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In re Kucharz: Unemployment compensation included in a debtor’s “current monthly income” calculation although it is a “surprisingly difficult question”
On October 28, 2009 the Bankruptcy Court for the Central District of Illinois entered the debate on unemployment compensation and whether it should be included in the “current monthly income” calculation of debtors.1 The Chief Judge of the Bankruptcy Court for the Central District of Illinois, Thomas L. Perkins, weighed the textual and contextual issues surrounding 11 U.S.C. § 101(10A)(B) and found that the unemployment compensation should be included in a debtor’s “current monthly income.”2 This decision squares the debate with two courts holding unemployment compensation should be excluded in a debtor’s “current monthly income” and two courts holding that it should be included.3
I. Background
Pursuant to 11 U.S.C. § 101(10A) the Bankruptcy Code broadly defines “current monthly income” drawing in every source of income the debtor has available, “[t]he term ‘current monthly income’—(A) means the average monthly income from all sources that the debtor receives . . . without regard to whether such income is taxable income, derived during the six-month period [before filing of the bankruptcy petition] . . .”4 However, after a broad definition of “current monthly income” which taketh away, the Code starts to giveth. In 11 U.S.C. § 101(10A)(B), “[current monthly income] includes any amount paid by any entity other than the debtor . . . on a regular basis for the household expenses of the debtor or the debtor’s dependents . . . but excludes benefits received under the Social Security Act . . ..“5
This section begs the question: what exactly does “benefits received under the Social Security Act” mean? Does this phrase mean that any funds received from the Social Security Act are excluded? Or, must a court determine what funds are “benefits” under the Act and what funds are just indirectly related to the Act and thus excluded from “current monthly income”? This issue has divided several bankruptcy courts and remains undecided in others, at least in published opinions.6
The answer to this question is more important than some may see at first blush. The means test of BAPCPA incorporates “current monthly income” and uses it as an initial hoop that consumer debtors must jump through. If the debtor’s “current monthly income” is too high according to the median wages of individuals in the debtor’s state, the debtor may not be granted access to Chapter 7 bankruptcy relief.7
II. Cases leading up to the decision
In 2007 the Court in the case of In re Sorrell, in the Southern District of Ohio, concluded that this compensation is a “benefit under the Social Security Act.”8 This Court was the first to address this issue and publish an opinion after the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) reforms.9
The Bankruptcy Court of Massachusetts came next in the case of In re Munger, and sided with the Sorrell Court that unemployment compensation is a “benefit received under the Social Security Act” as provided by Section 101(10A)(B).10 This court relied much on the analysis of the Sorrell decision, but it added an analysis of the commentators who have addressed this issue.11
The Bankruptcy Court for the Middle District of Pennsylvania came after Sorrell and Munger, in 2008, and yet held that unemployment compensation is not a “benefit received under the Social Security Act;” thus this income must be included in the debtor’s “current monthly income” calculation.12
III. The In Re Kucharz approach
With the Bankruptcy Courts split on the issue of whether unemployment compensation is a “benefit received under the Social Security Act,” the Bankruptcy Court for the Central District of Illinois laid out its approach to this divisive issue. The Court began the analysis by noting that this issue presents a “surprisingly difficult question.”13 With the difficult task identified, the Court began its analysis by a detailed look at the Social Security Act and whether the Act creates a federal program of unemployment compensation or one that is mainly state run.14 The Court noted that the Social Security Act created incentives for the states to enact unemployment programs, but found that the benefits paid to the unemployed citizens of the state are received under state law as opposed to the Social Security Act.15 In this way the Court agreed with the position of Judge Eugene Wedoff of the Bankruptcy Court for the Northern District of Illinois in an article that he authored.16
The Court reached this conclusion by focusing on the word “under” in the phrase, “benefit received under the Social Security Act” of Section 101(10A)(B).17 “The preposition ‘under’ is both the cause of and the key to unlock the mystery.”18 The Court found, by looking this word up in the dictionary, that “under” means “required by” or “in accordance with.”19 The Court reasoned that because the Social Security Act did not compel the states to enact unemployment compensation programs, the unemployment benefits that the citizens of these states received are from the states themselves not the federal government as provided by the Social Security Act.20 Thus, the Court concluded, that the benefits received by these citizens are not received “under” the Social Security Act but rather “under” the states’ unemployment programs.21
After making a determination based on the language of Section 101(10A)(B) the Court went on to describe the section as ambiguous and therefore proceeds to undertake a “contextual analysis” of Section 101(10A)(B).22 In context, the Court found that BAPCPA and the means test were put in place to identify those debtors who have the ability to pay their creditors do pay their creditors.23 The Court noted that “current monthly income” is a backward-looking test that then is projected forward to determine the debtor’s income in the future.24 The Court found that if unemployment compensation is left out of this calculation it would not be an accurate determination of what the debtor will earn in the future because it omits the unemployment compensation received, which is the debtor’s substitute wages.25
The Court in the case of In re Kucharz now squares the debate with two decisions for inclusion of unemployment compensation in a debtor’s “current monthly income” calculation and two courts for exclusion of these benefits.
