In June, the U.S. Supreme Court ruled that bankruptcy judges have discretion to adjust a debtor’s projected disposable income (“PDI”) based on known or virtually certain changes in his income and expenses at the time of the plan confirmation hearing. The Court rejected a mechanical approach to determining PDI. Hamilton v. Lanning, 78 USLW 4518 (June 7, 2010).
When Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, it sought in various respects to curtail bankruptcy judges’ discretion in consumer bankruptcy cases. The Hamilton decision restores some of that discretion, and that is good news for debtors and creditors alike.
In some cases Hamilton gives creditors an opportunity to litigate the PDI calculation at the confirmation hearing with a view to increasing a debtor’s plan payments. This hand is to be played carefully, however, because unless the debtor fails the means test, the law permits the debtor to dismiss a chapter 13 case or convert it to chapter 7 liquidation at any time. So, if creditors are going to get more than liquidation value through the plan, they may not wish to push so hard that the debtor converts to chapter 7, where creditors are limited to liquidation value of assets and future income is sheltered from creditors’ claims. If the chapter 7 option is unavailable because the debtor fails the means test, then creditors may wish to be more aggressive about the PDI calculation.