by Wendell Sherk, Missouri Bankrupcty Attorney • Posted in *Chapter 13 Bankruptcy

Social Security Income is heavily protected from your creditors outside bankruptcy. And Congress has repeatedly emphasized that it should remain protected from creditors inside bankruptcy as well.
An open question has remained, though. When a person files Chapter 13, one of the requirements is, generally, that their income — after their reasonable and necessary living expenses are covered — will be used to repay their debt. But what if a part of that extra income is from Social Security. Is it bad faith to hold that money back from the payment?
No it isn’t, according to the Eighth Circuit Bankruptcy Appellate Panel.
In this case, an elderly couple filed Chapter 13 and devoted $1,135 per month to their plan payment. Their budget showed they had over $2,560 per month available to pay creditors, although the extra funds were derived from Social Security. The trustee objected that failing to apply these extra funds was bad faith. The bankruptcy court and BAP disagreed.
The BAP pointed out that Congress excluded Social Security from consideration under the “best efforts” — the “how much money is left over after expenses?” — test in wage earner plans. Indeed, the Eighth Circuit recently concluded that Congress excluded Social Security from the bankruptcy estate entirely. So making such a budget-related objection under a different section — the good faith test — is not an appropriate end-run around Congress’ definition of what must be used to repay creditors.
It is useful to note that the BAP was not required to address, and pointedly did not reach out to address, whether excluding Social Security could be a component of other good faith issues. Nor whether such an objection might be brought to bear under the aforementioned “best efforts” test.
Although the Supreme Court, in Lanning, that plan payments should be based on actual income available, it did not have to address the congressional exception for Social Security from the definition of disposable income. It seems clear that Congress fully intended to leave Social Security income off the table, as a core policy decision. It has done so several times over the years in both bankruptcy and Social Security legislation. Whether judges disapprove of this policy decision, they are bound to enforce it. And creditors, who promoted the BAPCPA legislation that included this exception, should bear the consequences as they have enjoyed the fruits of their efforts.
Case reference: Fink v. Thompson, #10-6018, 2010 WL 358400 (8th Cir.BAP 9/16/10), available here as well.