In re: David Welsh, et al

Filing

FILED OPINION (KENNETH F. RIPPLE, STEPHEN S. TROTT and RICHARD A. PAEZ) AFFIRMED. Judge: KFR Authoring, FILED AND ENTERED JUDGMENT. [8562194]--[Edited 03/25/2013 by ASW: Opinion updated to correct the BAP panel's order. Resent notice.]

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FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

IN RE : DAVID C. WELSH AND
SHARON N. WELSH ,
Debtors,

ROBERT G. DRUMMOND , Chapter 13
Trustee,
Appellant,

No. 12-60009
BAP No.
10-1465

OPINION

v.
DAVID C. WELSH and SHARON N.
WELSH ,
Appellees.

Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Perris, Pappas, and Hollowell, Bankruptcy Judges,
Presiding
Argued and Submitted
November 8, 2012—Portland, Oregon
Filed March 25, 2013

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IN RE: WELSH
Before: Kenneth F. Ripple,* Stephen S. Trott,
and Richard A. Paez, Circuit Judges.
Opinion by Judge Ripple

SUMMARY**

Bankruptcy
The panel affirmed the judgment of the Bankruptcy
Appellate Panel, which affirmed the bankruptcy court’s
judgment confirming a Chapter 13 plan as proposed in good
faith.
The panel held that Congress’s adoption of the
Bankruptcy Abuse Prevention and Consumer Protection Act
forecloses a court’s consideration of a debtor’s Social
Security income or a debtor’s payments to secured creditors
as part of the inquiry into good faith under 11 U.S.C.
§ 1325(a).

COUNSEL
Robert G. Drummond,
Appellant/Trustee.

Great

Falls,

Montana,

for

*

The Honorable Kenneth F. Ripple, Senior Circuit Judge for the U.S.
Court of Appeals for the Seventh Circuit, sitting by designation.
**

This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.

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Edward A. Murphy, Murphy Law Offices, PLLC, Missoula,
Montana, for Appellees/Debtors.
Tara Twomey, National Consumer Bankruptcy Rights Center,
San Jose, California, for amicus curiae.

OPINION
RIPPLE, Senior Circuit Judge:
David and Sharon Welsh filed a Chapter 13 bankruptcy
petition in the United States Bankruptcy Court for the District
of Montana. The Trustee objected to the Welshes’ proposed
plan on the ground that it was not proposed in good faith.
The bankruptcy court overruled the objection, and the Trustee
appealed to the Bankruptcy Appellate Panel for the Ninth
Circuit (“BAP”). A divided panel of the BAP affirmed the
decision of the bankruptcy court. Again the Trustee
appealed, and we now affirm.
BACKGROUND
The Welshes filed a voluntary Chapter 13 petition on May
27, 2010. Their required schedules revealed the following
assets: a home in Missoula, Montana, valued at $400,000,
encumbered by a secured claim of $330,593.66; a Ford F-250
valued at $10,000, encumbered by a secured claim of
$18,959; a 2006 Subaru Outback valued at of $9,500,
encumbered by a secured claim of $12,211; a 2005 Toyota
Matrix valued at $2,200, encumbered by a secured claim of
$1,996; a 2005 Airstream trailer valued at $23,000,
encumbered by a secured claim of $39,000; and two 2007
Honda ATVs each valued at $2,700, encumbered by secured

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claims of $3,065 and $4,500. In addition to their secured
debts, the schedules revealed unsecured claims totaling
approximately $180,500, the largest of which were their
daughter’s student loan debt in the amount of $60,000 and a
joint debt owed to Bank of America on a line of credit in the
amount of $50,000.
Mrs. Welsh is employed as a nurse and reported on
Schedule I a monthly income of $6,975.40. She also draws
a pension of $1,100 per month. Mr. Welsh is retired, but
listed a monthly income of $358.03 from wages, salary and
commissions, as well as Social Security income in the amount
of $1,165.
Because their income exceeds the median for the state of
Montana, the debtors calculated their disposable income
according to the “means test.” On Form 22C,1 they listed
their current monthly income as $8,116.31; their current
monthly income did not include Mr. Welsh’s Social Security
income of $1,165 because Social Security income is excluded
from the current monthly income calculation.2 After
deducting future payments on secured claims, the debtors
were left with a disposable income of $218.12 per month.3
The Welshes proposed a plan that provided for payments
of $125 per month to unsecured creditors for the first thirty
1

See ER 116 (“CHAPTER 13 STATEMENT OF CURRENT
MONTHLY INCOM E AND CALCULATION OF COMMITM ENT
PERIOD AND DISPOSABLE INCOME”).
2

See id. at 117 (“Income from all other sources. . . . Do not include
any benefits received under the Social Security Act . . . .”).
3

See id. at 122.

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months of the plan. After their vehicle loans were paid, the
payments would increase to $500 per month for the last thirty
months of the plan. The proposed plan would pay off
approximately $14,7004 of the debtors’ $180,500 unsecured
debt.
The Trustee objected on the ground that the debtors had
not proposed their plan in good faith, a requirement for
confirming the plan under 11 U.S.C. § 1325(a)(3), because of
the “minuscule” payments to unsecured claims while they
were living in a $400,000 home, making payments on various
luxury and unnecessary items and failing to commit one
hundred percent of their disposable income to the plan.5
In its decision, the bankruptcy court noted that it “reviews
the totality of the circumstances to determine whether a plan
has been proposed in good faith.”6 The bankruptcy court
observed that, in Leavitt v. Soto (In re Leavitt), 171 F.3d 1219
(9th Cir. 1999), we had looked to four factors to determine
whether a plan had been proposed in good faith: “(1) whether
debtors misrepresented facts in their plan or unfairly
manipulated the [Bankruptcy] Code, (2) the debtors’ history
of filings and dismissals, (3) whether the debtors intended to
defeat state court litigation, and (4) whether egregious
behavior is present.”7 The bankruptcy court observed that
4

See id. at 125.

