Reasonable and necessary expenses under Section 1325(b) of the Bankruptcy Code, postconfirmation considerations, and the effect of conversion and dismissal of Chapter 13 cases

University of Memphis Law Review, The, Summer 2002 by Kennedy, David S, Clift, R Spencer III

I. INTRODUCTION

It is often said that the Bankruptcy Code (Code) attempts to strike an equitable balance between the competing and countervailing interests of debtors and their creditors. In creating the comprehensive statutory scheme under the Code, one can hardly expect Congress to precisely address and legislate on each and every possible matter with clearly demarcated guidelines for the United States bankruptcy courts to ministerially or routinely apply during the administration of every bankruptcy case and proceeding. The courts do not interpret the statutory provisions of the Code "with the ease of a computer"; rather, they are guided by particular facts and circumstances of a given case or proceeding, the relevant provisions of the Code and the Federal Rules of Bankruptcy Procedure (Rules), and equitable principles.1 The role of an adjudicator requires United States bankruptcy judges to make judicial determinations in many areas of the law guided by a sense of law and equity.2 More specifically here, bankruptcy judges often address numerous postpetition issues including standard of living issues for some debtors that are balanced with the rights of creditors and the trustees in Chapter 13 cases.

Chapter 13 trustees and the court examine the debtor's budget and proposed repayment plan on a case-by-case basis to determine whether all expenditures are "reasonably necessary" under (sec)1325(b).3 While it is hardly feasible for the Chapter 13 trustees and bankruptcy judges to micromanage all of the details of every Chapter 13 debtor's life, courts frequently review, on a caseby-case basis, the reasonable and necessary expenses of Chapter 13 debtors because what is reasonably necessary for the maintenance and support of the debtor and the debtor's dependents remains an open question for interpretation in many instances.4 Judicial review of reasonable and necessary expenses in Chapter 13 cases covers a diverse array of debtors' expenditures. Courts closely scrutinize the debtors' expenditures ranging from charitable contributions to tickets for tractor-pull events.5

effect of the confirmation of the plan under (sec)1327(a), and modifications of the plan after confirmation under (sec)1329 of the Code and Rule 3015(g) of the Federal Rules of Bankruptcy Procedure. Part IV addresses voluntary conversion of a Chapter 13 case to a Chapter 7 case under (sec)1307(a) of the Code and Rule 1017(f) of the Federal Rules of Bankruptcy Procedure, including a discussion regarding whether a Chapter 13 debtor has an absolute right to convert from Chapter 13 to Chapter 7, the rights of trustees and creditors to seek to involuntarily convert a debtor's Chapter 13 case to a Chapter 7 case under (sec)1307(a), and the effect of conversion on the property of the estate upon conversion from Chapter 13 to Chapter 7 under (sec)348(f) of the Code. Part V addresses case dismissals under (sec)1307 and the effect of a case dismissal under (secs)349 and 362(c)(2)(B) of the Code. Part VI offers some conclusions after an analysis of various expansive topics arising in Chapter 13.

II. REASONABLE AND NECESSARY EXPENSES INCURRED BY CHAPTER 13 DEBTORS

In 1984, in response to desires of consumer creditors that more demanding statutory debt repayment provisions be enacted under the Code, Congress passed (sec)1325(b) as part of the Bankruptcy Amendments and Federal Judgeship Act of 1984 (1984 amendments).6 Section 1325(b) primarily was intended to statutorily revise and clarify the Chapter 13 plan confirmation process in favor of unsecured creditors. The consumer credit industry aggressively lobbied for substantially increased payments to unsecured creditors under confirmed Chapter 13 plans while Congress attempted to balance and preserve the goal and policy of encouraging individual debtors to seek to voluntarily repay their debts under the auspices of Chapter 13.7

and support of the debtor and the debtor's dependents under the newly created (sec)1325(b), Congress actually created new statutory conflicts and areas for more litigation when it passed (sec)1325(b) of the Code.8 Since enactment of the 1984 amendments, the lower courts, Chapter 13 trustees, and bankruptcy practitioners for debtors and creditors have struggled attempting to harmonize the statutory language in (sec)1325(b)(2)(A).9

Section 1325(b) of the Code provides, in its entirety, as follows:

(1) If the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan

(A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or

(B) the plan provides that all of the debtor's projected disposable income to be received in the three-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan.

(2) For purposes of this subsection, "disposable income" means income which is received by the debtor and which is not reasonably necessary to be expended