In re: David C. Welsh and Sharon N. Welsh
465 B.R. 843
9th Cir. BAP2012Background
- Debtors filed a chapter 13 petition and sought to retain six vehicle loans; Social Security income was excluded from disposable income calculations.
- Trustee objected, arguing plan payments on vehicle debt and lack of full disposable income show lack of good faith.
- Debtors’ Model: Sharon earns substantial income; David is disabled and receives Social Security; household owns a valuable home with a large mortgage and several encumbered vehicles.
- Form B22C showed current monthly income of about $8,116 (excluding Social Security) and disposable income of $218; Schedule I/J showed income including Social Security and a net monthly surplus around $394.
- Plan proposed $125 monthly for 30 months, then $500 for 30 months, totaling $18,750; secured debts would be paid in full for six vehicles, including some argued unnecessary assets.
- Bankruptcy court held that Social Security income was properly excluded from disposable income and that deductions for secured debt payments were permitted; concluded plan was proposed in good faith under Leavitt factors.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Can secured-debt payments be deducted from disposable income if collateral is unnecessary? | Trustee argues such payments are not permissible if collateral unnecessary. | Welsh argues §707(b)(2) permits these payments regardless of necessity as part of the means test. | Yes; deductions for secured debt payments are allowed. |
| Did the court apply the correct legal standard for good faith under §1325(a)(3)? | Trustee contends the court misapplied Leavitt totality-of-circumstances. | Welsh argues the court used proper standard and considered totality of circumstances. | Yes; court applied correct legal standard. |
| May Social Security income be considered in evaluating plan good faith when excluded from disposable income calculations? | Trustee argues excluding Social Security from disposable income could show bad faith. | Welsh argues Social Security is excluded from disposable income by statute and should not drive bad faith. | Yes; Social Security income may be considered in good faith analysis. |
Key Cases Cited
- Goeb v. Heid (In re Goeb), 675 F.2d 1386 (9th Cir. 1982) (establishes totality-of-the-circumstances test for good faith in chapter 13)
- Leavitt v. Soto (In re Leavitt), 171 F.3d 1219 (9th Cir. 1999) (multifactored approach to good faith in 13 proceedings)
- In re Smith, 418 B.R. 359 (9th Cir. BAP 2009) (means-test treatment of secured-debt payments; conflict with necessity concept)
- In re Martinez, 418 B.R. 347 (9th Cir. BAP 2009) (means-test treatment; necessity of collateral in determining deductions)
- In re Welsh, 440 B.R. 836 (Bankr. D. Mont. 2010) (Social Security exclusion and good faith consideration analyzed; later affirmed)
- In re Upton, 363 B.R. 528 (Bankr. S.D. Ohio 2007) (examines good faith under totality-of-circumstances, including Social Security factors)
- In re Herrmann, 2011 WL 576753 (Bankr. D. S.C. 2011) (consideration of Social Security and plan structure in good faith analysis)
- In re Hall, 442 B.R. 754 (Bankr. D. Idaho 2010) (critique of requiring use of Social Security for basic needs in disposable income context)
- In re Espinosa, 559 U.S. 260 (2010) (Supreme Court clarifies role of good faith review independent of objection)