By Karon Fowler

Yesterday, in Pliler v. Stearns, the Fourth Circuit affirmed and remanded an appeal from the United States Bankruptcy Court for the Eastern District of North Carolina. The court held that above-median income debtors with negative disposal income are obligated to maintain Chapter 13 bankruptcy plans that last for five years when their unsecured creditors have not been paid in full.

Joe and Katherine Pliler filed a voluntary petition for Chapter 13 relief along with a proposed Chapter 13 plan.  The plan contained an early termination provision that would have allowed them to complete the plan within fifty-five months. The Trustee filed an objection to confirmation of the plan and a motion to dismiss for failure to file a plan in good faith and failure to pay an amount necessary during the applicable commitment period to comply with the statutory requirements. The Chief Bankruptcy Judge entered an order denying the objection and motion to dismiss. He directed the Trustee to file a motion for confirmation of a plan requiring the Plilers to pay a certain amount for sixty months with no early termination language. The Judge held that the statute’s “applicable time period” mandates that an above-median-income debtor commit to a sixty-month plan period irrespective of projected disposable income.

If the trustee or an unsecured creditor objects to the confirmation of a proposed Chapter 13 plan, the court may not confirm the plan unless “the plan provides that all of the debtor’s projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan.” (emphasis added).

The court reviewed the definition of applicable commitment period in 11 U.S.C. § 1325(b)(4) and held that an “applicable commitment period” is a temporal requirement. This is in step with all other circuits to have addressed the issue. The court’s plain language interpretation of the statute, in turn, effectuates the core purpose of the 2005 bankruptcy code revisions as “ensuring that debtors devote their full disposable income to repaying creditors.” This purpose is best achieved when Chapter 13 plans are required to last for three or five years, depending on the debtors’ income, unless all unsecured claims are fully repaid sooner.

The Plilers nevertheless argued that because their monthly disposable income as calculated on their initial bankruptcy form showed negative $291.20, no “projected disposable income” will be received “in the applicable commitment period,” rendering the plain length requirement senseless. However, the court explained the lack of projected disposable income at the time a plan is confirmed does not necessarily preclude additional funds from appearing later. It is not absurd for debtors to expectantly receive income (e.g., inheritances).

The court also rejected the Pliliers’ argument that the “applicable commitment period” only functions in relation to the provision requiring that all of the debtor’s projected disposable income to be received in the applicable commitment period be applied to make payments to unsecured creditors. However, the court points out that § 1329 expressly allows for post-confirmation plan modification. For purposes of plan modification, the court interprets the applicable commitment period as serving to measure plan duration in a manner wholly unrelated to debtors’ disposable income. Therefore, because the Plilers are above-median-income debtors, they are obligated to maintain a five year plan.

The Plilers’ other argument on appeal was that the bankruptcy court erred in looking beyond the negative disposable income calculation on their initial form to evaluate their projected disposable income. On this point, the Fourth Circuit expressed dissatisfaction with the bankruptcy court’s statement that it has the liberty to abandon the Code’s disposable income formula in favor of Schedules I and J completely, at least where debtors have not disposable income. Yet, the court recognized that a bankruptcy court undoubtedly has the ability to consider Schedule I, Schedule J, or other such evidence to ascertain “known or virtually certain” changes to disposable income. The court explained that the bankruptcy court did not err in relying on the Plan payment figure the Plilers themselves had proposed by stretching that figure over the full five-year period.

The order below was rendered at a joint session dealing with other cases. The Plilers did not receive an individualized hearing with an opportunity to present evidence regarding the feasibility of a five-year plan and any other pertinent points. Therefore, the Fourth Circuit ordered the opportunity be made available on remand.

Amicus briefs were filed by the National Association of Consumer Bankruptcy Attorneys, as well as the Ecast Settlement Corporation.