Debtor Doesn’t Have to Contribute Social Security to Ch. 13 Plan

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By Daniel Gill

It wasn’t bad faith for a debtor not to pay savings from Social Security into his Chapter 13 plan, a federal judge in Illinois ruled ( In re Manzo , 2017 BL 299006, N.D. Ill., No. 16 C 7218, 8/25/17 ).

The Aug. 25 opinion by Judge Jorge Alonso, U.S. District Court for the Northern District of Illinois, relies on a Ninth Circuit case. It finds that a debtor is not in bad faith simply by declining to commit Social Security savings to his Chapter 13 plan. Since there was no other evidence of bad faith, the court reversed the bankruptcy court below.

Carl Manzo filed a Chapter 13 bankruptcy case on June 18, 2015. Chapter 13 allows individuals receiving regular income to obtain debt relief while retaining their property. To do so, the debtor must propose a plan that uses future income to repay all or a portion of his debts over a three- to five-year period.

Here, the debtor proposed a plan that would pay his creditors about $30 a month for 36 months. The money would come from Social Security payments, his only income.

But Manzo also had a bank account with more than $7,000 remaining from a lump sum payment of retroactive Social Security benefits that he received in 2013.

Although those funds were exempt—they were Manzo’s personal property and not property of his bankruptcy estate—the bankruptcy court said it was a sign of bad faith he didn’t voluntarily commit some of it to pay his creditors. The court suggested half.

Alonso ruled otherwise. The good faith analysis of a Chapter 13 plan shouldn’t be focused on the amount of repayment under the plan. Rather, it “should center on whether there are ‘other indicia of bad faith,’” he said.

“There was no suggestion at the confirmation hearing of any fraud, misrepresentation, or other deceptive or inequitable conduct on the part of Mr. Manzo,” he said.

Manzo was represented by Ainat Natalie Margalit, Chicago. The court’s docket indicates that no brief was submitted by an appellee.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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