Bankruptcy—Calculation of Debtor's "Projected Disposable Income"

Hamilton v. Lanning, No. 08-998

A debtor who files for bankruptcy under Chapter 13 must agree to a court-approved repayment plan for making installment payments to creditors. If the bankruptcy trustee objects to the repayment plan, the plan can be confirmed only if it provides that all of the debtor's "projected disposable income" during the applicable period "will be applied to make payments to unsecured creditors under the plan." 11 U.S.C. § 1325(b)(1)(B). Congress has defined a formula for calculating "disposable income" based on the debtor's average monthly income over the six-month period before the bankruptcy petition was filed, id. § 1325(b)(2)(A)(i), but it has not provided a separate definition of "projected disposable income."


The Supreme Court held that when a bankruptcy court calculates a debtor's projected disposable income, it may account for changes in the debtor's income or expenses that are "known or virtually certain" at the time of confirmation. In doing so, the court rejected what has become known as the "mechanical approach," which would require courts to apply the rigid formula in Section 1325(b)(2)(A)(i), and instead adopted the so-called "forward-looking approach," which allows the bankruptcy court to deviate from that formula if there are special circumstances that affect the debtor's income or expenses.


The Court began by explaining that the ordinary usage of the word "projected" allows many factors to be taken into account, and it does not assume that the past will necessarily repeat itself. This understanding is consistent with how the term is used in other federal statutes, some of which expressly recognize that future projections may deviate from historical averages for a variety of reasons. The Court also explained that courts traditionally exercised discretion when projecting future income in the years before Congress codified these practices in the Bankruptcy Code, and that if Congress had intended to overrule longstanding practice, it presumably would have said so expressly. The Court cautioned, however, that—consistent with historical practice—the bankruptcy court's calculation of projected disposable income should depart from the historical average "only in unusual cases," and that it should take into account only "known or virtually certain information" about the debtor's future income or expenses. Slip op. 12.

Justice Scalia dissented, arguing that because the only mention of "disposable income" in Section 1325(b) is as part of the phrase "projected disposable income," the statutory definition of disposable income must also be used as the formula for projected disposable income. Under the Court's interpretation, he explained, the statutory definition is rendered entirely superfluous.

Bankruptcy courts now have greater discretion to determine how much a debtor must commit to repaying unsecured creditors, and a greater number of Chapter 13 repayment plans will likely be confirmed even over the objection of the bankruptcy trustee.