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CHAPTER 13 PLAN
IMPORTANT: THIS FIRM MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR CURRENT STATUS OF ANY LAW, CASE, ARTICLE OR PUBLICATION CITED HEREIN OR LINKED TO. WARNING – SOME OF THESE REFERENCES ARE PRE-BAPCPA.
Arizona adopted a chapter 13 model plan – effective for all cases filed, converted after December 1, 2017
According to the Arizona Bankruptcy Court the failure rate of those who file their own chapter 13 cases (without an experienced chapter 13 attorney) is over 98%. Even with a very good chapter 13 attorney the failure rate is between 40 and 50%. Why? Because life happens!! Most people are in chapter 13 cases for five years (a few as little as three years). During that period life goes on for the debtor – their income changes, their life situation changes (marriage, divorce, children or death), their goals change (keep the house or give it up, retire or keep working).
The following is a good summary of how a chapter 13 works (with those who do not have businesses). It is offered here for educational purposes only.
Bradley’s Bankruptcy Basics: Chapter 13 Bankruptcy — Consumer Bankruptcy with a Payment Plan
Chapter 13 bankruptcy provides relief only to individuals with regular income. This Chapter is most frequently used by debtors who have sufficient disposable monthly income to make some payments over time to their creditors. Chapter 13 debtors frequently have enough equity in their residence that, if they were to file for Chapter 7, the residence would likely be sold for payment to creditors. Often filed to stave off foreclosure, Chapter 13 allows debtors to save their homes and/or cars, which includes curing any past due payments and continuing to make monthly payments through a three- to five-year payment plan.
Chapter 13 cases require careful monitoring by creditors to ensure that bankruptcy events affecting the creditors’ claims or collateral are timely and effectively addressed. We’ve put together a high-level overview or “timeline” of a Chapter 13 case, emphasizing concepts and milestones of particular importance for creditors. Chapter 13 contains a number of specialized requirements for residential mortgage creditors, which are included in the timeline as well. We have also created a preliminary checklist to help you navigate the early stages of a Chapter 13 bankruptcy.
Proofs of Claim
Because creditors are paid through a plan, creditors must file proofs of claim in Chapter 13 cases. (Note that proofs of claim must also be filed in Chapter 11 cases, as well as in Chapter 7 cases in which the Chapter 7 trustee has identified assets to liquidate.) A proof of claim describes how much the debtor owed a particular creditor as of the date the bankruptcy petition was filed. The claim is designated as either secured or unsecured, and documents supporting the existence of the claim including evidence of security interests, are attached. Creditors must file their proofs of claim by the deadline set forth in the notice of bankruptcy. If the deadline is missed, the creditor’s claim may be disallowed, and no payments will be made toward it. Future blog posts will describe the proof of claim filing process in more detail.
The Chapter 13 Plan
Within 14 days of filing the petition, Chapter 13 debtors must file a proposed Chapter 13 plan. Bankruptcy courts often have “form” Chapter 13 plans that debtors fill out and file. The plan describes the amount of disposable income the debtor will pay toward his creditors, including amounts that various classes of creditors will receive during the three- or five-year plan period. Although the Bankruptcy Code does not allow debtors to modify mortgages on their primary residences through Chapter 13 plans, debtors can repay mortgage arrears over the course of the plan to bring the loan current.
Creditors must carefully review the Chapter 13 plan terms to determine how their claims will be treated. The Chapter 13 trustee will make the payments to creditors. However, some plans provide for certain claims to be paid to creditors directly by the debtor “outside of the plan.” Depending on the plan terms, the confirmation order, or the bankruptcy court’s local rules, relief from the stay, or other relief, may be available to a creditor without further court order if the debtor stops making payments outside of the plan. If it is a “conduit” plan, i.e. the debtor pays the trustee, who subsequently disburses to the creditors, the creditor must seek relief from the stay before exercising state law remedies if payment stops during the case.
Changes in Amounts Due During a Chapter 13 Plan
Chapter 13 plans last for at least three years, with most continuing for five years. (Longer plans are now permitted if the debtor has been impacted by COVID-19, which we’ll cover in future posts.) During that time period, amounts debtors may owe, particularly for debts secured by mortgages, will fluctuate due to annual escrow analyses, interest rate adjustments, and other fees or costs that are recoverable from the debtor under the loan documents. To be paid for these changed or additional charges, creditors must file certain forms in the bankruptcy case. More information about payment change notices, post-petition fee notices, and responses to notices of final cures will be included in future blog posts.
Payment Change Notice
Bankruptcy Rule 3002.1 requires creditors with claims secured by the debtor’s principal residence (usually mortgage servicers or lenders whose claims are secured by mortgages) to file a “payment change notice” no less than 21 days prior to the date the new payment amount is due. Typical payment changes for which a payment change notice must be filed are annual escrow analyses and interest rate adjustments for adjustable rate mortgages. The payment change notice should be filed on the official form.
Post-Petition Fee Notice
Bankruptcy Rule 3002.1 also requires creditors with claims secured by the debtor’s principal residence to file notices of any fees or costs that are incurred after the bankruptcy filing (i.e. post-petition) and are recoverable from the debtor pursuant to the loan documents. Post-petition fees can include, for instance, attorneys’ fees for analyzing the creditor’s treatment under a Chapter 13 plan or costs for a broker price opinion (BPO). Post-petition fee notices should be filed on the official form. Creditors have 180 days to submit their Post-Petition Fee Notices or the claim is barred.
Loan Modifications in Chapter 13
Debtors who file under Chapter 13 to save their homes from foreclosure are often interested in modifying the loan secured by their principal residence. Several bankruptcy courts have their own mortgage modification mediation procedures to facilitate this process. If the parties enter into a loan modification agreement, such agreement likely will be subject to the approval of the Chapter 13 trustee or the bankruptcy court. The parties should adhere to local rules, administrative orders, court-specific loss mitigation program procedures, or judicial preferences to ensure the agreement is approved properly.
