THE ROLE OF “CURRENT MONTHLY INCOME” IN CHAPTER 13
Whether or not a particular source of a debtor’s incoming funds is considered part of his or her “current monthly income” can have a tremendous effect on how much the debtor must pay to creditors under Chapter 13. It can make a difference of tens of thousands of dollars, as it did under the facts of a recently published decision by the Bankruptcy Appellate Panel of the Ninth Circuit, Adinolfi v. Meyer.
But first we need some statutory context.
A bankruptcy court can “confirm,” or approve, a Chapter 13 payment plan only if the plan meets a number of requirements. One of these is that a plan can’t be confirmed over the objection of the trustee or an unsecured creditor except under one of two conditions: 1) the plan provides for full payment of all unsecured debts, or 2) “the plan provides that all of the debtor’s projected disposable income . . . will be applied to make payments to unsecured creditors under the plan.” Section 1325(b)(1) of the Bankruptcy Code.
As for the first condition, let’ assume that the plan is not providing for full payment—100%—of the unsecured debts, since Chapter 13 plans generally don’t. So instead today we focus on the second condition—paying all “projected disposable income” into the plan.
Section 1325(b)(2) defines “disposable income” as “current monthly income” minus “amounts reasonably necessary to be expended” “for the maintenance and support of the debtor or a dependent” and, where applicable, any necessary business expenses.
So, effectively every dollar coming each month to a Chapter 13 debtor that is NOT considered “current monthly income” means one less dollar available for the debtor’s Chapter 13 monthly plan payment to creditors.
THE EXCLUSION OF “BENEFITS RECEIVED UNDER THE SOCIAL SECURITY ACT”
“Current monthly income” does not include a potentially significant source of some debtors’ incoming money—benefits “received under the Social Security Act.” The Bankruptcy Code’s definition of “current monthly income” expressly excludes such benefits. See Section 101(10A(B)).
But the Social Security Act is an enormous statute, referring to numerous benefit programs. It takes up twelve volumes of the U. S. Code Annotated. Its many benefit programs have diverse funding mechanisms. The different benefits are administered by different combinations of federal, state, local governmental agencies. (See a list and short description of some of the main programs authorized by the Social Security Act, taking up 6 pages in Adinolfi v. Meyer, the recent local Bankruptcy Appellate Panel opinion about to be discussed.)
Given their diversity in funding and administration, are ALL the different kinds of benefits referred to in the Social Security Act excluded from “current monthly income”? And if not, what are the principled bases for deciding which is or is not excluded?
THE RECENT 9TH CIRCUIT BAP OPINION OFADINOLFI v. MEYER
In this 2-1 split decision the Bankruptcy Appellate Panel (“BAP”) determined in a case of first impression that one particular benefit, monthly payments of Adoption Assistance, are “benefits received under the Social Security Act” and are thus excluded from “current monthly income.” Therefore, these funds are also excluded from “disposable income” and from the amount that must be paid in the monthly Chapter 13 plan payment.
The debtor, Nancy Adinolfi, received a combined $1,422 per month through two Adoption Assistance Program Agreements administered and paid out by the Merced County Human Services Agency. She disclosed these Adoption Assistance payments but argued that those funds were “benefits received under the Social Security Act” and thus not included in her “disposable income.”
Adinolfi’s Chapter 13 plan proposed a monthly payment of $935, which would have paid 0% to unsecured non-priority creditors since the money went instead to secured and/or higher priority creditors. The Chapter 13 trustee objected, and the bankruptcy judge in Fresno denied confirmation of Adinolfi’s payment plan for not including the Adoption Assistance payments in her “current monthly income.”
She appealed to the BAP, which overturned the bankruptcy court and held that the Adoption Assistance payments were excluded from “current monthly income” as “benefits received under the Social Security Act.”
Note that since the Adoption Assistance payments were $1,422 per month, Adinolfi sought to avoid paying 60 month times that amount, or $85,320, to her creditors. (She was an above-median-income debtor, requiring her to have a 60-month plan.)
