HAMILTON V. LANNING : CASE SUMMARY

The Supreme Court in Hamilton v. Lanning 560 U.S. 505 (2010) held that a bankruptcy court may consider changes in a debtor’s income or expenses that are known or virtually certain at the time of plan confirmation. The Court rejected a purely mechanical application of the statutory formula.

FACTS OF THE CASE

Stephanie Lanning filed for relief under Chapter 13 of the Bankruptcy Code. During the six months preceding her bankruptcy filing, she received a one-time buyout payment from her former employer. This unusual payment artificially inflated her “current monthly income” under the Bankruptcy Code’s formula. Based on that historical calculation, the Chapter 13 trustee argued that Lanning should pay substantially more to creditors than her actual future income would permit. Lanning proposed a plan based on her actual anticipated earnings from her new job, which were significantly lower. The trustee objected.

ISSUE BEFORE THE SUPREME COURT

The principal issue before the Supreme Court was when calculating a Chapter 13 debtor’s “projected disposable income” under 11 U.S.C. §1325(b)(1)(B), must courts mechanically apply the statutory formula based solely on historical income, or may they consider known or virtually certain changes in the debtor’s future income or expenses.

FINDINGS OF THE SUPREME COURT

Justice Alito, writing for the majority, adopted the “forward-looking approach. The  Supreme Court observed that  the word “projected” naturally implies a prediction about the future rather than a simple multiplication of past income figures.

Although the statutory calculation of disposable income serves as the starting point, courts are not required to ignore facts demonstrating that the debtor’s future financial circumstances will differ substantially from historical averages.

Congress did not clearly indicate an intention to abandon the pre-2005 practice under which bankruptcy courts could account for significant, foreseeable changes in income or expenses.

A strictly mechanical approach could produce absurd results by requiring payments that debtors could not realistically make or by allowing debtors to pay less than they could actually afford.

SIGNIFICANCE OF THE JUDGMENT

Hamilton v. Lanning is one of the most important Chapter 13 bankruptcy decisions of the modern era because it rejected a rigid, formula-driven interpretation of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). It has preserved  judicial discretion in determining a debtor’s repayment capacity. It has established the forward-looking approach for calculating projected disposable income.

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Mukesh Suman is a lawyer and legal author based at Delhi, India. He has extensive experience in insolvency and bankruptcy matters. He also provides legal support services to USA based bankruptcy lawyers. Mukesh can be approached at mukesh_suman@outlook.com or +91 9717864570.