeals in Beaulieu v. Ragos.

In Beaulieu, the Debtors’  received $1,854.00 per month in Social Security benefits, but only committed $200.00 per month to their Plan.

The Trustee for the Bankruptcy Court for the Eastern District of Louisiana, S.J. Beaulieu, objected to confirmation of the Plan because the Debtors’ were not contributing all $1,845.00 of the Social Security benefits to payment of creditors.  The Trustee also raised an alternative argument that the act of filing a Plan that did not commit all of the disposable income was filed in bad faith.

The bankruptcy judge, Elizabeth W. Magner, rejected these arguments, and ruled that both the Bankruptcy Code and the Social Security Act evidenced Congressional intent to  excluded benefits from disposable monthly income.

On appeal by the Trustee, the Fifth Circuit Court off Appeals agreed with the decision of the bankruptcy court finding that the bankruptcy code defined disposable monthly income as current monthly income, and that the Code  explicitly excluded social security from current monthly income.

This opinion is consistent with the recent decision of the Tenth Circuit in  Cranmer.