Update on the Ross-Tousey, et al issue

The blog entry below that I wrote just 5 days ago about Ross-Tousey and related cases… I predicted that the U.S. Supreme Court would address the issue in its 2010-2011 term. Turns out I was right, and had I made the prediction 5 days earlier, I could have claimed to be psychic. As it turns out, certiorari was granted in Ransom v. MBNA (09-907) on June 21. This will be the case to watch in the coming months.

Effect of Lanning on Ross-Tousey, Clark, and Dionne

Prior to Hamilton v. Lanning, another major issue that had courts divided was the question of secured debt payments being deducted on the Means Test (Form B22C) when the secured debt payment did not exist. In the Eastern District of Wisconsin, I want to briefly mention three cases:
Ross-Tousey v. Neary (In re Ross-Tousey), 549 F.3d 1148 (7th Cir. Wis. 2008) – this case was about a Chapter 7 debtor, but we mention it because it rose to the level of the 7th Circuit Court of Appeals. Debtors took an ownership deduction for a vehicle with no lien on it. Bankruptcy Court permitted it, District Court reversed, Circuit Court reversed the District Court.
In re Dionne, 402 B.R. 883 (Bankr. E.D. Wis. 2009) – Chapter 13 debtors were permitted to take an ownership deduction for a vehicle they intended on surrendering.
In re Roger & Roberta Clark, Case No. 07-23390 – Chapter 13 debtors were permitted to take an ownership deduction on a vehicle with no lien on it.
Dionne and Clark are both Chapter 13 cases. Ross-Tousey and Clark deal with vehicles with no lien on it. Dionne deals with a vehicle that has a lien on it, but the debtors intend to surrender.
The holding in Hamilton v. Lanning permits the Court to consider changes to the debtor’s income or expenses that are known or reasonably certain. Since the surrender of a vehicle and the loss of a secured debt payment is a change in financial circumstances (and the debtor’s intent to do so is known because it is stated on the proposed Chapter 13 Plan), then it stands to reason that Lanning reverses Dionne. Clark is distinguishable in that there is no change in circumstances, the vehicle that the ownership deduction is taken for did not have a secured debt payment due at the time of filing. However, given the nature of the discussion in Lanning about a plain-reading of projected disposable income, I think that if a Clark-like case was brought in front of the U.S. Supreme Court, they would not see a distinction based on the lack of a change in circumstances. So in my legal opinion (which is just that, an opinion, until a Court rules otherwise), Dionne and Clark can be lumped together. If one is held is violation of Lanning, then I think the other one fails, too, and vice versa.
It is important to note, however, that the issue of contractually due payments and vehicle ownership deductions was not discussed in Lanning, this is merely an extrapolation of how the case law in Lanning would/should probably be applied to Dionne and Clark. This is why I included Ross-Tousey in my analysis, because the 7th Circuit is the highest legal authority which is directly addressed these questions. Otherwise, it is completely irrelevant as a Chapter 7 case, because a different standard is applicable.
I would also note that this line of cases analyzes the difference between “applicable deductions” and “actual deductions”, which is another way that Dionne and Clark might be distinguished and not overruled by Lanning.
Given that Lanning did not directly address the ownership expense issue, I would not be surprised to see this issue make its way to the U.S. Supreme Court during its 2010-2011 term. In the meantime, there are still doctrines of good faith and abuse to be considered. In my opinion, since the SCOTUS is taking the forward-looking approach, a debtor playing it safe would be wise to only take the vehicle ownership deduction if they have a vehicle with a secured debt payment.