Notice of Final Cure
Creditors whose claims are secured by mortgages should be on the lookout for the Chapter 13 trustee to file a notice of final cure payment at the end of the plan period. If the debtor’s Chapter 13 plan provided for repaying mortgage arrears over the course of the plan, the notice of final cure payment will indicate the trustee’s determination that all amounts required to cure the arrearage claim have been paid.
Creditors must file a response to the notice of final cure payment within 21 days after service of the notice. This response will state whether the creditor agrees that all arrears have been paid. The response will also state whether any post-petition amounts under the mortgage loan remain unpaid. To the extent the creditor asserts that the arrearage has not been cured or that post-petition amount remain unpaid, the creditor must itemize these amounts.
Although Chapter 13 debtors typically will not receive a discharge with respect to long-term mortgage debt, creditors will nonetheless be bound by the information included in their response to notice of final cure payment. Failure to file a response can be deemed an agreement with the information in the Chapter 13 trustee’s notice of final cure payment, which can likewise bind creditors, regardless of whether the notice of final cure is correct.
FAILURE TO MOVE FORWARD WITH 13:
In re Lawson v Wells Fargo, BAP NO. CC 19-1011 (9th Cir BAP, 7/31/19) Chapter 13 debtor Pamela Lawson appeals an order dismissing her case after the bankruptcy court denied confirmation of her chapter 13 plan because it concluded that she was not appropriately pursuing a chapter 13 case. Her plan did not propose plan payments, did not specify the plan term, and did not provide for payment to Wells Fargo Bank, N.A., her only significant creditor.
FEASIBLE PLAN:
Ranta v. Gorman, No. 12-2017We therefore hold, in agreement with the Sixth Circuit, that “a debtor with zero or negative projected disposable income may propose a confirmable plan by making available income that falls outside of the definition of disposable income—such as ․ benefits under the Social Security Act—to make payments under the plan.” Baud, 634 F.3d at 352 n. 19; see also In re Kibbe, 361 B.R. 302, 314 n. 11 (B.A.P. 1st Cir.2007) (per curiam) (noting that the revised definition of projected disposable income “does not preclude a debtor’s use of available monies excluded from the definition ․ to support the feasibility of the debtor’s plan). Thus, in evaluating whether a debtor will be able to make all payments under the plan and comply with the plan, the bankruptcy court must take into account any Social Security income the debtor proposes to rely upon, and may not limit its feasibility analysis by considering only the debtor’s “disposable income.” If the debtor’s actual net income, including Social Security income, is sufficient to cover all the required payments, the plan is feasible.
In re Barraza, 346 B.R. 724 (Bkrtcy.N.D.Tex. 2006) RUSSELL F. NELMS, Bankruptcy Judge Case dismissed or converted based on abuse for debtor working 80 hours a week at two jobs
Debtor cannot claim IRS ownership expenses for car that is paid off.
Debtor cannot deduct payments toward 401(k) loan from income in doing the means test, but can deduct them for calculation of chapter 13 disposable income § 707(b)(2), § 1325(f), 1325(b)(3)(A)
Although the court acknowledged that the equities favored permitting the hard-working and sincere debtor to file chapter 7, the court felt bound by the strict letter of the Code. “The starting point for the court’s analysis is not whether the debtor’s lifestyle makes him deserving of one form of relief or another, but the language of the statute itself.”
As to a claim for ownership cost (as opposed to operating cost) the court concluded that the IRS Collection Standards must be followed, and such guidelines do not permit an ownership expense where the car is paid for. The court did not that since the debtor’s vehicle was 18 years old he would be entitled to an additional operating expense of $200.
Although acknowledging that section 1322(f) explicitly provides that repayments of loans to retirement funds do not constitute disposable income, nevertheless the codified formula for calculation of means test does not provide a step for deduction of such loan repayments, and therefore they could not be deducted from the final figure for purposes of the presumption of abuse.
Said the court: “… why are these sums not deducted from current monthly income when determining chapter 7 eligibility? Stated another way, why would Congress presume under section 707(b)(2)(A) that this amount of money could be used to pay unsecured creditors, and then deny unsecured creditors access to that money in chapter 13? The court confesses that it does not know. Nevertheless, the court’s lack of prescience as to Congress’s reasoning does not permit it to revise a formula that is otherwise clear on this particular point.”
The court also held that the debtor’s $400 monthly payment to his girlfriend to cover living expenses and to help support girlfriend’s dependent children were not deductible. The court observed that his basic living expenses were already deducted under the 707(b)(2)(A) and could not be deducted as a “special circumstance” under 707(b)(2)(B), because the language of the section does not authorize a deduction for voluntary support as to which the debtor is morally, but not legally obligated.
Finally, the court held that the disposable income calculation must be based on actual projected income (i.e., a “forward-looking analysis”) pursuant to the schedules, not merely the codified formula.
“Effective Date of the Plan” for Best Interests Test upon Modification
Posted by NCBRC – July 28, 2021
The best interests test does not provide authority to compel turnover through plan modification of settlement funds from the debtor’s post-petition personal injury case where that money would not be available to unsecured creditors in a case converted from chapter 13 to chapter 7 under section 348(f). In re Taylor, No. 16-40873 (Bankr. D. Kans. July 21, 2021).
After the debtor’s chapter 13 plan was confirmed, she sustained a personal injury for which she filed a lawsuit. The case settled, and the trustee moved to modify her plan to incorporate $20,000 of the settlement, arguing that the money became property of the bankruptcy estate under section 1306 and, under the best interest of creditors test, should be paid to unsecured creditors. The debtor objected.
