August 11, 2009
Michelle Maslowski

 

In In re Turner, 2009 WL 2136867 (7th Cir. July 20, 2009) (slip opinion), the debtor, Joel Turner, filed a petition for bankruptcy under Chapter 13 and submitted a plan that would distribute his entire projected disposable income to his unsecured creditors for a period of five years. At the time he filed his plan, the debtor was making monthly payments of $1,521.00, which he deducted from his family income to arrive at his disposable income. However, the debtor intended to abandon the home to the mortgagee, effectively allowing the mortgagee to foreclose on the house, and he would no longer be responsible for the $1,521.00 monthly mortgage payment during the entirety of the bankruptcy plan’s duration. The trustee in bankruptcy, representing the unsecured creditors, objected and the bankruptcy court overruled the objection.

Judge Posner for the Seventh Circuit noted that in the wake of the housing market bubble burst, it is foreseeable that many debtors will walk away from their houses if they cannot make their monthly payments or the house becomes a bad investment as the principal of the mortgage exceeds the value of the home. Thus, this issue of whether an evaporating debt can be treated as persisting throughout the entire period during which the bankruptcy plan will be in effect is likely to be an issue in many future bankruptcy proceedings.

To answer the question, Judge Posner began by noting the language of the Bankruptcy Code is unclear on this issue, due to the fact that it does not define “projected disposable income” as “expected” on one hand, or the disposable income mechanically calculated in the debtor’s bankruptcy plan on the other. While a debtor’s financial situation on the date of his filing is relevant to which chapter the bankruptcy will proceed, the future financial situation of the debtor is relevant in balancing the interests of the debtor to cover his living expenses and the interests of the unsecured creditors in recovering as much of what the debtor owes them as possible. The court reasoned that a fixed debt that will disappear prior to the plan’s approval is not intended to enrich the debtor at the expense of his unsecured creditors. As a result, the court adopted the view held by the majority of circuits and found that the final calculation of a debtor’s disposable income should take into consideration changes that have occurred in the debtor’s financial circumstances.