Mortgage Modification Scams – point of clarification

Several weeks ago I wrote a blog post about mortgage modification scams.
I should clarify my concern. I think most people are aware that there are mortgage modification scams out there involving third-party companies, most of which you’ve never heard of. If you want additional information, I would encourage you to read more about them here, here, and here. If you believe that you are the victim of a mortgage modification scam, or if you believe you have been solicited by a scammer, definitely call your state attorney general’s office, and consider contacting the FBI and the Federal Trade Commission as well.
To clarify, my concern is broader than these upstart companies hoping to cash in by taking advantage of distressed homeowners. Most of the attention is focused on these third party companies, and almost no attention seems to be paid toward the banks and big mortgage lenders, which I am beginning to believe are scamming homeowners as well. They are bilking homeowners for huge processing fees, not following through on the modification even though the homeowner has done everything the mortgage company has asked of them, and burning precious time in the foreclosure process.
So this is an open invitation – if you believe that you have been or are being scammed by your original mortgage company for a loan modification – I would like to hear from you. Certainly, I’d still recommend contacting your state’s AG, the FBI, and the FTC. But give us a call at (920) 490-6160. I am interested in examining the loan modification paperwork, and any other related documents. I’m not sure yet what I’m looking for, but we certainly would respect your privacy, and encourage you to redact any personal information contained on your paperwork before submitting them for my review. If what I suspect is true, we may take steps toward prosecuting some class action claims against these overlooked mortgage lenders.

Hamilton v. Lanning decision rendered.

About 2-1/2 months after hearing oral arguments, the Supreme Court of the United States today rendered its decision in the case of Hamilton v. Lanning. It is an 8-1 decision, with Justice Scalia as the lone dissenter.
For those of you who haven’t been listening to me yak about Lanning, a quick overview… In Chapter 13, debtors are required to submit a Statement of Current Monthly Income (Form B22C, aka The Means Test) which calculates the debtor’s projected disposable income based off of the debtor’s past six months of income, less expenses necessary for maintenance or support of the household. The inherent problem with this formula is that it assumes that the debtor’s future income will mimic the debtor’s past income, which in bankruptcy situations, is rarely true. When the debtor’s income goes down after or just prior to filing for bankruptcy, the Means Test is skewed to show that the debtor can afford to pay more than what the debtor can actually afford. When the debtor’s income goes up after or just prior to filing, creditors end up cheated out of money that the debtor can afford to put into the Plan.
Courts have evolved and split themselves into two camps: the mechanical approach and the forward looking approach. The mechanical approach assumes that Congress, when enacting BAPCPA, intended to eliminate judicial discretion and replace it with a mathematical formula for calculating the debtor’s projected disposable income. The Means Test becomes the alpha and omega of the calculation. The forward looking approach notes the absurd results behind the mechanical approach which cuts both ways – in favor of debtors and creditors, depending on the circumstances – and also notes certain ambiguities and inconsistencies in the definitions, distinctions, and usage of the terms “disposable income” and “projected disposable income”.
The Court held today that forward looking approach was the correct approach, noting most strongly “the ordinary meaning of ‘projected’.” Projected numbers look at historical figures, but also consider other factors. The official holding is:

[…] when a bankruptcy court calculates a debtor’s projected disposable income, the court may account for changes in the debtors income or expenses that are known or virtually certain at the time of confirmation.

What does this mean? As absurd as the mechanical approach could be, at least the mechanical approach would have produced less litigation. For the next 10 or 20 years, we (attorneys and trustees) will be debating what constitutes “known or virtually certain”, and a lot of case law is going to evolve out of that, particularly over the next two years as attorneys test the boundaries of this guideline.
It is also a double-edged sword. Debtors who have an increase in income after or just prior to filing bankruptcy will be forced to deviate from the Means Test in a manner favorable to their creditors and to the debtor’s detriment. The Court spoke about this quite a bit in dicta on page 14 (part D) of the opinion.
Finally, although the decision doesn’t talk much about the expense side of the equation, the holding does. This means that cases allowing “contractually due” payments on debts that the debtor knows will not be paid once the bankruptcy case is filed (in other words, taking a mortgage expense on a house you’re surrendering in bankruptcy) such as is the case in In re: Dionne are probably overturned now (though I wouldn’t rule out more litigation on that issue).