The best interest of creditors test, codified in section 1325(a)(4), provides that unsecured creditors in a chapter 13 case should receive no less than they would have received in a chapter 7 liquidation based on the value of estate property “as of the effective date of the plan.” That test is incorporated into section 1329(a) which provides that at any time during the pendency of a chapter 13 case, the trustee, debtor, or unsecured creditor may move to modify the plan to increase or reduce plan payments. Section 1306(a) provides that “property of the estate includes, in addition to the property specified in section 541” all property specified by section 541 “that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted.”
Because the phrase “effective date of the plan” in section 1325(a)(4) is not defined in the Code, some courts, such as Forbes v. Forbes (In re Forbes), 215 B.R. 183 (8th Cir. BAP 1997) and Sanchez v. Sanchez (In re Sanchez), 270 B.R. 322 (Bankr. D.N.H. 2001), have found the effective date to be the original date of the chapter 13 petition. These cases dealt with property newly acquired post-petition. The Forbes court found that “the effective date of the plan is not altered by plan modification,” noting that a modified plan does not need to be confirmed but may replace the original plan “if it is not disapproved.” That court was further convinced by the fact that the chapter 7 estate is governed by section 541 and section 1306 does not come into play in determining the chapter 7 estate property.
Other courts, such as In re Barbosa, 235 B.R. 540, 552 (Bankr. D. Mass. 1999), aff’d, Barbosa v. Solomon, 243 B.R. 562 (D. Mass. 2000), aff’d, 235 F.3d 31 (1st Cir. 2000), In re Villegas, 573 B.R. 844 (Bankr. W.D. Wash. 2017) and In re Nott, 269 B.R. 250 (Bankr. M.D. Fla. 2000), have found the effective date to be the modification date. In each of these cases, the court addressed a post-petition change in value to pre-petition property. The Barbosa court reasoned that using the modification date as the effective date gives effect to section 1325(a)(4). That court relied in part on “Keith Lundin’s Chapter 13 treatise and the 1977 legislative history of § 1325(a)(4), which states ‘the application of the liquidation test must be redetermined at the time of the confirmation of the modified plan.’”
The court here noted that other bankruptcy courts in Kansas have relied on Barbosa to find that “the effective date of the plan” for the best interests calculation is the date of plan modification. In In re Auernheimer, 437 B.R. 405 (Bankr. D. Kan. 2010), the debtor sought reduction of plan payments to reflect reduced value of personal assets and uncollectible receivables. That court found that using the modification date as the effective date dovetailed with section 348(f) which provides that the original chapter 13 valuations do not carry over to a converted chapter 7 case.
Likewise, in In re Davenport, No. 08-41213, 2011 WL 6098068 (Bankr. D. Kan. Dec. 7, 2011), the court granted the trustee’s motion for modification to capture proceeds from property the debtor sold for fifteen times its value as appraised on the petition date. The court found using the modification date as the effective date would allow unsecured creditors to receive what they would get if the case were converted under section 348(f) at that time.
The court agreed with those courts finding that the “effective date” was the date of plan modification, finding that the debtor’s position would render the best interests test meaningless in the context of modification.
Turning to the calculation of best interests using the modification date as the effective date, the court looked to section 348(f) to compare what unsecured creditors would receive in a hypothetical chapter 7 case converted at that time and what they would receive under the proposed modification. Section 348(f) provides that the “property of a Chapter 7 estate resulting from a good faith conversion from Chapter 13 consists of property of the estate as of the date of filing of the petition that remains in the debtor’s possession or control at the time of conversion.” The converted estate does not include property acquired during the pendency of the chapter 13 case under section 1306(a). Because unsecured creditors would not receive after-acquired property in a converted chapter 7 case, the court found they were not entitled to it in a modified chapter 13 case.
The court was further persuaded by tenets of statutory construction under which the specific applies over the general. Here, section 1306 is a general provision supplementing estate property under section 541, while section 348(f) specifically addresses property belonging to an estate converted from chapter 13 to chapter 7. For that reason, for purposes of the best interest test, the modified plan should be compared to the property that would be included in the hypothetical converted chapter 7 case.
The court denied the trustee’s motion to modify the debtor’s plan.
In re Baker, 620 B.R. 655 (US Bankruptcy court, D. Colorado, 9/29/20) Background: Trustee and Chapter 13 debtor both proposed modifications to debtor’s confirmed plan following a post-confirmation sale of his residence for a price that generated a surplus in excess of amount of his state law homestead exemption.
Holdings: Held that: date for “performing best interests of creditors” calculation, for purpose of determining whether confirmed Chapter 13 plan may be modified, remains the petition date and does not shift to plan modification date; and confirmation of Chapter 13 plan results in termination of bankruptcy estate; and it was not bad faith by Chapter 13 debtor, following post-confirmation sale of his home, to propose plan modification under which he would retain any net proceeds.
The (bankruptcy) court allowed the plan modification under § 1329(c) to surrender the residence, even though the 60-month time period set forth in § 1329(c) had already expired.
We (the BAP) agree with the bankruptcy court that the debtors’ plan payments were not complete for purposes of § 1329(a). We conclude, however, that the debtors could not modify their plan to surrender their residence, because the surrender was a payment made outside the 60-month time limit. Accordingly, we REVERSE.
Accordingly, we join the overwhelming majority of courts holding that a chapter 13 debtor’s direct payments to creditors, if provided for in the plan, are “payments under the plan” for purposes of a discharge under § 1328(a) and hold that this same rule should apply in the context of post-confirmation plan modifications under § 1329(a). Although the language in § 1328(a) is slightly different from that in § 1329(a) — § 1328(a) uses the phrase “payments under the plan” while § 1329(a) uses the phrase “payments under such plan” — we see no reason to interpret these phrases differently.