It will be interesting to see how other courts approach this issue and eventually decide whether unemployment is a “benefit received under the Social Security Act.” ■
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(A) means the average monthly income from all sources that the debtor receives (or in a joint case the debtor and the debtor’s spouse receive) without regard to whether such income is taxable income, derived during the 6-month period ending on—
(i) the last day of the calendar month immediately preceding the date of the commencement of the case if the debtor files the schedule of current income required by section 521(a)(1)(B)(ii); or
(ii) the date on which current income is determined by the court for purposes of this title if the debtor does not file the schedule of current income required by section 521(a)(1)(B)(ii); and
(B) includes any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor’s spouse), on a regular basis for the household expenses of the debtor or the debtor’s dependents (and in a joint case the debtor’s spouse if not otherwise a dependent), but excludes benefits received under the Social Security Act, payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes, and payments to victims of international terrorism (as defined in section 2331 of title 18) or domestic terrorism (as defined in section 2331 of title 18) on account of their status as victims of such terrorism.
6. See, e.g., In re Baden, 396 B.R. 617 (Bankr. M.D. Pa. 2008); In re Munger, 370 B.R. 21 (Bankr. D. Mass. 2007); and In re Sorrell, 359 B.R. 167 (Bankr. S.D. Ohio 2007).
7. See 11 U.S.C. § 707(b) (2006). Note that this is an extremely simplified discussion of the “current monthly income” prong of the means test for a general understanding of the reader only.
8. See In re Sorrell, 359 B.R. 167 (Bankr. S.D. Ohio 2007).
9. Id. at 180 (“The court is not aware of any reported decisions on the question,[of whether unemployment compensation is a “benefit received under the Social Security Act”], although the issue has been addressed by bankruptcy commentators”). This court therefore broke new ground in interpreting this section of the BAPCPA amendments.
10. See In re Munger, 370 B.R. 21 (Bankr. D. Mass. 2007)
11. Id. at 23-25. The court based its determination that unemployment compensation should be excluded in “current monthly income” calculations as a “benefit received under the Social Security Act” based on its statutory interpretation and the Sorrell opinion. Id. The court found that Section 101(10A)(B) clearly states that Social Security Act benefits should be excluded from “current monthly income,” and the court refused to further look at the intent of Congress in enacting this amendment to the Bankruptcy Code. Id.
12. See generally In re Baden, 369 B.R. 617 (Bankr. M.D. Penn. 2008).
13. Id. at *1.
14. Id.
15. Id. at *4. The Court notes that if the Social Security Act was repealed the Illinois unemployment compensation program would still be able to continue on and provide support for the unemployed citizens of Illinois. Id. at *3.
16.See Eugene R. Wedoff, Means Testing in the New § 707(b), 79 Am. Bankr. L.J. 231, 247 (2005) (opining that excluding unemployment compensation to from the “current monthly income” calculations of the debtors “would be a strained interpretation . . . since unemployed individuals received no benefits ‘under the Social Security Act’ but only under the programs adopted by the states, which may provide benefits beyond those that are federally funded).
17. Id.
18. Id.
19. Id.
20. Id.
21. Id.
22. Id. at *5.
23. Id.
24. Id.
25. Id.