Sale of Assets Results in Disposable Income

Gliding over the crucial question of whether sale of an asset results in income, a Florida bankruptcy court ordered the debtors, Mr. and Mrs. McMillan, to distribute a portion of their sale proceeds to their creditors as disposable income. In re McMillan, No. 11-5348 (Bankr. M.D. Fla. July 2, 2015). Mr. McMillan invested $30,000 in an auto repair business. The debtors moved the court for approval of a settlement under which they would sell Mr. McMillan’s interest in the business for over $18,000.

After determining in an earlier proceeding that the funds were not exempt, the court went directly to the question of whether the income generated from the sale constituted “disposable income.” Noting that disposable income is “current monthly income received by the debtor … less amounts reasonably necessary to be expended … for the maintenance or support of the debtor or a dependent of the debtor,” the court conducted an assessment of the debtors’ financial needs balanced against their overall financial situation. Based on this assessment, the court concluded that the $7,500 remaining after the debtors made certain necessary expenditures would be deemed disposable income for distribution to creditors.

Unfortunately, in reaching this conclusion, the court skipped over the question of whether the sale of an asset constitutes income at all. Black’s Law Dictionary (6th ed. 1991) defines income as “[t]he return in money from one’s business, labor, or capital invested; gains, profits, salary, wages, etc.” This definition (as well as basic financial sense) does not contemplate generation of “income” by the sale of one’s own assets.

Other courts have found that “income” does not result from sale of a debtor’s assets. In In re Zahn, 391 B.R. 840, 845-46 (B.A.P. 8th Cir. 2008), the court found that although “income” is not defined in the Code, the standard definition does not include assets and investments owned by the debtor (though it may include interest or profits based on those assets). The reasoning being that“[t]he same money cannot be received as income twice.” The court concluded that “[i]ncluding money from what is essentially the liquidation of an asset gives an artificially high income which may result in an unrealistic calculation of disposable income.” Likewise, In re Breeding, 366 B.R. 21 (Bankr. E.D. Ark. 2007), held that redemption of the debtor’s certificates of deposit did not generate income.

McMillan Bankr MD Fla opinion