Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Diane Davis
Jan. 28 — Adoption Assistance payments a debtor receives under the Social Security Act aren't considered “disposable income” that must be included in a Chapter 13 debtor's payment plan to creditors, the U.S. Bankruptcy Appellate Panel of the Ninth Circuit held Jan. 19 (Adinolfi v. Meyer (In re Adinolfi), 2016 BL 14040, 9th Cir., No. EC-15-1091-JuFD, 1/19/16).
Reversing and remanding the bankruptcy court's judgment, Judge Robert J. Faris noted that no other court has previously decided whether the Social Security exclusion covers adoption payments.
Taking a broad reading of the Social Security exclusion, the BAP said that excluding payments from the debtor's disposable income was within the purpose of the Social Security Act.
This broad interpretation could mean that benefits received under most programs governed by the Social Security Act (SSA) aren't “disposable income” that must be part of a debtor's Chapter 13 plan, and are beyond the reach of Chapter 13 creditors. In Chapter 13 bankruptcy, individuals receiving regular income can obtain debt relief while retaining their property but must propose a plan that uses future income to repay a portion of their debts over a three to five year period.
The BAP noted that most, but not all courts have held that unemployment compensation is not excluded from disposable income in Chapter 13.
Judge Meredith A. Jury dissented, however, concluding that this was not the outcome Congress intended. According to Jury, the Adoption Assistance payments are paid to the debtor as required by state law, not by the SSA or the Social Security Administration.
Although the SSA may be a source of funds that make up part of the payment, the Adoption Assistance payments are received from the State of California and its corresponding state agency, not under the SSA.
Debtor Nancy Adinolfi receives $1,422 per month in Adoption Assistance payments under the Adoption Assistance and Child Welfare Act of 1980. That act established a program of federal payments to participating states to provide funds for financial assistance to families adopting special needs children from foster care. California receives funds from the federal government under Title IV-E of the Social Security Act.
Half of the funding came from the federal government, 37.5 percent from the state, and 12.5 percent from the county. The payments were made directly by the county social services agency, not by the federal government.
The debtor filed for Chapter 13 protection and disclosed the Adoption Assistance payments. She proposed a Chapter 13 plan that didn't include the payments in her disposable income. As a result, she proposed making a monthly payment of $935, which would pay 0 percent to unsecured, non-priority creditors.
Chapter 13 trustee Michael H. Meyer objected to confirmation of the plan, arguing that it was improper to exclude the Adoption Assistance payments from her income when calculating her plan payments.
The bankruptcy court ruled in favor of the trustee, and the debtor appealed to the BAP.
Bankruptcy Code Section 1325(b)(1) provides that the court can't confirm a plan over the objection of the trustee or an unsecured creditor unless the plan provides for full payment of all unsecured claims or “the plan provides that all of the debtor's projected disposable income … will be applied to make payments to unsecured creditors under the plan.” Under Section 1325(b)(2), the term “disposable income” means “current monthly income received by the debtor” subject to an exclusion, less certain expenses. Section 101(10A) (B) defines “current monthly income” and excludes benefits received under the Social Security Act.
The exclusion from current monthly income is called the “SSA exclusion.”
On appeal, the trustee argued that a narrow interpretation of the SSA exclusion is more consistent with the purposes of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). According to the trustee, the purpose of BAPCPA was to separate “can-pay” debtors from “can't-pay” debtors and to require “can-pay” debtors to pay as much as they can afford.
The BAP didn't agree with the trustee. Congress decided that “benefits received under the Social Security Act” shouldn't count when identifying “can-pay” debts and deciding how much more they should pay, the BAP said. This is reasonable, the BAP said, because “SSA programs are intended to benefit people who are needy in some respect: they are aged, sick, physically or mentally disabled, suffering from family separation or abuse, or the like.”
Using a natural reading of the SSA exclusion, the BAP found that excluding the Adoption Assistance payments from current monthly income is consistent with the purpose of the SSA.
Chief Judge Randall L. Dunn joined the majority's opinion.
David R. Jenkins represented appellant/debtor Nancy Adinolfi; Deanna K. Hazelton represented appellee/ Chapter 13 trustee Michael H. Meyer.
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