In re: Thiel, No. 10-00434-TLM (Bankr. D. Idaho, March 1, 2011).
In a recent California bankruptcy case, a bankruptcy court held that Chapter 13 debtors failed the "disposable income" test in section 1325(b)(1) of the bankruptcy code, and could not receive confirmation of their plan.
The debtors in the case, Michael and Stefanie Thiel, submitted to the court that their joint monthly income was $12,690.65. Under sections 1325(b)(2) and (3), the debtors' monthly disposable income was $1102.70. Despite this calculation, the debtors' proposed plan was to pay only #304.00 for 60 months (a total of $93,688.00 over the period of the plan) and then discharge the remainder of their obligations. Most of this would go to the nondischargeable unsecured debts they owed, and only $6,133.79 to unsecured creditors.
The trustee objected to the plan because a debtor who does not propose to pay their unsecured creditors in full must provide that all their "projected disposable income" be applied to the unsecured creditors. The policy behind this is to make sure that debtors are not cheating the system, and are paying all they reasonably can to their creditors.
The debtors argued that their disposable income, though higher on the submitted forms than the amount payable to unsecured creditors under their plan, is actually much lower in reality, as their transportation costs are much higher than the form provides. They argued that the forms, which allocate specific amounts predetermined based on local standards, should be irrelevant in the face of testimony and their personal budgets.
The court disagreed, holding that only in exceptional cases, where significant changes in the debtor's financial circumstances are known or virtually certain, can a bankruptcy court use its discretion to adjust the debtor's disposable income. Although these issues are complicated, the main point here is that a debtor in Chapter 13 is required to pay his creditors what the law determines to be a reasonable amount based on his income, not his own personal preference.