5
See id. at 114–15. The Trustee also objected to the plan on other
grounds, but does not pursue those grounds in the present appeal.

6

7

In re Welsh, 440 B.R. 836, 847 (Bankr. D. Mont. 2010).

Id. (citing Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1224–25 (9th
Cir. 1999)).

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there was no evidence of the first three factors and that the
case before it was distinguishable from those in which it had
found egregious behavior.
Egregious behavior supporting a finding of
bad faith [in] In re Opper, 20 Mont. B.R. 123,
132 (Bankr. D. Mont. 2002), consisted of
debtors proposing $0 to unsecured creditors
while making payments to secured creditors to
retain luxury items such as a boat and
snowmobile, repaying a loan to a 401(k) plan,
and failure to list assets. Opper, 20 Mont.
B.R. at 132.
The facts shown by the record in the
instant case are not comparable to Opper.
Debtors’ Plan proposes $14,700 in payments
to unsecured creditors. Their ATV’s [sic] are
not a luxury, since at least one is required for
Sharon to plow her driveway in the winter in
order to reach her home. David is the owner
of the Toyota, on which they make payments
but let their daughter use, and the secured
creditor filed a claim in this case which has
been allowed without objection showing
David is the borrower. Their retention of the
Airstream, by itself, is not enough to find
egregious conduct.[8]
The court also believed that the Trustee’s good faith objection
“ignore[d] the fact that payments to secured claims are
authorized in the means test at 11 U.S.C. § 707(b)(2)(A)(i)
8

Id. at 848 (footnote omitted).

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and (iii).”9 Second-guessing payments to secured creditors,
the bankruptcy court continued, would run afoul of precedent
which held that “where a debtor is current on a secured
obligation that is provided for in Form 22C, the Court refrains
from determining whether the expense is reasonable.”10
The bankruptcy court also rejected the Trustee’s argument
that the plan was not proposed in good faith because it failed
to utilize any of Mr. Welsh’s Social Security income. The
bankruptcy court observed that 42 U.S.C. § 407(a) protects
Social Security income from “the operation of any
bankruptcy or insolvency law”; according to the bankruptcy
court, considering Social Security income in the good faith
analysis would water down this protection. Moreover, the
fact that Social Security income was excluded from the
definition of current monthly income under the means test
reinforced this conclusion. Therefore, the Welshes “ha[d]
satisfied their burden of proof to show that they proposed
their Plan in good faith.”11
A divided panel of the BAP affirmed the bankruptcy
court’s judgment. The BAP framed the issue accordingly:
The issue is whether, in determining
whether a debtor has filed a chapter 13 plan in
good faith, the court may take into
consideration the debtors’ failure to include
income for plan payments that the Code

9

Id.

10

Id.

11

Id. at 850.

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specifically excludes from current monthly
income, and the debtors’ deduction of
expenses that are expressly allowed by the
Code in calculating disposable income. In
other words, if the debtor has properly
calculated projected disposable income and so
meets the minimum payment amount under
§ 1325(b)(1)(B), can items used in that
calculation be the basis for a finding that the
plan was not proposed in good faith.[12]

In answering this question, the BAP noted that “[t]he
Bankruptcy Code does not define ‘good faith.’”13 The BAP
further observed, however, that, in Goeb v. Heid (In re Goeb),
675 F.2d 1386 (9th Cir. 1982), we had determined that “[t]he
‘good faith’ inquiry” was dependent on “whether the debtors
[had] ‘acted equitably in proposing their Chapter 13 plan,’”
which, in turn, depended on “‘whether the debtor has
misrepresented facts in his plan, unfairly manipulated the
Bankruptcy Code, or otherwise proposed his Chapter 13 plan
in an inequitable manner.’”14 Although “‘the substantiality of
the proposed repayment’” was one consideration, “ultimately
the good faith determination must take into account ‘all
militating factors.’”15

12

Drummond v. Welsh (In re Welsh), 465 B.R. 843, 852 (B.A.P. 9th Cir.
2012).
13

Id.

14

Id. at 852–53 (quoting Goeb v. Heid (In re Goeb), 675 F.2d 1386,
1390 (9th Cir. 1982)).
15

Id. at 853 (quoting In re Goeb, 675 F.2d at 1390).

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The BAP noted that amendments to the Bankruptcy Code
in 1984 and 2005 had not changed the requirement that a plan
be proposed in good faith. Nevertheless, Congress had
enacted specific substantive requirements for plan
confirmation that addressed considerations which previously
had been encompassed by the good faith inquiry. Therefore,
in the BAP’s view, courts no longer needed to consider
whether particular types of income were available to pay
creditors and whether proposed payments to creditors were
sufficient because Congress explicitly had defined
“disposable income”16 and required that disposable income be
used for the satisfaction of creditors. Therefore, according to
the BAP:
[T]aking advantage of a provision of the
Code, such as calculating disposable income
under the test explicitly set out in the Code, is
not an indication of lack of good faith. Thus,
we reject those cases that allow a court to take
into consideration an above-median-income
debtor’s exclusion of income or deduction of
expenses that are allowed by the means test
formula in determining whether a debtor has
proposed the plan in good faith.
Section 1325(a)(3) still plays a role, and
the court must take into consideration the
totality of the circumstances, based on the
factors the Ninth Circuit has articulated for
determining good faith. If, in proposing a
plan, the debtor has misrepresented facts,
unfairly manipulated the Code, or engaged in
16

See 11 U.S.C. § 1325(b)(2).

