Finding that it encroached on a below-median debtor’s substantive rights, the Fifth Circuit invalidated a local form chapter 13 plan provision that required all debtors to turn over any tax refund in excess of $2,000. Diaz v. Viegelahn, No. 19-50982 (5th Cir. Aug. 26, 2020).
NCBRC filed an amicus brief on behalf of the NACBA membership in support of the debtor in this case.
This case challenged section 4.1 of the local chapter 13 plan for the Bankruptcy Court for the Western District of Texas which requires debtors to turn over to the trustee any tax refund in excess of $2,000. That section allows debtors to retain the refund only if they move to do so within twenty-one days and if their plan otherwise pays 100% to unsecured creditors. When the debtor here filed her bankruptcy schedules, she crossed off section 4.1 and proposed instead to amortize her expected refund of $3,261 over the course of twelve months. Her expenses off-set the monthly income represented by the tax refund.
The bankruptcy court found that the debtor had no ability to change the terms of section 4.1 and denied confirmation of her plan. In accordance with the court’s order, the debtor filed an amended plan under which she complied with section 4.1 and increased her monthly payments to unsecured creditors to reflect the additional contribution to the plan. She then appealed the denial of confirmation of her first plan. The district court affirmed, and she appealed to the Fifth Circuit.
On appeal, the court began with sections 1321 and 1322(b)(11) which give the debtor the exclusive right to propose any plan not inconsistent with the Code. Under section 1325(a)(1), the court must confirm any plan that complies with Code requirements. If, however, the trustee or an unsecured creditor objects to the debtor’s proposed plan, section 1325(b)(1)(B) provides that the court may confirm only if the debtor commits all of her projected disposable income to the plan. Fed. R. Bankr. P. 9029(a) permits bankruptcy courts to adopt local rules governing practice and procedure in their courts, including creating form chapter 13 plans, so long as the local rules do not abridge any of the debtor’s substantive rights. A district that does not have its own local form plan must adopt the National Plan – Official Form 113.
Because the trustee objected to the debtor’s plan in this case, the court had to determine whether her plan contributed all of her projected disposable income as described in Hamilton v. Lanning, 560 U.S. 505 (2010), taking into account future income that the debtor was virtually certain to receive. Neither the Code nor Lanning dictate how expected tax refunds should be treated in chapter 13.
Turning to the question of whether section 4.1 of the local plan form violated the debtor’s substantive rights, the court differentiated between above- and below-median debtors. While above-median debtors have limits set by the IRS National Standards on the expenses they may claim to offset their income, below-median debtors may reduce their disposable income by the amount of any expenses necessary for their maintenance and support.
The debtor here argued that, as a below-median debtor, she had a right to retain any tax refund that was necessary for her maintenance and support, and that the local plan form, which applies equally to above- and below-median debtors, violated that substantive right.
The court agreed, reasoning that “[s]ection 1325(b)(2) of the Code, as clarified in Lanning, plainly allows below-median income debtors to retain any income that is reasonably necessary for their maintenance and support.” Section 4.1 thwarted that principle by applying equally to above- and below-median debtors and by not taking into account a below-median debtor’s necessary expenses. The court found that the district’s need for efficiency must take a back seat to the debtor’s right to confirm a plan that is tailored to her income and expenses. The court observed that the debtor’s expenses were well below the IRS’s National Standards that would have applied to her expenses had she been an above-median debtor. The court, therefore, found it plausible that she would use her tax refund to pay for reasonable expenses.
The court made no finding with respect to whether the debtor’s proposed provision amortizing her refund was confirmable. It also declined the debtor’s request that it impose a specified treatment of tax refunds on the district, finding that it had no authority to usurp the district’s authority to promulgate its own local rules.
The court vacated and remanded.
Tags: Plan confirmation
