In a noteworthy reversal of course from a 2008 decision, the 9th Circuit sitting en banc decided in In re Flores that a debtor couple’s Chapter 13 repayment plan must last at least five years, rejecting the couple’s proposed three-year plan. Even though the couple had no projected disposable income, because the couple had an above-average household income, Section 1325 of the Bankruptcy Code required the longer period, the court decided.

The case began when Cesar and Ana Flores filed for Chapter 13 bankruptcy. They proposed to pay their unsecured creditors $122 per month for three years. That $122 amount was one percent of their income. Despite a fairly sizable overall income, though, the Floreses had no disposable income. Nevertheless, the bankruptcy court decided to reject the couple’s proposed plan and impose a five-year plan (and $148 monthly payment) instead, after the bankruptcy trustee objected.

The debtors appealed and, initially, a 9th Circuit panel agreed with them, citing a 2008 case, In re Kagenveama, which concluded that minimum plan periods were inappropriate where the debtors had no disposable income. The court sitting en banc, however, sided with the lower court, noting that a 2010 U.S. Supreme Court case, Hamilton v. Lanning. The Lanning decision indicated that courts should look at Chapter 13 debtors’ future income in determining the correct plan. “The statute is meant to allow creditors to receive increased payments from debtors whose earnings happen to increase,” Judge Susan Graber wrote.

Two judges dissented, arguing strongly that the majority’s position ran contrary to the bankruptcy code’s stated objective of giving debtors a “fresh start.” By saddling the Floreses, a couple with zero current disposable income, with 60 monthly payments of $148, they hardly received a true fresh start. The dissent also took issue with the majority’s conclusion of that language in Bankruptcy Code, specifically Section 1325(b)(1)(B), required the imposition of a repayment period of at least five years. “Because the Floreses have no projected disposable income to distribute to unsecured creditors during the applicable commitment period, there is no applicable commitment period that applies to them,” Judge Harry Pregerson wrote.

This new decision is a very impactful ruling for those consumers who may need a fresh start financially but have somewhat larger incomes. For the Floreses, the plan the court approved contained a total payout of nearly $8,900, more than double the roughly $4,400 amount in the debtors’ proposed plan. As this shows, this new standard may shift the balance regarding whether some people pursue Chapter 7, Chapter 13 or another option given the substantial additional financial obligation the Flores ruling places on those debtors who might otherwise have selected the Chapter 13 option.

Weighing one’s options inside and outside bankruptcy can be tricky, and the Flores decision adds another factor to that equation. To make the most informed decision about your financial future, it is important to work with someone who understands and is up-to-date on all aspects of bankruptcy law. To get quality advice about the costs and benefits of your options, contact the Bay Area bankruptcy attorneys at the Law Offices of Melanie Tavare. Oakland bankruptcy attorney Melanie Tavare can help you understand what the law requires of you, and help you select an option that makes sense for your circumstances. Call (510) 255-4646 for your free consultation today.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code