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egregious behavior, a court may find that the
plan was not proposed in good faith. That
finding may not, however, be based on the
mere fact that the debtor has excluded income
or deducted expenses that the Code allows.[17]

The BAP then observed that “[t]he same analysis applie[d] to
consideration of a debtor’s exclusion of Social Security
income in calculating disposable income.”18 The BAP
observed that, not only is Social Security income
“specifically excluded from the disposable income
calculation for chapter 13 debtors,”19 but 42 U.S.C. § 407 also
contains an explicit prohibition that Social Security income
not be “subject to . . . the operation of any bankruptcy or
insolvency law.” The BAP concluded that the debtors’
exclusion of Social Security income from the disposable
income calculation, therefore, is not, “by itself, probative of
a lack of good faith,” and it
reject[ed] the reasoning of the cases that say
that, because Social Security payments are
intended to provide for a recipient’s basic
needs, a debtor must use the benefit payments
to provide for those basic needs, thereby
freeing up other, non-exempt income, for plan
payments. E.g., In re Hall, 442 B.R. 754
(Bankr. D. Idaho 2010). This approach
simply does by indirection what the Code says

17

In re Welsh, 465 B.R. at 854–55 (footnote omitted).

18

Id. at 855.

19

Id.

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cannot be done, which is to include Social
Security benefit payments in a debtor’s
disposable income calculation.[20]
The BAP therefore affirmed the bankruptcy court’s order
confirming the Welshes’ plan.
Judge Pappas dissented. He believed that “the bankruptcy
court did not engage in the sort of unfettered ‘totality of the
circumstances’ review mandated by In re Goeb. Instead, the
bankruptcy court applied a ‘not-quite totality of the
circumstances’ test, and decided it should not consider two
highly relevant factors about Debtors’ plan. That was
error.”21 Judge Pappas first opined that it was not violative of
the Social Security prohibition to consider those payments in
the good faith analysis. He observed that
the fact that a debtor receives Social Security
income is considered all the time, for many
different purposes, in chapter 13 cases. For
example, a debtor’s monthly Social Security
payments can provide the basis for a
bankruptcy court to find that a debtor has
“regular income” to be eligible for chapter 13
relief in the first place.[22]
Moreover, “[w]hile a debtor’s projected disposable income as
calculated under § 1325(b)(2) sets a floor for chapter 13 plan

20

Id. at 856.

21

Id. at 859 (Pappas, J., dissenting).

22

Id.

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payments, these calculations do not constitute a safe harbor,
nor dictate whether a debtor could comfortably be paying
more to creditors in a particular case.”23 Judge Pappas
therefore concluded:
Like the many other bankruptcy courts
that have done so, this Panel should hold that
Social Security income is a relevant factor for
the bankruptcy court to consider in evaluating
a debtor’s good faith under a [sic]
§ 1325(a)(3). If Congress wanted bankruptcy
courts to exclude consideration of Social
Security benefits under § 1325(a)(3), it could
have easily done so expressly, as it did in
§ 101(10A). It did not, and we should not
strain to imply that restriction in reading
other, inapplicable statutes. In this case, when
the bankruptcy court held that it was
constrained from considering Debtor’s Social
Security payments, it erred.[24]
Judge Pappas also took issue with the bankruptcy court’s
conclusion that it could not consider payments made to
secured creditors in the good faith calculus. According to
Judge Pappas, “that current payments to secured creditors are
deducted in a § 707(b)(2)/§ 1325(b) means test analysis is not
reason enough for the bankruptcy court to decline to exercise
its conscience in deciding whether, in proposing large plan
payments on unnecessary secured debts, the plan treats

23

Id. at 860.

24

Id.

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Debtors’ other creditors equitably.”25
Judge Pappas,

13
“Here,” explained

Debtors should reasonably be expected to
propose a chapter 13 plan that retains, and
pays the debts secured by, their home and
necessary vehicles. But there is nothing in the
record to demonstrate that Debtors needed, or
that they should pay the debts for, a car their
nonresident, physician-daughter drives, two
four-wheeler ATVs, or an Airstream travel
trailer.[26]
Judge Pappas concluded:
While it may be an amorphous, somewhat
subjective standard, at bottom, § 1325(a)(3) is
designed to prevent confirmation of
inequitable plans. A bankruptcy court simply
cannot decide if a plan is proposed in good
faith if it declines to consider either that a
debtor receives Social Security income, or the
nature, amount and reasonableness of the
debtor’s proposed payments to secured
creditors through a plan. Because the
bankruptcy court refused to consider such
highly relevant facts as part of the totality of
the circumstances in Debtors’ case, it applied
an incorrect legal analysis in examining
Debtors’ good faith, and abused its discretion

25

Id. at 860–61.

26

Id. at 861 (footnotes omitted).

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in confirming Debtors’ plan. The principles
of fairness embodied in § 1325(a)(3) require
that we vacate the order confirming the plan
and remand to the bankruptcy court to
perform a proper good faith analysis of
Debtors’ plan.[27]
DISCUSSION

In this appeal, the Trustee renews the arguments made to
the bankruptcy court and to the BAP. Specifically, he
maintains that, in determining whether the Welshes proposed
their Chapter 13 plan in good faith, the bankruptcy court
should have considered the amount that the Welshes were
paying to secured creditors for luxury items and also should
have considered Mr. Welsh’s Social Security income.28
27

Id. at 862–63.

28

In this court, the Trustee does not argue— nor could he, see infra pp.
23–25— that, in calculating disposable income under § 1325(b), the
W elshes either should have included Social Security income among their
available income or should not have deducted their payments to secured
creditors. T he issue is limited to whether these items, while properly
accounted for in the calculation of disposable income, nevertheless may
be considered as evidence that the plan was not proposed in good faith
under 11 U.S.C. § 1325(a)(3).
There has been a disagreement among the bankruptcy courts in this
circuit regarding whether, in light of Congress’s recent amendments, the
good faith inquiry should continue to include consideration of either a
debtor’s Social Security income or a debtor’s use of funds to pay secured
debts. Compare In re Welsh, 440 B.R. at 849–50 (holding that neither the
debtors’ failure to use their Social Security income for the benefit of
creditors nor their payments to secured creditors explicitly allowed by
11 U.S.C. § 707(b)(2)(A)(i) evidenced a lack of good faith), with In re
Enabnit, — B.R.— , 2013 W L 309909, at *4–5 (Bankr. N.D. Cal. Jan. 17,