Notes: First, Judge Brand did not understand how the debtor could obtain a discharge after missing mortgage payments when defaulting on the mortgage was grounds for dismissal.
Second, Judge Brand said that the computation of disposable income assumes the debtor will make mortgage payments. By skipping the mortgage, she said that the debtor would benefit from “living without mortgage payments at the expense of creditors.” Had the debtors surrendered the home, the distribution to unsecured creditors would have increased.
The debtors argued that surrendering the home was not a payment and thus did not run afoul of the Code. Judge Brand disagreed. She held that “surrender is a form of payment for purposes of Section 1329(c).”
Finally, Judge Brand hinted that the proposed modification was not in good faith, thus rendering the amendment unconfirmable under Section 1325(a)(3). She said the debtors’ good faith was “in question” because they paid nothing to unsecured creditors while retaining over $100,000.
The BAP therefore reversed the bankruptcy court for abuse of discretion because the court had no authority to allow an amendment after the 60th month.
N.B.: Since Arizona is in the Ninth Circuit, Rivera likely would have been reversed on appeal. However, there was no appeal, so the Rivera debtors received their discharges. The Gibson debtors likewise received their discharges because there was no appeal. In re Gibson, 582 B.R. 15 (Bankr. C.D. Ill. 2018), and Robert Rivera And Margarita Rivera 13-20842, 2019 WL 1430273 (Bankr. D. Ariz. Mar. 28, 2019).
But see: In re Drabo No. 1:15-bk-653 (Bankr. D. D.C. May 10, 2019) (unpublished) Adopting the minority view, the Bankruptcy Court for the D.C. Circuit found that the chapter 13 debtor’s direct payments to a residential lienholder were not provided for under the plan and, therefore, her failure to make all the payments did not preclude entry of discharge.
In re Simmons, 14-10757 (Bankr. S.D. Ga. Sept. 30, 2019) Bankruptcy Judge Susan D. Barrett of Augusta, Georgia, joined the minority by holding that a post-petition default on direct mortgage payments “standing alone does not constitute a material default” justifying dismissal under Section 1307(c)(6).
Before granting a discharge, Judge Barrett is still requiring her debtors to survive a good faith hearing and explain how they spent the money not paid to the lenders. Implicit in her September 30 opinion is the suggestion that the debtors cannot prove good faith if the money not paid to lenders would have increased the distribution to unsecured creditors.
ABI article” Denying Chapter 13 Discharges for Direct Payment Defaults 6/2019
7/2017 – at least one Phoenix chapter 13 trustees is considering filing motions to deny discharge based on the arguments in the cases below that post-petition mortgage payments are plan payments. As of this date there is no 9th Circuit precedent to go on, but Texas, Florida, VA, NY and CO all have decided post-petition mortgage payments are plan payments.
Side bar: the debtors sign a Certification that they Are Eligible to receive a discharge. If they failed to comply with the terms of the Plan doesn’t that = perjury?
- Robert Rivera And Margarita Rivera (2:13-bk-20842-MCW) (3/28/19): ORDER Denying Trustee’s Motion to Dismiss Bankruptcy Case Due to Plan Default. The Court concludes that Debtors’ failure to pay all their direct post-petition mortgage payments is not a failure to complete all payments required under the plan.Having completed all required plan payments and performed all other obligations under the Code and Rules and there are no indicia of wrongdoing, Debtors are now entitled to their Chapter 13 discharge.
- 1713729_1_Evans_v_Stackhouse.pdf
- In_re_Heinzle_511_B.R._69_Bankr._W.D._Tex._2014_.pdf
- In re Gibson, C.D. Illinois (3/2018) This Court disagrees with the absolutist view that section 1328(a) should be construed in a way that would make every uncured default on a direct payment grounds for dismissing the case without a discharge. At most, whether a Chapter 13 debtor’s failure to make direct payments warrants denial or revocation of a discharge should be determined on a case-by-case basis, under other sections of the Bankruptcy Code, taking into account the debtor’s state of mind and the effect on creditors. Where, as here, a debtor’s conduct was truly innocent and unsecured creditors were not harmed, denial of discharge is not an appropriate remedy. The punishment does not fit the crime. See in re Starkey, 2016 WL 3034738 (Bankr. D.C.) (where a mortgage claim provide for under Section 1322(b)(5) and thus excepted from discharge, the discharge of the other debts is of no concern to the mortgage creditor and the lack of payments to the mortgage creditor is of no concern to the other creditors, so that ‘denying a discharge in that circumstances would seem silly.’)
- In re Dukes, D.C. Docket Nos. 2:15-cv-00420-SPC; 9:09-bkc-02778-FMD (11th Cir. Ct Ap 12/6/18) Florida case that holds that if the Plan merely states that the debtor would make the ongoing mortgage payments to the bank holding the mortgage, the mortgage is not “provided for” under the plan. The facts giving rise to the case are different than what this thread is about (here the debtor defaulted on the mortgage, the bank foreclosed, and then tried to collect the balance, and the debtor tried to argue the mortgage was discharged).HELD: In doing so, we hold that, for a debt to be “provided for” by a plan under § 1328(a), the plan must make a provision for or stipulate to the debt in the plan. Because Debtor’s plan did nothing more than state that the Credit Union’s mortgage would be paid outside the plan, it was not “provided for” and was not discharged.
- Simon v. Finley (In re Finley), 18-4011, 2018 BL310219 (Bankr. S.D. Ill. Aug. 28, 2018), On the question of a general chapter 13 discharge, the lower courts are split on whether failure to make direct mortgage payments bars a chapter 13 debtor’s general discharge. In re Finley the bankruptcy courts in Illinois disagree on giving a discharge to a chapter 13 debtor who missed direct mortgage payments.