THE FACTS ABOUT THE FUNDING OF THIS BENEFIT
The BAP majority opinion asserts that among the numerous programs related to the Social Security Act
the federal government funds and administers some of the programs itself, but most of the programs contemplate some degree of state involvement, and many are jointly funded and operated by the federal and state governments.
The opinion catalogs four broad categories of programs. These categories range from those funded entirely by the federal government, including what most people think of when they say “Social Security”—”federal old-age, survivors, and disability insurance benefits”— to “block grants” and loans whose funding that may or may not be tied to the state’s costs of those programs, such as Temporary Assistance for Needy Families (TANF)—or “welfare.”
The BAP placed Adoption Assistance into the second of its four categories, those in which the federal government reimburses states for their administrative expenses and all or part of the benefits if the program meets the fed’s requirements.
The U.S. Department of Health and Human Services determines the amount of federal matching funds to provide California for various subsidized programs, including the Adoption Assistance Program. California then pays individuals who qualify. In this case Adinolfi was paid through the Merced County Human Services Agency. 50% of her Adoption Assistance payments came from federal funds, with the rest from the state and county.
THE ADMINISTRATION OF THIS BENEFIT
The Adoption Assistance Program is found in Title IV, Part E of the Social Security Act, titled “Federal Payments for Foster Care and Adoption Assistance.” It was added to the Social Security Act through the Adoption Assistance and Child Welfare Act of 1980.
On the federal level, the program is administered by the U.S. Department of Health and Human Services, by its Children’s Bureau.
On the state level, California set up a statutory scheme to comply with the federal requirements. It administers the program through the California Department of Social Services. Each recipient of the Adoption Assistance benefits signs an agreement that is required under federal law but is between the recipient and the State of California.
THE BAP’S RATIONALE
The issue was one of statutory construction of a phrase within the Bankruptcy Code’s definition of “current monthly income”: “excluding benefits received under the Social Security Act.”
Both the majority and dissenting options agreed that the “received under the Social Security Act” phrase is ambiguous, with the majority so concluding because different bankruptcy courts have interpreted that language in conflicting ways in the context of unemployment benefits.
After analyzing every word of the phrase the majority looked at the entire phrase and concluded that the “most natural reading of this phrase is ‘benefits received subject to the authority of, and in accordance with, 42 U.S.C.A. §§ 301-1397mm.’ ” That statutory reference is to the entire Social Security Act, consisting of Chapter 7, titled “Social Security,” of Title 42. (Note that § 1305 states that “[t]his chapter may be cited as the ‘Social Security Act’.”)
Given the above “most natural reading,” the majority concluded:
The Adoption Assistance payments received by the Debtor are paid out by the county government, but are subject to the federal program requirements and standards of 42 U.S.C.A. §§ 670-679c and federal oversight. Thus, under our reading of the phrase, the Adoption Assistance payments which the Debtor receives are “benefits received under the Social Security Act” and are excluded from her “current monthly income.”
The BAP majority responded to the opposing arguments of the Chapter 13 trustee as follows:
All of these arguments boil down to the proposition that, when Congress referred to “benefits received under the Social Security Act [“SSA”],” it really meant only benefits received under some of the SSA programs. However, when Congress referred to the “Social Security Act” as a whole, Congress knew of the many differences between and nuances in the individual SSA programs. Nothing in the language of the SSA exclusion suggests that Congress intended to include only those programs that are funded and administered solely by the federal government. Accepting the Trustee’s arguments would create arbitrary distinctions not clearly intended by Congress and would amount to an impermissible rewriting of the statute.
THE DISSENT’S RATIONALE
Judge Meredith Jury, the Chief Judge of the BAP for the Ninth Circuit, wrote the dissent. She is a bankruptcy judge of the federal Central District of California, the Riverside Division.