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Whether the BAP applied the correct legal standard in
determining good faith is a question of law that we review de
novo.29
A. The History of the Good Faith Requirement
We begin our consideration of the good faith requirement
with the statutory language and the interpretation of that
language over the years. The good faith requirement of
§ 1325, which has been a part of the Bankruptcy Code since
its enactment in 1978, provides:
§ 1325. Confirmation of plan
(a) Except as provided in subsection (b),
the court shall confirm a plan if-(1) the plan complies with the
provisions of this chapter and with the
other applicable provisions of this title;
(2) any fee, charge, or amount
required under chapter 123 of title 28, or
by the plan, to be paid before
confirmation, has been paid;

2013) (disagreeing with In re Welsh that the nature of secured debts may
not be considered in assessing good faith under § 1325(a)(3)).
29

See In re Love, 957 F.2d 1350, 1354 (7th Cir. 1992) (“The lower
courts’ conclusions with regard to the legal standard applicable to good
faith determinations are questions of law reviewed under the de novo
standard.”); Anderson v. Cranmer (In re Cranmer), 697 F.3d 1314, 1316
(10th Cir. 2012) (“W hether a court may consider [Social Security income]
in the good faith analysis is also a question of law reviewed de novo.”).

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(3) the plan has been proposed in
good faith and not by any means
forbidden by law;
(4) the value, as of the effective date
of the plan, of property to be distributed
under the plan on account of each allowed
unsecured claim is not less than the
amount that would be paid on such claim
if the estate of the debtor were liquidated
under chapter 7 of this title on such
date; . . . .

11 U.S.C. § 1325(a) (2006) (emphasis added). Shortly after
its enactment, we considered the meaning of the “good faith”
requirement in In re Goeb, 675 F.2d 1386. In that case, the
debtors had proposed a plan that provided payments to
unsecured creditors at a rate of one cent on the dollar. The
bankruptcy court found that the debtors had “not intend[ed]
to substantially repay their unsecured debts,” and, therefore,
the plan was not proposed in good faith.30 On appeal, we
observed that Congress had not defined “‘good faith,’” and,
“[a]bsent some compelling reason” for doing so, we were
hesitant to infer an inflexible, blanket rule that required
substantial repayment to unsecured creditors in all cases.31
Congress, we noted, had set forth a minimum repayment

30

In re Goeb, 675 F.2d at 1387.

31

Id. at 1388.

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level,32 and “[t]he presence of an explicit statutory standard
. . . strongly suggests that Congress did not intend to
substitute a more rigorous standard when it imposed a general
good-faith requirement.”33 Moreover, Congress was aware
that courts had come to different conclusions on the question
whether substantial repayment was required. We therefore
decline[d] to impose a substantial-repayment
requirement because (1) it is contrary to the
language of the statute, (2) whether it would
best further the purposes of the Bankruptcy
Code is uncertain, and (3) Congress is aware
of the perceived deficiency in § 1325(a).
Rather than set a rigid standard under the
guise of interpreting “good faith,” we
deem[ed] it advisable to apply the law as
written and wait for Congress to create, if it
chooses, further conditions for the
confirmation of Chapter 13 plans.[34]
We then focused on the task of defining good faith. In
doing so, we were “impeded not only by it[s] being an
ambiguous term that resists precise definition in any case, but
also by the lack of authoritative guidance on its meaning in

32

As it does now, 11 U.S.C. § 1325(a)(4) “require[d] that the amount to
be paid on each unsecured claim cannot be ‘less than the amount that
would be paid on such claim if the estate of the debtor were liquidated
under Chapter 7.’” In re Goeb, 675 F.2d at 1388.
33

In re Goeb, 675 F.2d at 1388.

34

Id. at 1389.

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§ 1325(a)(3).”35 We “f[ou]nd instructive” the Supreme
Court’s discussion of good faith in American United Mutual
Life Insurance Co. v. City of Avon Park, 311 U.S. 138 (1940),
in which the Court had “focused on ‘[e]quity and good
conscience’ in finding that the acceptance [of a bankruptcy
plan] had not been made in good faith.”36 Following that
lead, we concluded that “the proper inquiry is whether the
Goebs acted equitably in proposing their Chapter 13 plan”
and that this inquiry should focus on “whether the debtor
ha[d] misrepresented facts in his plan, unfairly manipulated
the Bankruptcy Code, or otherwise proposed his Chapter 13
plan in an inequitable manner.”37 We added that, “[t]hough
it may consider the substantiality of the proposed repayment,
the court must make its good-faith determination in the light
of all militating factors.”38 This inquiry was “quite broad,”39
and, consequently, we did not “attempt . . . to compile a
complete list of relevant considerations”; instead, we
instructed that “bankruptcy courts should determine a
debtor’s good faith on a case-by-case basis, taking into
account the particular features of each Chapter 13 plan.”40
In 1984, Congress amended Chapter 13 to address
perceived abuses in the bankruptcy process. Most pertinent

35

Id. at 1389–90.

36

Id. at 1390 (second alteration in original).

37

Id.

38

Id. (emphasis added).

39

Id. n.9.

40

Id. at 1390.

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to the issues currently before us was the concern that, as in In
re Goeb, debtors were proposing plans that provided for
minimal repayment of unsecured creditors, while the debtors
maintained excess income that could have been devoted to
those debts.41 The 1984 amendments, therefore, added a
projected disposable income requirement: An objection by
the trustee or an unsecured creditor triggered a requirement
that the debtor devote all of his disposable income for three
years to make payments under the plan.42 Section 1325(b)
defined “disposable income” as “income which is received by
the debtor and which is not reasonably necessary to be
expended” either “for the maintenance or support of the
debtor or a dependent” or for the continuation of a going
business.43
The changes in the Bankruptcy Code did not require our
reconsideration of the “totality of the circumstances” test as

41

See, e.g., Deans v. O’Donnell (In re Deans), 692 F.2d 968, 972 (4th
Cir. 1982) (“[R]epayment to unsecured creditors, although not a
requirement for confirmation of every Chapter 13 plan, was one intended
purpose of Chapter 13’s enactment. Failure to provide substantial
repayment is certainly evidence that a debtor is attempting to manipulate
the statute rather than attempting honestly to repay his debts.”).
42

See 11 U.S.C. § 1325(b) (1988) (“(1) If the trustee or the holder of an
allowed unsecured claim objects to the confirmation of the plan, then the
court may not approve the plan unless, as of the effective date of the
plan— . . . (B) the plan provides that all of the debtor’s projected
disposable income to be received in the three-year period beginning on the
date that the first payment is due under the plan will be applied to make
payments under the plan.”).
43

See id. § 1325(b)(2) (1988).