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Davis v. Holman (In re Holman), 17-1118 (D. Kan. Oct. 31, 2018) The court ruled that the debtors were entitled to chapter 13 discharges because they had completed their plan payments on time, even though the debtors’ misconduct would have resulted in a loss of discharge if the bankruptcy court had a reservoir of equitable power to overcome the command of the statute.
- Hardship discharge to get around this issue: In re Wayne and Maier, 1:13-bk-07879-BKM Chapter 13 Trustee moved to dismiss the case because the Debtors failed to make direct payments to their mortgage lender outside the plan. Which party prevails depends on whether direct payments to mortgage lenders are “payments under the plan” as required for discharge under ‘ 1328(a). Because the Court is compelled to agree with the Trustee. All is not lost for the Debtors here, however. Under the circumstances of this case, the Debtors are eligible for a hardship discharge under ‘ 1328(b). Seeing no objection to their request and finding that they satisfy the elements required, the Court will deny the Trustee’s motion and grant the Debtors a hardship discharge.
Article: With Notice Comes Responsibility Direct Payments to Creditors Are Payments “Under the Plan” and Required for Debtor to Be Granted § 1328(a) Discharge, By Elizabeth L. Gunn
Chapter 13 provides debtors with many powerful remedies, and one of the most often utilized remedies is the right to cure and maintain payments on a secured (or unsecured) claim on which the last payment is due after the final date of the debtor’s plan pursuant to § 1322(b)(5). In practice, the curing of a debtor’s pre-petition mortgage arrears, without the incurrence of ongoing late fees, attorneys’ fees or default interest, while protected from other collection efforts by the automatic stay, is one of the great benefits to a debtor utilizing chapter 13.
Absent the completion of all payments (INCLUDING THE PAYMENTS TO BE MADE OUTSIDE THE PLAN – SAY TO THE MORTGAGE COMPANY), the debtor has not completed the terms of the “new contract” that he/she proposed to all of his/her creditors and that was confirmed by the bankruptcy court. A debtor who does not complete all payments has not completed all payments under the plan and is not entitled to a discharge, as set forth in § 1328(a).
In re Gibson, 12-81186 (Bankr. C.D. Ill. March 5, 2018) Failing to make direct payments on a nondischargeable mortgage is not grounds for denying a chapter 13 discharge, according to Bankruptcy Judge Thomas L. Perkins of Peoria, Ill. The debtors confirmed a five-year plan provided for the debtors to make direct payments on the first and second mortgages on their home. Although the first mortgage was current at filing, there was more than $9,000 in arrears on the second mortgage to be cured under the plan with payments from the trustee.
Near the end of the plan payments, the trustee filed and served two notices under Bankruptcy Rule 3002.1(f) pertaining to the mortgages. The notices stated that the debtors had made all payments required to be made to the trustee, that the pre-petition arrears on the second mortgage had been paid, and that the debtors were to make direct payments on both mortgages.
The lender on the second mortgage responded under Rule 3002.1(g) by saying that the arrears had been cured but that the debtors were about $19,000 in default on second mortgage payments due after filing. The trustee then moved to dismiss the chapter 13 case without granting a discharge.
Judge Perkins held a trial and concluded that the debtors misunderstood the plan. According to the judge, the debtors believed they were not required to make payments on the second mortgage. They testified that they understood their lawyer as telling them that they were only required to pay the first mortgage.
Judge Perkins denied the trustee’s motion to dismiss and granted the discharge, noting, however, that the debt on the second mortgage was not dischargeable. In his 17 years on the bench, the judge said, he had “never dismissed a chapter 13 case without discharge, where the required payments to the trustee were completed, for the reason that the debtor failed to make all of the direct mortgage payments.”
CHAPTER 13 CONVERTED TO 7:
full present value of the real property, including any appreciation between the Chapter 13 petition date and date of conversion, is property of the Chapter 7 bankruptcy estate.
In re Castleman, (9th Cir. July 28, 2023) “In sum,” Judge Hawkins said, “the plain language of § 348(f)(1) dictates that any property of the estate at the time of the original filing that is still in [the] debtor’s possession at the time of conversion once again becomes part of the bankruptcy estate, and our case law dictates that any change in the value of such an asset is also part of that estate. In this case, that property increased in value.”
In re Castleman, 19-12235 (Bankr. W.D. Was, June 7, 2021) The issue before me is whether the debtor or the Chapter 7 bankruptcy estate receives the benefit of appreciation in property value for the period between filing of a Chapter 13 case and conversion of that case to Chapter 7. Choosing between conflicting judicial approaches, I determine that the Chapter 7 estate receives the benefit as appreciation is not a distinct and separate asset under the Bankruptcy Code and nothing in the statute fixes the value of estate assets at the date of petition. I conclude that the full present value of the real property, including any appreciation between the Chapter 13 petition date and date of conversion, is property of the Chapter 7 bankruptcy estate.
Postpetition, pre-conversion appreciation in value of Chapter 13 debtor’s home inured to the benefit of the debtor.
In re Cofer, 19-40361-JMM, (Bankruptcy court, D. ID, 1/8/21) Holdings: The Bankruptcy Court, Joseph M. Meier, J., held that the fact that property of the Chapter 13 estate, including debtor’s residence, may have vested in debtor once plan was confirmed did not prevent the property from entering the estate when debtor converted her Chapter 13 case to a case under Chapter 7; conversion of debtor’s Chapter 13 case to a case under Chapter 7 did not affect state law homestead exemption that debtor could claim, which remained the $32,020.56 exemption that debtor had on petition date; but postpetition, pre-conversion appreciation in value of Chapter 13 debtor’s home inured to the benefit of the debtor.
