Chapter 13 debtor's proposed plan could include Social Security income

When debts become too overwhelming, a Chapter 13 bankruptcy proceeding may be the best solution for some individuals. A Chapter 13 bankruptcy allows a debtor with regular income to repay or discharge debts after making payments to creditors, usually for a period of three to five years. The debtor in such a proceeding proposes a debt adjustment plan, and the court must determine if the plan is "feasible."

The question may arise, however, as to what income should be included in determining if a plan is feasible. The United States Court of Appeals for the Fourth Circuit grappled with this issue in the recent case of Mort Ranta v. Gorman.

Did the debtor have adequate income?

In this case, the debtor had presented a plan which he considered feasible, if his Social Security income was included in his projected disposable income. However, the bankruptcy trustee-the person charged with administering the bankruptcy-objected to the plan.

The trustee argued that the debtor did not have adequate income to support the plan. The bankruptcy court agreed, denying confirmation of the debtor's proposed plan on the basis that the federal bankruptcy law excludes Social Security income from the calculation of "disposable income." The debtor appealed this decision, seeking confirmation for his preferred plan.

Was the debtor's plan feasible?

In reviewing the case, the Court of Appeals had to determine whether the debtor's Social Security income should be disregarded for purposes of evaluating whether his plan was feasible. Under the law, a plan should be confirmed if the debtor will be able to make all payments under the plan.

The bankruptcy court had reasoned that because Social Security income is excluded from disposable income, that such income also should be excluded when evaluating the feasibility of the overall plan. However, this was not correct.

The applicable law simply stated that a debtor must be able to make the payments required by the plan-it did not also require that only "disposable income" be used for making payments. Otherwise, it would be unlikely that a debtor whose primary source of income was Social Security would ever be able to propose a plan that could be confirmed.

Thus, the Court of Appeals held that the bankruptcy court must use in its calculations any Social Security income the debtor proposes to depend upon. If a debtor's actual net income, including Social Security income, was sufficient to meet all required payments, then the bankruptcy plan would be feasible.

Debt relief and a fresh start

With a confirmed plan, a debtor will be able to deal with all his or her debts. Under a Chapter 13 proceeding, some debts may be paid in full, while others are not, and the debtor is provided with a fresh start.

There are a number of approaches available to those considering bankruptcy proceedings and which solution is best for you depends on your individual circumstances. You should consult with an attorney experienced in all aspects of consumer bankruptcy prior to taking any action.