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a measure of good faith,44 and we continued to employ that
formulation.45 Nevertheless, they did raise questions about
the breadth of the “good faith” inquiry. The 1984

44

See In re Smith, 848 F.2d 813, 819 (7th Cir. 1988) (noting that, in
enacting the 1984 amendments, “Congress demonstrated no specific intent
to change the prevailing ‘totality of the circumstances’ test”).
45

See, e.g., In re Leavitt, 171 F.3d at 1224. In re Leavitt concerned “the
appropriate standard of bad faith as ‘cause’ to dismiss a Chapter 13
bankruptcy petition with prejudice.” Id. at 1220 (footnote omitted). W e
held that “[b]ad faith, as cause for the dismissal of a Chapter 13 petition
with prejudice, involves the application of the ‘totality of the
circumstances’ test.” Id. at 1224. In determining whether a petition was
filed in bad faith, we instructed that the following factors should be
considered:
(1) whether the debtor “misrepresented facts in his
[petition or] plan, unfairly manipulated the Bankruptcy
Code, or otherwise [filed] his Chapter 13 [petition or]
plan in an inequitable manner,” [Eisen v. Curry (In re
Eisen), 14 F.3d 469, 470 (9th Cir. 1994) (per curiam)]
(citing In re Goeb, 675 F.2d 1386, 1391 (9th Cir.
1982));
(2) “the debtor’s history of filings and dismissals,” id.
(citing In re Nash, 765 F.2d 1410, 1415 (9th Cir.
1985));
(3) whether “the debtor only intended to defeat state
court litigation,” id. (citing In re Chinichian, 784 F.2d
1440, 1445-46 (9th Cir. 1986)); and
(4) whether egregious behavior is present, [In re]
Tomlin, 105 F.3d [933,] 937 [(4th Cir. 1997)]; In re
Bradley, 38 B.R. 425, 432 (Bankr. C.D. Cal. 1984).
In re Leavitt, 171 F.3d at 1224 (first, second and third alterations in
original).

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21

amendments included statutory language that directly
addressed matters, such as how much a debtor had to pay
under a plan, that previously had been subsumed in the “good
faith” inquiry. Once Congress explicitly addressed those
issues, a number of courts and commentators concluded that
there was no need to consider them as part of the inquiry into
good faith.46
In 2005, Congress again revised Chapter 13 when it
enacted the Bankruptcy Abuse Prevention and Consumer
Protection Act (“BAPCPA”). The good faith requirement
under § 1325(a) remained the same, but there were significant
changes with respect to the calculation of disposable income.
Before the BAPCPA, bankruptcy judges had authority to
determine a debtor’s ability to pay based on the individual
circumstances of each case and each debtor.47 Congress
46

See, e.g., In re Smith, 848 F.2d at 820 (observing that the totality of
the circumstances test “has been narrowed only by the few specific
provisions of [the amendments] which now cover situations which
previously fell within the [totality of the circumstances] analysis”); Educ.
Assistance Corp. v. Zellner, 827 F.2d 1222, 1227 (8th Cir. 1987)
(observing that the 1984 addition of “‘ability to pay’ criteria subsumes
most of the [totality of the circumstances] factors and allows the court to
confirm a plan in which the debtor uses all of his disposable income for
three years to make payments to his creditors” and that, therefore, the
“inquiry into whether the plan ‘constitutes an abuse of the provisions,
purpose or spirit of Chapter 13,’ has a more narrow focus” (citation
omitted)); 8 Collier on Bankruptcy ¶ 1325.04[1] (Alan N. Resnick &
Henry J. Sommer eds., 16th ed. 2010) (“Because Congress dealt with the
issue quite specifically in the ability-to-pay provisions, there is no longer
any reason for the amount of a debtor’s payments to be considered as even
a part of the good faith standard.” (footnote omitted)).
47

See, e.g., In re Awuku, 248 B.R. 21, 29 (Bankr. E.D.N.Y. 2000) (“In
determining what is a reasonably necessary expense, Congress could have
not been clearer in stating its unmistakable intention that the bankruptcy

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replaced this discretion with a detailed, mechanical means
test,48 which requires debtors with above-median income to
calculate their “disposable income” by subtracting specific
expenses from “current monthly income,” as defined by the
Bankruptcy Code.49 For our purposes, several elements of
this calculation are important. The debtor begins with his
“current monthly income,” which, by definition, explicitly
“excludes benefits received under the Social Security Act.”50
The debtor then subtracts living expenses51 based on the
Internal Revenue Service’s “Collection Financial Standards,”
a detailed series of averages for living expenses that the
Service uses to calculate necessary expenditures for
delinquent taxpayers.52 The debtor also subtracts his
averaged payments to secured creditors due during the
following sixty months.53

judges have authority to exercise their sound discretion in applying a very
broad and open-ended standard.”).
48

Coop v. Frederickson (In re Frederickson), 545 F.3d 652, 658 (8th
Cir. 2008) (“In enacting BAPCPA, Congress reduced the amount of
discretion that bankruptcy courts previously had over the calculation of an
above-median debtor’s income and expenses.”).
49

See 11 U.S.C. § 1325(b)(2)–(3) (2006).

50

11 U.S.C. § 101(10A)(B) (2006).

51

Id. § 707(b)(2)(A)(ii).