Appreciation in real property vests in the debtor post-confirmation (in the 9th Circuit)
Q: Client is in a Chapter 13. Plan was confirmed over a year ago and the SOC contains the following vesting language:
“The effective date of the Plan shall be the date of this order. Property of the estate vests in Debtor upon confirmation, subject to the rights of the Trustee to assert a claim to any additional property of the estate pursuant to 11 U.S.C. § 1306.”
Client wants to sell her house and will have approx. $200,000 equity. If the house vested back to client, the trustee won’t have a claim to this equity, right?
Answer (as of 8/21/21): Correct. All equity belongs to the Debtors. See In re Black: 9th Cir. BAP NV-19-1351, 11/21/2019 Debtor Richard L. Black obtained confirmation of a chapter 13 plan that required him to pay $45,000 to his creditors when he sold or refinanced his rental property. About three years later, he sold the property for $107,000. He proposed to pay $45,000 to his creditors and to retain the excess sale proceeds for himself. Chapter 13 trustee Kathleen A. Leavitt (“Trustee”) moved to modify Mr. Black’s confirmed plan to require him to pay the excess sale proceeds to his unsecured creditors. The bankruptcy court approved the modified plan.
Mr. Black appeals, arguing that he was not required to commit the excess proceeds to his plan payments.
CONCLUSION: We hold that the Trustee’s modified plan was timely and complied with the applicable statutes. But we agree with Mr. Black that he was entitled to retain the excess sale proceeds. Accordingly, we reverse the Bankruptcy Court.
See also: In re Larzelere, Bankr.D.N.J. 8/24/21) Following the Ninth Circuit Bankruptcy Appellate Panel and splitting with the First Circuit, Bankruptcy Judge Andrew B. Altenburg, Jr., of Camden, N.J., gave the post-petition appreciation in the value of non-exempt property to the chapter 13 debtor and not to creditors.
See this case for a very detailed analysis of Code on this question: In re Baker, 620 B.R. 655 (Bankruptcy Court, D. Colorado 9-29-22) “Courts may disagree on whether the BIC test should be recalculated as of the date of modification and whether the estate terminates at confirmation. However, this Court has determined both issues in the Debtor’s favor and ruled that he is permitted to retain the sale proceeds. As a result, it cannot find that in doing so he is acting in bad faith or unfairly manipulating the Code.”
NOTE: “Best Interests of Creditors Test” – if $160,000 equity was scheduled, it vests back to debtor upon confirmation, and if the debtor (post confirmation) sells the property and receives $200,000 in excess proceeds because of post-confirmation appreciation, the plan presumably was not confirmed unless the creditors were to be paid the excess equity above the homestead ($10,000) as part of “best interest of creditors test”. That extra $10,000 is going to the trustee, whether it is already part of the plan payments, or the plan proposed to contribute the extra $10,000 upon the sale of the property. But the additional $30,000 due to post-confirmation appreciation is the debtor’s to keep. But, don’t forget to deduct the chapter 7 administrative expenses and the costs of sales from the total sale proceeds, minus the homestead allowance and the secured creditors.
December, 2017 – new model chapter 13 plan required. See attached article on process.
In re Tran, (Bkrtcy.N.D.Cal.) July 7, 2010: Plans – Debtor’s ineligibility for Chapter 13 discharge did not prevent strip off of lien through plan. A bankruptcy judge in California held that a Chapter 13 debtor’s ability to use a plan to strip off a wholly unsecured junior lien is not conditioned on the debtor’s eligibility for a discharge, but solely upon the debtor’s obtaining confirmation of, and performing under, a Chapter 13 plan that meets all statutory requirements. The judge disagreed with various cases to the contrary. Nonetheless, a Chapter 13 petition filed by a debtor who was solvent, in a balance sheet sense, and whose prior Chapter 7 discharge less than four years before the petition date left her ineligible for discharge in Chapter 13, had to be dismissed as a “bad faith” filing. The debtor’s proposed plan provided for payment only of a relatively small amount of arrearages on debts secured by a first deed of trust and served no real purpose other than to allow the debtor to strip off a wholly unsecured junior deed of trust lien in circumvention of the prohibition against lien stripping in Chapter 7.
In Re: Mansaray-Ruffin, No. 05-4790 (U.S. 3rd Circuit Court of Appeals, June 24, 2008)
A debtor in a Chapter 13 bankruptcy case did not invalidate a lien on her property by providing for it as an unsecured claim in her confirmed plan, without initiating an adversary proceeding as required by the Federal Rules of Bankruptcy Procedure. Includes lengthy dissent.
In re: Richard W. Paschen (07/10/02 – No. 01-16353) (11th Cir Ct App) 11 U.S.C. section 1322(c)(2) permits Chapter 13 debtors to bifurcate under-secured, short-term home mortgages into secured and unsecured claims, with the unsecured claim subject to “cramdown” pursuant to 11 U.S.C. section 1325(a)(5).b WARNING: PRE-BAPCPA
Effective 12/1/17 – Under former Bankruptcy Rule 4003(d), lien avoidance under 11 U.S.C. § 522(f) was done exclusively by the filing of a motion. The rule now permits lien avoidance to be initiated through a plan provision. Rule 4003(d) is amended to provide that a lien may be avoided by filing either a motion or by serving a chapter 13 plan on the lien holder in the manner provided for in Rule 7004. New Rule 5009(d) also provides a procedure for obtaining an order declaring that the lien is released under the terms of a confirmed plan.
In re Washington, BAP NO. CC-18-1206-LKuF (July 30, 2019 Debtor Gwendolyn Washington obtained a chapter 7 discharge, which extinguished her personal liability on the debt secured by a junior lien on her residence. About five years later, she filed a chapter 13 case; she obtained an order valuing at zero the junior lien held by Option One Mortgage Corporation, serviced by Real Time Resolutions, Inc. (“RTR”). RTR filed an unsecured claim in the full amount of the debt it believed it was owed; Ms. Washington objected on the ground that her personal liability had been discharged. The bankruptcy court overruled the objection, concluding that the discharge did not fully eliminate the claim and that the plain language of § 506(a) required the allowance of RTR’s unsecured claim in the amount of $307,049.79. We REVERSE.