In HER statutory construction of the same phrase, “excluding benefits received under the Social Security Act,” she focused on the ambiguity in the two words, “received under.” She opined that “a benefit ‘received under’ the Social Security Act may refer to a direct benefit made by the federal government or it may refer to an indirect benefit made by a state-run program.”
Her dissent continued:
The word “under” directly follows the word “received” and in my view the words must be read together. Simply defined, “received” means “to come into possession of.” [Citation omitted.] Therefore, read together, “received under” means “to come into possession of as required by or in accordance with” the SSA. This definition certainly suggests that unless the Social Security Administration is directly involved with the payment of money to the Debtor and the determination of who is entitled to the funds, the benefits are not “received under” the SSA.
APPLICABILITY OF ADINOLFI TO OTHER BENEFITS “RECEIVED UNDER THE SOCIAL SECURITY ACT”
How broadly does this opinion apply to the numerous other benefits related to the Social Security Act beyond Adoption Assistance payments? Seemingly to ALL such benefits.
The majority prefaces its 5-page summary of many of the benefits related to the Social Security Act with: “Our purpose [in providing the summary] is to emphasize the wide variation in the programs authorized by the SSA and the futility of picking and choosing which programs are ‘under’ the SSA.” The implication is that it’s futile to pick and choose among them because the statutory language includes them all.
More directly the majority stated:
Congress used broad language which excludes all “benefits received under the Social Security Act.” Congress knew that, under many SSA programs, state and local governments cut the benefit checks. Congress also knew how to refer to specific portions of the SSA when it wanted to do so. See, e.g., §§ 362(b)(2)(D), (E), (F), (G); 704(c)(1)(A)(i); 1302(d)(1)(A)(i). But in this case, Congress referred to the entire SSA. We must assume that, when Congress referred broadly to the SSA, Congress meant exactly what it said.
Even the dissenting opinion lends credence to the breadth of the majority’s holding, complaining that “this approach would exclude from the monies which must be committed to pay chapter 13 creditors any funds remotely connected to the SSA and the federal government . . . .”
APPLICABILITY TO CHAPTER 7 CASES
Does the exclusion of “all ‘benefits received under the Social Security Act'” also apply to the calculations of the “means test” for debtors seeking to qualify for a Chapter 7 “straight bankruptcy” case?
The majority in Adinolfi acknowledged that
the definition of “current monthly income” in § 101(10A)(B) applies to chapter 7 cases as well as chapter 13 cases. Section 707(b) provides (in brief summary) that the bankruptcy court can dismiss a chapter 7 case as abusive if the debtor’s income exceeds the applicable median income and the debtor’s “current monthly income” (reduced by certain expenses) exceeds a threshold.
This is demonstrated concretely in the pertinent official forms used in Chapter 7 cases.
Official Form 122A-1, “Chapter 7 Statement of Your Current Monthly Income,” is used to determine whether the debtor’s “current monthly income,” on an annualized basis, exceeds the published “median family income” for the debtor’s state and size of family. Question 10 in the form, about debtor’s “Income from all other sources not listed above,” parrots the statutory language in stating: “Do not include any benefits received under the Social Security Act . . . .”
So now after Adinolfi, Chapter 7 debtors in California can exclude any Social Security Act benefit income from their “current monthly income.” As a result debtors with such benefits will more likely pass the “means test” and qualify for Chapter 7 relief by their “current monthly income” being less than the family median income amount applicable to their household size.
Furthermore, Chapter 7 debtors who receive more than the “median family income” amount use Official Form 122A-2, “Chapter 7 Means Test Calculation” to determine whether they qualify for Chapter 7 after subtracting allowed expenses from their income. Since the starting income amount is the “current monthly income” from the form referred to above, above-median debtor’s ability to exclude “all ‘benefits received under the Social Security Act'” makes more likely that even such higher income debtors would fall under the threshold of being “abusive,” and would thus qualify under Chapter 7.