52

See Charles J. Tabb & Jillian K. McClelland, Living with the Means
Test, 31 S. Ill. U. L.J. 463, 477–78 (2007).
53

11 U.S.C. § 707(b)(2)(A)(iii)(I) (2006).

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As is the case here, the manner in which the means test
calculates “disposable income” may underestimate the
amount of actual funds that a taxpayer has available to pay
unsecured creditors. A debtor who receives Social Security
income or support payments for dependent children does not
have to account for that income when calculating “disposable
income” according to the means test. Moreover, on the
expense side, the means test allows for the deduction of
secured debts without regard for the nature of the collateral.
The result may be that, consistent with the means test, the
debtors could make secured payments on luxury or comfort
items, such as ATVs and motor homes, with the result that
little “disposable income,” as that figure is calculated,
remains to pay unsecured creditors.
The disparity between a debtor’s actual disposable funds
and “disposable income,” as defined in Chapter 13, as well as
the apparent priority given to secured creditors has “renewed
the debate over ability to pay as a good faith factor.”54 As in
the present case, trustees and unsecured creditors have
challenged debtors’ proposed plans as lacking good faith
when the debtor retains Social Security income or proposes
to continue making payments on expensive homes, cars or
other items, to the detriment of unsecured creditors. We turn
first to the issue of Social Security income.
B. Consideration of Social Security Income in the Good
Faith Analysis
The Trustee maintains that the good faith inquiry requires
us to consider whether an above-median-income debtor is
54

H on. W . Homer Drake, Hon. Paul W . Bonapfel & Adam M .
Goodman, Chapter 13 Practice & Procedure § 9B:33, at 802 (2012).

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using all his available income for the payment of his
creditors, regardless whether that income is part of the
“disposable income” calculation. Here, the Trustee maintains
that the Welshes’ failure to devote Mr. Welsh’s Social
Security income to the payment of unsecured creditors shows
a lack of good faith. We cannot reconcile this concept of
good faith with the statutory language.
As we have set forth in some detail, in enacting the
BAPCPA, Congress made a conscious effort to cabin the
discretion of bankruptcy judges in assessing disposable
income.55 Congress replaced a case-by-case analysis of
disposable income with a rigid, mechanical means test. The
calculation of “disposable income” now incorporates the
definition of “current monthly income,” and the definition of
“current monthly income” excludes Social Security income.
Because “[p]rior to BAPCPA, courts typically included
Social Security benefits in the calculation of disposable
income,” Baud v. Carroll, 634 F.3d 327, 347 (6th Cir. 2011)
(collecting cases), cert. denied, 132 S. Ct. 997 (2012), we
agree with the Sixth Circuit that this new approach to
disposable income is a “‘clear indication that Congress
intended . . . a departure’ from any such pre-BAPCPA
practice,” id. (alteration in original) (quoting Hamilton v.
Lanning, 130 S. Ct. 2464, 2473 (2010)).
Here, the Trustee does not contend, of course, that the
calculation of disposable income should have incorporated
Social Security income; the statutory language is clearly to
the contrary. Instead, he concedes that disposable income
was calculated correctly under the BAPCPA, but nevertheless
maintains that the Welshes’ failure to dedicate Mr. Welsh’s
55

See supra notes 47–53, and accompanying text.

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Social Security income to the payment of unsecured creditors
requires a conclusion that the plan was not proposed in good
faith, as required by § 1325(a)(3). We cannot conclude,
however, that a plan prepared completely in accordance with
the very detailed calculations that Congress set forth is not
proposed in good faith. To hold otherwise would be to allow
the bankruptcy court to substitute its judgment of how much
and what kind of income should be dedicated to the payment
of unsecured creditors for the judgment of Congress. Such an
approach would not only flout the express language of
Congress, but also one of Congress’s purposes in enacting the
BAPCPA, namely to “reduce[] the amount of discretion that
bankruptcy courts previously had over the calculation of an
above-median debtor’s income and expenses.” Coop v.
Frederickson (In re Frederickson), 545 F.3d 652, 658 (8th
Cir. 2008).
We previously have eschewed establishing “rigid”
repayment requirements “under the guise of interpreting
‘good faith,’” on the recognition that Congress could enact,
“if it chooses, further conditions for the confirmation of
Chapter 13 plans.” In re Goeb, 675 F.2d at 1389. Just as we
cannot add to what Congress has enacted “under the guise of
interpreting ‘good faith,’” so too we cannot ignore the explicit
repayment requirements that Congress has chosen to enact.
When Congress speaks directly to one of the good faith
factors, the judicial good faith inquiry is narrowed
accordingly. See, e.g., Educ. Assistance Corp. v. Zellner,
827 F.2d 1222, 1227 (8th Cir. 1987) (noting that § 1325(b)’s
“‘ability to pay’ criteria subsume[d] most” of the factors
under the totality of the circumstances test). Congress has
spoken directly, and it explicitly excluded Social Security

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income from the calculation of disposable income. We thus
join every court of appeals that has decided the issue in
concluding that, “[w]hen a Chapter 13 debtor calculates his
repayment plan payments exactly as the Bankruptcy Code
and the Social Security Act allow him to, and thereby
excludes [Social Security income], that exclusion cannot
constitute a lack of good faith.” Anderson v. Cranmer (In re
Cranmer), 697 F.3d 1314, 1319 (10th Cir. 2012); see also
Beaulieu v. Ragos (In re Ragos), 700 F.3d 220, 227 (5th Cir.
2012) (“Having already concluded that Debtors’ plan fully
complied with the Bankruptcy Code, it is apparent that
Debtors are not in bad faith merely for doing what the Code
permits them to do.”); cf. Fink v. Thompson (In re
Thompson), 439 B.R. 140, 144 (B.A.P. 8th Cir. 2010)
(“Standing alone, the Debtors’ retention of Social Security
income is insufficient to warrant a finding of bad faith under
§ 1325(a)(3).” (internal quotation marks omitted)).56
56