New rule (12/1/17) In addition to filing a motion or claim objection, Bankruptcy Rule 3012(b) now permits the debtor to request a determination of the amount of an allowed secured claim through a chapter 13 plan provision, except for claims of governmental units (which may be made only by motion or claim objection). If the plan is used, it must be served in the manner provided for service of a complaint and summons under Bankruptcy Rule 7004, which in most cases means first class mail. Rule 3015(g)(1) is also amended to provide that any determination of the secured claim amount made through confirmation of a chapter 13 plan is binding on the creditor, even if the creditor files a proof of claim in a different amount and no objection to the claim is filed.
If the plan contains a request that property be valued to determine an allowed secured claim under Rule 3012(b) or a request for avoidance of a lien under Rule 4003(d), it must be served under the procedures in Rule 7004. Service under Rule 7004 ordinarily is done by first class mail, except that insured depository institutions must be served pursuant to Rule 7004(h) by certified mail addressed to an officer of the institution. If these requests are made in the plan, the debtor must also highlight this in an initial paragraph of the plan, usually by checking an applicable box.
Order Avoiding Lien on Real Property, Huggins vs Westbrook Townhouse HOA, 2:11-bk-14366; 2:11-ap-02234-GBN
“(1) For purposes of Debtors’ Chapter 13 plan only, the lienholder’s claim is valued at zero. Lienholder does not have a secured claim and the HOA lien for pre-petition amounts owed by Debtors may not be enforced, pursuant to 11 USC SS 506, 322(b)(2) and 1327, provided that the Chapter 13 case is completed and the Debtors receive a discharge.
(2) This Order shall become part of Debtors’ confirmed Chapter 13 plan.
(3) Upon entry of a discharge in Debtors’ Chapter 13 case, the HOA Lien for pre-petition amounts owed by Debtors shall be voided for all purposes and, upon Application by Debtors, the Court will enter an appropriate form of judgment voiding the HOA lien, which when recorded will operate as a release of all the liens for the pre-petition debt.”
Home Funds Direct v. Monroy, No. 10-60005 (9th Circuit) Language in chapter 13 plan can require the secured creditor take certain procedural obligations under the plan – such as notifying the debtor, debtor’s attorney and trustee of changes in the mortgage payment: has ruled that a court-authorized addendum to a chapter 13 plan altering what must be included in a mortgagee’s monthly statements does not violate the separation of powers clause of the constitution and was consistent with the purpose and requirements of RESPA. The court further found that freedom from reporting requirements was not a “right” protected from modification by section 1322(b)(2).
Bankruptcy Weapons to Terminate a Zombie Mortgage
Robert Berger U.S. Bankruptcy Court, Washburn Law Journal, Vol. 54, No. 3, 2015
Abstract
Bankruptcy’s strongest public policy is the possibility of a fresh start for a borrower – a way for a debtor to free himself from the burdens of pre-petition obligations and re-commence his or her financial life. A debtor can surrender property burdened by a lien to the lien-holder and thereby release him or herself from ongoing obligations under the loan. This is true even in cases where the collateral’s value is less than the secured loan – for in bankruptcy, a lender’s secured claim is limited to the value of its lien. In chapter 13, a debtor who elects to keep secured property must pay off the secured claim through an acceptable plan, and if the debtor opts to liquidate the secured property, then the debtor may sell it free and clear of liens if it is authorized to do so under § 363 of the Bankruptcy Code. This straightforward method of wiping the slate clean in bankruptcy has recently been threatened by home mortgage holders’ reluctance to foreclose. If the secured lender refuses to accept a debtor’s surrender and foreclose on its lien, the mere filing of bankruptcy will not operate to release the borrower from legal responsibility for property carrying costs and associated liabilities. In cases of foreclosure delay, the defaulted mortgage becomes impossible to kill off completely, even when a borrower has abandoned the home and sought a bankruptcy fresh start. This undead mortgage prevents the property from entering the flow of commerce and poses a barrier to acquisition by a new owner willing to shoulder its upkeep. Neighborhoods and municipalities also pay the cost of zombie mortgages, as years can drag by with no resident owner paying homeowner association dues or property taxes. Furthermore, vacant, unmaintained properties pose a safety hazard and drive down community property values. Borrowers and communities have tried – with varying success – to address this zombie mortgage apocalypse with creative tools, as have bankruptcy debtors and courts.
When mortgage lenders refuse to foreclose real property surrendered in bankruptcy, courts have variously attempted to address the zombie mortgage. One underutilized way to kill off a zombie mortgage is to order the home be sold, free and clear of liens, under § 363 of the Bankruptcy Code. This section permits a trustee (or debtor-in-possession) to sell property free of outstanding liens in certain enumerated cases, including cases of lender assent, cases where the sale price will cover the aggregate value of liens encumbering the property, and cases where a free-and-clear sale would otherwise be available under a legal or equitable proceeding. Each of these options provides an interesting possible route to clearing title and providing a debtor with a fresh start in cases of foreclosure delay. Section 363 sales are also available in cases of a dispute about the underlying obligation, and this raises the possibility that lender misbehavior during the life of a mortgage loan can create lien vulnerability in bankruptcy.
This article explores the utility of the various subparts of § 363 as a tool to terminate zombie mortgages in bankruptcy. We believe that this bankruptcy power of sale provides a useful avenue to free debtors from the haunting shadow of a defaulted, un-foreclosed mortgage and associated involuntary homeownership. At the same time, the bankruptcy trustee sale power of § 363 can provide great community and market benefits and alleviate foreclosure crisis fallout by encouraging home occupancy and maintenance, wiping out stale liens, and releasing real property back into the stream of commerce.
