Fourth Circuit: Social Security May Be Excluded From Disposable Income in Chapter 13 Bankruptcy

People filing for Chapter 13 bankruptcy in Maryland, Virginia, West Virginia, North Carolina, and South Carolina, won a significant victory this month. On July 1, 2013, the Fourth Circuit ruled that bankruptcy filers do not have to include social security as part of their disposable income when calculating plan payments.  In re Ranta,  2013 WL 3286252 (4th Cir. 2013).

This means that people receiving Social Security income in the Fourth Circuit may keep social security income, even if it means having a surplus of income after paying expenses and the plan payment.

Social Security and Disposable Income

The law on whether social security must be included as part of a Chapter 13 debtor’s disposable income is unsettled throughout the country.  (To learn about the role your disposable income plays in your Chapter 13 case, see The Best Effort Requirement in Chapter 13 Bankruptcy.)

Even though the bankruptcy code specifically states that social security should not be included as part of the disposable income calculation, many bankruptcy courts have ruled that if a debtor’s plan does not devote social security income to the payments, then the plan is proposed in “bad faith.”  For all practical purposes, these courts require a debtor to include social security income in disposable income.

(To learn more about this issue, see Can I Keep My Social Security Income in Chapter 13 Bankruptcy?)

The Fourth Circuit’s Decision

The Fourth Circuit, in In re Ranta, has settled this issue for those filing for bankruptcy in Maryland, Virginia, West Virginia, North Carolina, and South Carolina.  In the Ranta case, the court ruled that the bankruptcy code’s exclusion of social security in the disposable income calculation means what it says – that disposable income does not have to be included in plan payments. If a debtor chooses to exclude social security income from plan payments, he or she may do so, even if this means having surplus income each month.  The Fourth Circuit joins several other Circuits in ruling this way, including the Fifth, Sixth, Eighth, and Tenth Circuits.

You Have the Option to Devote Social Security to Your Plan

Of course, a debtor in the Fourth Circuit may choose to include social security income as part of plan payments. This would make sense if the debtor could not otherwise propose a confirmable plan (for example, because payments would not cover the minimum amount that the debtor must pay to unsecured creditors).