The W elshes argue in the alternative that, even if Congress’s adoption
of the means test did not preclude courts from considering debtors’
retention of Social Security income in assessing good faith, such
consideration nevertheless would be prohibited by 42 U.S.C. § 407; that
section provides in relevant part:
(a) In general
The right of any person to any future payment
under this subchapter shall not be transferable or
assignable, at law or in equity, and none of the moneys
paid or payable or rights existing under this subchapter
shall be subject . . . to the operation of any bankruptcy
or insolvency law.
(b) Amendment of section
No other provision of law, enacted before, on, or
after April 20, 1983, may be construed to limit,

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The Trustee maintains, however, that the good faith
requirement, located in § 1325(a), should not be read in light
of the disposable income calculation, located in § 1325(b).
The Trustee explains that the Bankruptcy Code “‘initially’
mandates ‘good faith.’ Once past this threshold,” the Trustee
reasons, “the debtor may proceed to confirmation unless a
creditor objects.”57 The Trustee urges us to “determine that
the good faith test and the disposable income test serve two
different purposes,” and, therefore, “they must be read
separately.”58
We agree with the Trustee’s contentions, but disagree that
it leads to the conclusion that the good faith inquiry can
encompass considerations of what income, and how much
income, a debtor is devoting to the proposed plan. As we set
forth in In re Leavitt, 171 F.3d at 1224, our good faith
analysis includes whether: (1) the debtor has misrepresented
the facts, manipulated the Bankruptcy Code or filed in an
inequitable manner; (2) the debtor’s history of bankruptcy
filings; (3) the debtor intended to frustrate collection of a
state-court judgment; and (4) “egregious behavior is present.”

supersede, or otherwise modify the provisions of this
section except to the extent that it does so by express
reference to this section.
42 U.S.C. § 407(a)–(b) (2006) (emphasis added). Because we conclude
that Congress’s adoption of the means test precludes us from considering,
as part of our good faith inquiry, a debtor’s retention of Social Security
income, we have no occasion to decide whether such consideration would
violate § 407’s prohibition.
57

Appellant’s Br. 7.

58

Id. at 8.

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In sum, the inquiry focuses on the debtor’s motivation and
forthrightness with the court in seeking relief. The disposable
income requirement, in contrast, focuses on the amount of
funds that Congress expects a debtor to devote to paying off
unsecured creditors. These two inquiries are, indeed, separate
and distinct.
Therefore, consideration of disposable
income—now defined in great detail by Congress—has no
role in the good faith analysis.
The Trustee further submits that the approach that we
adopt today frustrates the policy undergirding the BAPCPA:
“to help ensure that debtors who can pay creditors do pay
them.” Ransom v. FIA Card Servs., N.A., 131 S. Ct. 716, 721
(2011). The mechanism by which Congress chose to
effectuate this policy, however, is the means test. See id.
(describing the means test as being at “the heart of
BAPCPA’s consumer bankruptcy reforms” (brackets omitted)
(internal quotation marks omitted)). Moreover, as we have
observed in another context,
[l]egislation often results from a delicate
compromise among competing interests and
concerns. If we were to “fully effectuate”
what we take to be the underlying policy of
the legislation, without careful attention to the
qualifying words in the statute, then we would
be overturning the nuanced compromise in the
legislation, and substituting our own cruder,
less responsive mandate for the law that was
actually passed.

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Weyer v. Twentieth Century Fox Film Corp., 198 F.3d 1104,
1113 (9th Cir. 2000). We therefore decline to give greater
weight to one of the purposes of the BAPCPA by ignoring the
explicit language that Congress enacted.
C. Consideration of Payments to Secured Creditors in
the Good Faith Analysis
The Trustee also maintains that, in determining whether
the Welshes proposed their plan in good faith, the bankruptcy
court should have considered the Welshes’ payments to
secured creditors with respect to “luxury” items.
Specifically, the Trustee believes that a plan that allows the
Welshes to continue to make payments on loans secured by
these items, while paying relatively little to unsecured
creditors, is not one proposed in good faith. Again, we
conclude that the Trustee’s argument is foreclosed by the
disposable income calculation mandated by the BAPCPA.
Section 1325 states that disposable income is current
monthly income “less amounts reasonably necessary to be
expended— . . . for the maintenance or support of the debtor
or a dependent of a debtor.” 11 U.S.C. § 1325(b)(2) (2006).59

59

11 U.S.C. § 1325(b) further provides in relevant part:
(b)(1) If the trustee or the holder of an allowed
unsecured claim objects to the confirmation of the plan,
then the court may not approve the plan unless, as of
the effective date of the plan-...
(B) the plan provides that all of the debtor’s
projected disposable income to be received in the

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applicable commitment period beginning on the
date that the first payment is due under the plan
will be applied to make payments to unsecured
creditors under the plan.
(2) For purposes of this subsection, the term
“disposable income” means current monthly income
received by the debtor (other than child support
payments, foster care payments, or disability payments
for a dependent child made in accordance with
applicable nonbankruptcy law to the extent reasonably
necessary to be expended for such child) less amounts
reasonably necessary to be expended-(A)(i) for the maintenance or support of the
debtor or a dependent of the debtor, or for a
domestic support obligation, that first becomes
payable after the date the petition is filed; and
(ii) for charitable contributions (that meet
the definition of “charitable contribution”
under section 548(d)(3)) to a qualified
religious or charitable entity or organization
(as defined in section 548(d)(4)) in an amount
not to exceed 15 percent of gross income of
the debtor for the year in which the
contributions are made; and
(B) if the debtor is engaged in business, for the
payment of expenditures necessary for the
continuation, preservation, and operation of such
business.
(3) Amounts reasonably necessary to be expended
under paragraph (2), other than subparagraph (A)(ii) of
paragraph (2), shall be determined in accordance with
subparagraphs (A) and (B) of section 707(b)(2), if the
debtor has current monthly income, when multiplied by
12, greater than--

