Published on:

Debtor’s Retirement Annuity is Not Excludable from Disposable Income in Chapter 13

Railroadretirementboardlogo-color.svgIn a Chapter 13 bankruptcy case, debtors must provide a calculation of their total monthly income, as well as their total disposable income for a given month. These two amounts are not necessarily the same, as state and federal laws allow a debtor to exclude certain income sources from their “disposable income.” The debtor’s disposable income determines the plan for repayment of debts. A California appellate court recently addressed the question of whether a debtor could exclude his income from a retirement annuity established by an ambiguously-worded federal statute. In re Scholz, No. 11-60023, slip op. (9th Cir., Nov. 15, 2012). The court held that the debtor had to include Railroad Retirement Act annuity income in both his monthly and disposable income.

The debtors, a married couple, filed for Chapter 13 bankruptcy in 2010. In their statement of “current monthly income,” they excluded several thousand dollars of annuity income, which the husband received pursuant to the Railroad Retirement Act of 1974 (RRA). The debtors argued that they did not have to include this amount in their monthly income calculation because federal law provided that annuity payments under the RRA could not be “anticipated.” 45 U.S.C. § 231m(a). The bankruptcy court agreed, over the trustee’s objection, and approved the debtors’ plan, meaning that the husband’s RRA annuity income was not included in their calculation of projected disposable income under 11 U.S.C. § 1325(b)(2).

The Bankruptcy Appellate Panel (BAP) reversed the bankruptcy court’s exclusion of the annuity from the debtors’ monthly income, but also held that excluding it from disposable income was proper. First, the BAP concluded that, because Congress expressly provided for the exclusion of other retirement income sources from current monthly income, but did not do so for RRA annuity income, it did not intend for it to be excluded. Courts therefore cannot create “new, nonstatutory exclusions.” Scholz, slip op. at 5. The BAP then ruled that the debtors could exclude the RRA annuity from their projected disposable income, citing the “anti-anticipation” clause in the federal statute. Projecting the annuity as disposable income, the BAP held, would “anticipate” it in violation of the statute. Id. at 6.

The Ninth Circuit reversed the BAP and remanded the case with instructions to include the RRA annuity in the debtors’ disposable income. The statute does not define “anticipate,” the court noted, and the legislative history does not offer a clue to its meaning. The debtors argued for a literal interpretation of “anticipate,” as in “expecting a future event to occur and acting in accordance with that expectation.” Id. at 8. The court instead applied a definition of “anticipate” found in the law of trusts, meaning that “the interest of a sole beneficiary shall not be paid to him before a certain date.” Id., quoting Hisquierdo v. Hisquierdo, 439 U.S. 572, 588 (1979) (internal citations omitted). In this sense, including RRA annuity income in the disposable income calculation does not “anticipate” it, and therefore does not violate the “anti-anticipation” clause.

Bankruptcy offers a way for many individuals who have more debt than income to restructure their bills, or even discharge debts entirely. Bankruptcy attorney Devin Sawdayi has helped clients through the bankruptcy process in the Los Angeles area for over fifteen years. To schedule a free and confidential consultation, contact us today online or at (310) 475-9399.

More Blog Posts:

Student Loans and Bankruptcy, Part 1 – Are They Ever Dischargeable? Los Angeles Bankruptcy Lawyer Blawg, May 28, 2013

A Chapter 13 Bankruptcy Can Help You With Your Large Student Loan Debt, Los Angeles Bankruptcy Lawyer Blawg, May 21, 2013

Photo credit: By Railroad Retirement Board (Based on logo at [1]) [Public domain], via Wikimedia Commons.