Earlier this month, the Ninth Circuit Court of Appeals in Maney v. Kagenveama (In re Kagenveama), 527 F.3d 990 (9th Cir. June 2008) held that where an above-median chapter 13 debtor has negative “disposable income” per the means test but a monthly surplus per schedules I and J, the debtor is NOT required to propose a five year plan and the plan payment need not be based on the surplus.

Since the new bankruptcy laws became effective in October 2005, the new means test was added as a requirement to determine eligibility for Chapter 7 vs. Chapter 13 as well as to determine–if a debtor was ineligible for Chapter 7–how much the Chapter 13 monthly plan payment would be, and how long it must last. While the means test admittedly bears little resemblance to reality, it is the test Congress chose. It uses an average of the debtor’s income received from ALL sources (including gifts) from the 6 calendar months prior to filing, and then subtracts out certain allowed expenses (e.g. mortgage payments, allowed IRS-standard living expenses, etc.). There are many times where, for whatever reason, the means test shows the debtor having a certain amount of disposable income, whereas the actual current monthly income and expenses, reflected on bankruptcy schedules “I” and “J” show a much higher amount. Up until this decision, the Trustees in Chapter 13 cases were requiring debtors to pay the amount of their current, actual surplus income, rather than what the means test showed.

As far as the plan term goes, if the means test shows negative income, then a 3-year plan term (which is the minimum allowed in Chapter 13) would suffice.

With its decision in Kagenveama, the Ninth Circuit has stated that the means test controls. However, it did point out in a quick sentence that nothing in the opinion prevents a creditor or Trustee from seeking a modification of the Chapter 13 plan after it is confirmed.

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