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Section 1325 further provides that “[a]mounts reasonably
necessary to be expended under paragraph (2) . . . shall be
determined in accordance with subparagraphs (A) and (B) of
section 707(b)(2).” 11 U.S.C. § 1325(b)(3) (emphasis
added). For its part, section 707(b)(2) provides that current
monthly income shall be reduced by “[t]he debtor’s average
monthly payments on account of secured debts,” 11 U.S.C.
§ 707(b)(2)(A)(iii); that section, however, does not include
any qualification or limitation on the kind of secured debt that
is deducted from current monthly income.60 As we

(A) in the case of a debtor in a household of 1
person, the median family income of the applicable
State for 1 earner;
(B) in the case of a debtor in a household of 2,
3, or 4 individuals, the highest median family
income of the applicable State for a family of the
same number or fewer individuals; or
(C) in the case of a debtor in a household
exceeding 4 individuals, the highest median family
income of the applicable State for a family of 4 or
fewer individuals, plus $625 per month for each
individual in excess of 4.
11 U.S.C. § 1325(b)(1)–(3) (2006 & Supp. V 2012).
60

11 U.S.C. § 707(b)(2)(A)(iii) (2006 & Supp. V 2012) provides:
(iii) The debtor’s average monthly payments on
account of secured debts shall be calculated as the sum
of-(I) the total of all amounts scheduled as
contractually due to secured creditors in each
month of the 60 months following the date of the
filing of the petition; and

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recognized in Maney v. Kagenveama (In re Kagenveama),
541 F.3d 868, 873 n.2 (9th Cir. 2008), overruled on other
grounds by Hamilton v. Lanning, 130 S. Ct. 2464, 2475
(2010), prior to the BAPCPA,
[d]etermining what was “reasonably
necessary” for the maintenance or support of
the debtor was dependent on each debtor’s
individual facts and circumstances. This
amorphous standard produced determinations
of a debtor’s “disposable income” that varied
widely among debtors in similar
circumstances. BAPCPA replaced the old
definition of what was “reasonably necessary”
with a formulaic approach for above-median
debtors. 11 U.S.C. § 1325(b)(3).
Again, in the BAPCPA, Congress chose to remove from the
bankruptcy court’s discretion the determination of what is or
is not “reasonably necessary.”61 It substituted a calculation

(II) any additional payments to secured
creditors necessary for the debtor, in filing a plan
under chapter 13 of this title, to maintain
possession of the debtor’s primary residence,
motor vehicle, or other property necessary for the
support of the debtor and the debtor’s dependents,
that serves as collateral for secured debts;
divided by 60.
61
See Baud v. Carroll, 634 F.3d 327, 348 (6th Cir. 2011) (observing
that, “[p]rior to BAPCPA, bankruptcy courts had the discretion to
determine whether debtors’ mortgage expenses were reasonably
necessary” and “that § 1325(b)(3) provides a clear indication that
Congress intended a departure from such pre-BAPCPA practice”).

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that allows debtors to deduct payments on secured debts in
determining disposable income. That policy choice may
seem unpalatable either to some judges or to unsecured
creditors. Nevertheless, that is the explicit choice that
Congress has made. We are not at liberty to overrule that
choice.
The Trustee maintains, however, that “Congress did not
adopt a policy to prefer secured creditors over unsecured
creditors.”62 He points to the Supreme Court’s statement in
Ransom, 131 S. Ct. at 730, that “Congress did not express a
preference for one use of these funds over the other,” in
support of his contention. Read in context, Ransom does not
support the Trustee’s position. Ransom addressed the issue
whether a debtor “who owns his car outright, and so does not
make loan or lease payments, may claim an allowance for
car-ownership costs” under the means test.63 The Court
determined that the debtor could not. In doing so, it rejected
the debtor’s argument that “denying the ownership allowance
to debtors in his position sends entirely the wrong message,
namely, that it is advantageous to be deeply in debt on motor
vehicle loans, rather than to pay them off.”64 The Court
reasoned:
[T]he choice here is not between thrifty savers
and profligate borrowers, as Ransom would
have it. Money is fungible: The $14,000 that
Ransom spent to purchase his Camry outright

62

Appellant’s Br. 14.

63

Ransom v. FIA Card Servs., N.A., 131 S. Ct. 716, 721 (2011).

64

Id. at 729 (internal quotation marks omitted).

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was money he did not devote to paying down
his credit card debt, and Congress did not
express a preference for one use of these
funds over the other. Further, Ransom’s
argument mistakes what the deductions in the
means test are meant to accomplish. Rather
than effecting any broad federal policy as to
saving or borrowing, the deductions serve
merely to ensure that debtors in bankruptcy
can afford essential items. The car-ownership
allowance thus safeguards a debtor’s ability to
retain a car throughout the plan period. If the
debtor already owns a car outright, he has no
need for this protection.[65]

Therefore, when the Court made the statement upon which
the Trustee relies, it was addressing a debtor’s use of funds
pre-bankruptcy, not whether Congress gave a priority to
secured creditors after bankruptcy.
The calculation of “disposable income” under the
BAPCPA requires debtors to subtract their payments to
secured creditors from their current monthly income. In
enacting the BAPCPA, Congress did not see fit to limit or
qualify the kinds of secured payments that are subtracted
from current monthly income to reach a disposable income
figure. Given the very detailed means test that Congress
adopted, we cannot conclude that this omission was the result
of oversight. Moreover, even if it were, we would not be

65

Id. at 729–30 (emphasis added).

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justified in imposing such a limitation under “the guise of
interpreting ‘good faith.’”66
Conclusion
We conclude that Congress’s adoption of the BAPCPA
forecloses a court’s consideration of a debtor’s Social
Security income or a debtor’s payments to secured creditors
as part of the inquiry into good faith under 11 U.S.C.
§ 1325(a). We therefore affirm the judgment of the BAP.
AFFIRMED.

66

In re Goeb, 675 F.2d at 1389.