Appeals Courts: Keeping Social Security In Bankruptcy Can Be Good Faith

Two federal courts of appeal hold that Chapter 13 debtors who receive social security benefits do not act in bad faith by failing to contribute that income to their bankruptcy plans.

The 2005 bankruptcy law changes known as BAPCPA for the first time excluded “benefits received under the Social Security Act” from debtors’ disposable income, which Chapter 13 requires them to commit to their creditors.  Likewise, the Social Security Act provides that its benefits are not subject to the operation of bankruptcy law. But Chapter 13 also requires that debtors act in good faith in proposing their repayment plans.  So creditor interests, including Chapter 13 trustees, have attempted to end-run the social security exclusion by claiming that a debtor acts in bad faith if he fails to pay in social security benefits.

Now, within a few days of each other, two separate courts at the second-highest level of the federal judiciary have found that argument illogical.

Fred Cranmer, a senior citizen from Salt Lake City, filed a Chapter 13 case in 2010.  In calculating his disposable income to be paid to creditors, he excluded a portion of his $1,940 in monthly social security benefits, claiming they were exempt.  The bankruptcy court refused to confirm his plan, holding that this exclusion showed he did not propose his plan in good faith.  At the first level of appeal, the district court held the bankruptcy court was mistaken and that exclusion of social security income was no sign of bad faith. The bankruptcy trustee appealed to the U.S. Court of Appeals for the Tenth Circuit in Denver.

In an opinion filed October 24, the circuit court first held it clear that social security is indeed excluded from the calculation of disposable income.  Then, in a fairly short concluding passage, it found the trustee’s bad faith argument unpersuasive.  “When 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 SSI, that exclusion cannot constitute a lack of good faith. . . . A contrary holding would render the Code’s express exclusion of SSI  . . . from the calculation of the debtor’s projected income [ ] meaningless.”

Five days later, a sister court of appeals in New Orleans reached the same result for essentially the same reasons.

Benjamin and Stella Ragos filed Chapter 13 in early 2011 and also proposed a plan based on exclusion of some social security income. Unlike Fred Cramner’s experience, the bankruptcy court confirmed their plan as meeting the disposable income test and as filed in good faith. The trustee was allowed to bypass the intermediate court and appeal directly to the Fifth Circuit.

Like its Denver sister, the Fifth Circuit easily rejected the bad faith argument in a brief concluding section.  “Debtors are not in bad faith merely for doing what the Code permits them to do.  We thus hold that retention of exempt social security benefits alone is legally insufficient to support a finding of bad faith.”

Combined with decisions of the bankruptcy appellate panels of the Eighth and Ninth Circuits, this means that the four highest courts to consider the issue have now held that failing to pay social security is not evidence bad faith.

Unfortunately, this result is not as simple as it might appear. All of these courts have held that retaining social security alone is not bad faith.  But most courts regard good faith as based on the totality of the circumstances. The prospect remains that social security income may figure into a pattern that, viewed as a whole, may give rise to a finding of bad faith.

In addition, these holdings are not binding on the bankruptcy court in South Carolina.  The judges in this district are especially inclined to view good faith on a case-by-case basis and not based on broad, black-letter rules. And in at least two cases predating Cranmer and Ragos, social security has figured into our judges’ findings of bad faith. In one, the debtor proposed to pay for expensive and non-essential possessions — a definite no-no — while paying creditors a nominal amount. In the other, the court found bad faith based on a number of factors, among which was that the social security recipient spouse was failing to contribute a proportionate share of the joint household expenses.

It remains to be seen whether results like these, where social security income is considered a factor in good faith, even if not the decisive factor, will suvive the strong judicial momentum toward allowing debtors to do what the Bankrutpcy Code clearly appears to permit them to do: to use social security for purposes other than paying creditors.


Lex Rogerson is bankruptcy lawyer in Lexington, South Carolina. He is a native of Darlington, SC and attended public schools in Columbia. He graduated from Yale University and the University of South Carolina School of Law.

After admission to the bar in 1978, Lex worked for the state department of labor, trying occupational safety cases. He then realized a dream of living in the Rocky Mountains, moving to Missoula, Montana, where he worked with a small civil law firm. In 1981, he returned to South Carolina to work as a public defender.

Lex began private practice in Lexington in 1984 and has been representing consumers in bankruptcy cases since. He has always concentrated on representing ordinary individuals and throughout his career has assisted clients in criminal defense, police misconduct, personal injury, small estates, and appeals. For the last 10 to 15 years, bankruptcy has been his primary area of practice.

Bankruptcy attorneys and other lawyers frequently ask Lex to speak at seminars. He has led presentations on bankruptcy law the general practitioner needs to know, ethical issues in bankruptcy practice, and current developments in consumer bankruptcy. In 2008, a bankruptcy judge asked his collaboration in a seminar on trial evidence in bankruptcy court.

For three years, Lex taught legal writing as an adjunct at the USC School of Law. He understands that explaining the law clearly, not in jargon, is as important when discussing options with a client as when writing for a court. As someone told a group of lawyers many years ago: like it or not, when you entered law school, you became a professional communicator.

Understanding a lawyer’s obligation to serve the public and the justice system, Lex has been president of the Lexington County Bar Association and serves on its advisory committee. He is circuit and regional chair of the Resolution of Fee Disputes Board and a member of the SC Bar Pro Bono Committee. In 2001, he was named Pro Bono Attorney of the Year. The SC Supreme Court awarded him a certificate of appreciation for public service in 2002, and in 2006, he received the Billy Robinson Public Service Award from the SC Bankruptcy Law Association.

Lex has been lead attorney on published decisions in the South Carolina Court of Appeals and Supreme Court and in the federal Fourth Circuit Court of Appeals. He maintains an “AV” rating in Martindale-Hubbell Law Directory, the highest category for both legal ability and ethical standards.

Lex and his wife Shirley have been married for 27 years. They have two daughters, ages 19 and 22. While away from the office, Lex enjoys backpacking and hunting. He plays catcher in the SBL, a senior men’s baseball league. Though an unimpressive hitter, his teammates nevertheless say he plays hustling defense, calls a good game, and is fearless on plays at the plate.

Contact Information:

Lex A. Rogerson, Jr.
P.O. Box 365
111 E. Main Street, Ste. C
Lexington, SC 29072
(803) 359-5520
(803) 359-5555 (facsimile)
[email protected]

**CV, BV, and AV are registered certification marks of Reed Elsevier Properties Inc., used in accordance with the Martindale-Hubbell certification procedure standards and policies.

Lex Rogerson, Columbia Area Bankruptcy Lawyer

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