Category Archives: In re Welsh and Chapter 13 Bankrupcy

Bankruptcy and Secured Debt, In re Welsh and Chapter 13 Bankruptcy

By Ryan C. Wood

A reoccurring issue in Chapter 13 bankruptcy cases is whether you can keep multiple cars, ATVs, or trailers that you are still making payment on. Some of these may be considered “luxury” items, meaning that they are not necessary for you and your family’s maintenance or support. The Ninth Circuit recently decided in the case of In re Welsh (No. 12-60009, 9th Circuit, March 25, 2013) that it would not be considered bad faith to keep making payments on motorcycles, trailers, boats or other motor vehicles and therefore you would be able to keep them. Bankruptcy lawyers can now provide better guidance to clients.

In In re Welsh, Mr. and Mrs. Welsh filed for Chapter 13 bankruptcy. They had income from employment, social security, and a small pension. They were making payments to secured creditors for a house, 3 cars, 2 ATVs, and a trailer. The Trustee objected to the confirmation of the Welshs’ bankruptcy plan based on bad faith for 2 factors: failure to use some of the Social Security Income to pay unsecured creditors and paying secured creditors for what the Trustee deemed to be “luxury” items. The 9th Circuit shot down both of the Trustee’s objections.

Social Security income is excluded from the calculation of income pursuant to 42 U.S.C. §407(a). The Trustee agreed with the fact that the Social Security was correctly excluded from the calculation of income, but he argued that the failure to use any of the Social Security income to pay the unsecured creditors was bad faith. Determining good faith is based on the totality of circumstances. The court stated that Congress enacted the means test to calculate disposable income. Congress explicitly excluded Social Security income from the means test. Therefore, the court was not going to ignore the language Congress enacted and concluded it was not considered bad faith to not using Social Security funds to pay unsecured creditors. Most bankruptcy attorneys have long excluded Social Security funds from the Chapter 13 Statement of Monthly Disposable Income prior to this decision.

The Trustee’s next objection was regarding the payment to secured creditors for what he considered to be “luxury” items. His objection centered around the fact that the secured payments were for luxury items and not considered to be things reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor pursuant to 11 U.S.C. §1325(A)(i). The court responded by saying that §1325 indicates that what is considered to be reasonably necessary is determined by looking at §707(b)(2). §707(b)(2) does not provide any limits on the secured debt deducted from the currently monthly income. Therefore, if Congress had wanted to limit the kind of secured payments you can make in bankruptcy it would have done so. The court concluded that since there are no such limitations on secured payments it was not considered bad faith for the Mr. and Mrs. Welsh to deduct those payments on the means test as long term secured debts.