In re Watt, Case No. 14-31295-tmb13, (D. Or 10/15/14) Bankruptcy judge decided there were no prohibitions to allowing the Debtors to both surrender the Property and vest it in BONY Mellon. Nor is there any indication that Debtors plan was filed in bad faith. Accordingly, Court confirmed the Second Amended Plan over the objection of BONY Mellon. However, the Order Confirming Plan should amend the plan by interlineation to make clear that the Debtors are surrendering the Property and that entry of the Order has no effect on the relative priority or extent of the liens against the Property.
In re Rose, 512 B.R. 790 (Bankr. W.D. N.C. July 8, 2014) (case no. 4:12-bk-40743) Chapter 13—Treatment of secured claims— Transfer of collateral to creditor: No provision of the Bankruptcy Code permits a Chapter 13 debtor to force a secured creditor to accept a conveyance of the property serving as collateral for the debt. Nor does Florida law permit a debtor to compel a secured creditor to foreclose on the property or take title to the property. The court ultimately concluded that neither the Bankruptcy Code nor Florida state law permitted the court to compel the SBA to foreclose or accept title to the property by a quitclaim deed. However, in a clever work-around, the court authorized the debtors to deliver a quitclaim deed to the SBA and record it if the SBA’s actions (or lack thereof) demonstrated acquiescence under applicable Florida law.
In re Rosa, 495 B.R. 522 (Bankr. D. Hawaii, July 8, 2013) Debtor’s Chapter 13 plan provided that title to certain real property would be vested in the first mortgagee pursuant to 11 U.S.C.S. § 1322(b)(9). The standing trustee objected.
Overview: The debtor jointly owned property that was subject to a first and second mortgage. The property was apparently subject to homeowners’ association fees. The debtor had no equity in the property and both mortgages were seriously delinquent. To escape liability for association fees, the debtor proposed that title be vested in the first mortgagee pursuant to § 1322(b)(9). Neither mortgagee objected. The court held that it was reasonable to infer acceptance of the plan from the lack of an objection only if the first mortgagee had received adequate notice of the plan. The court held that the first mortgagee got proper notice of the plan, and its failure to object meant that it had accepted the plan, within the meaning of 11 U.S.C.S. § 1325(a)(5)(A).
Articles: You Take It: Force-Vesting under Chapter 13 Plan, by Andrew Helman and Nathaniel Hull, ABI Journal, April 2016 (reprinted for educational purposes only)
Tidewater Fin. Co. v. Kenney, No. 07-1664 (U.S. 4th Circuit Court of Appeals, June 25, 2008)
In a Chapter 13 bankruptcy proceeding, an order confirming the debtor’s Chapter 13 bankruptcy plan is reversed and the case remanded for further proceedings where: 1) the parties are left to their contractual rights and obligations and a creditor may pursue an unsecured deficiency claim under state law after a debtor satisfies the requirements for plan confirmation under section 1325(a)(5)(C) by surrendering his 910 vehicle; and 2) the circuit court joints the Seventh Circuit Court of Appeals in further recognizing that such unsecured debt need not be paid in full any more than other unsecured debts, but it cannot be written off in total while other unsecured creditors are paid some fraction of their entitlements.
QUESTIONS: Can a debtor purchase a vehicle while in a chapter 13?Does the debtor need court approval?
ANSWER: Depending on the policy of the chapter 13 trustee it might not be necessary to get the quote before filing the motion to incur new debt. Will need to prepare the motion and have the trustee sign it, then file with the court. No specific length of time for the court to sign, but normally done in a few days. Once the order is signed the Debtor takes it to the car dealer and purchases the vehicle.
File a new plan including intent to surrender the old vehicle. Depending on the trustee the plan may need to include the new vehicle payment, or file an amended J with new payment. If you do not know the exact amount then use the highest guideline vehicle payment allowed and adjust when the payment amount is settled and adjust the final Plan payment accordingly when preparing the SOC.
Talk with the trustee in order to determine what you will need.
The original lender will still need to file a motion for relief from stay even if the amended/modified plan provides for surrender of the vehicle. So, if possible, it is best to have specifics about the new car before the old car is surrendered.
Till v. SCS Credit Corp. (US Sup Ct 05/17/04 – No. 02-1016) Four justices conclude that the “prime-plus” or “formula rate” best meets the purposes of the Bankruptcy Code’s cram down provision; because the proposed 9.5% interest rate is higher than the risk-free rate, it is sufficient to account for the time value of money, which is all 11 U.S.C. section 1325(a)(5)(B)(ii) requires.
WARNING: PRE-BAPCPA
In re Brown, 348 B.R. 583 (Bkrtcy.N.D.Ga. 2006) JOYCE BIHARY, Bankruptcy Judge Court has discretion to alter the timing of adequate protection payments to PMSI secured creditor, and direct that payment will go toward principal, not interest § 1326(a)(1)
PMSI creditor objected to chapter 13 plan. Creditor argued that the payment had to be made directly to creditor rather than through the trustee, and should be applied to interest rather than the principal.
The court pointed to the language in § 1326(a)(1) stating “Unless the court orders otherwise …” and held that this language gives the court discretion to alter the requirements of the remainder of the section which provides adequate protection payments to be paid within 30 days of filing the petition directly to the creditor with proof of payment to the trustee. And, payment could be made to the trustee rather than the creditor.
The opinion offers a thorough exploration of the history of the general rule regarding postpetition interest and concludes “Past bankruptcy practice supports the conclusion and the Court holds that these pre-confirmation adequate protection payments are to compensate for any depreciation in the collateral and should be applied to principal only.”
Scott v. Caliber Home Loans, Inc. (In re Scott), 2015 Bankr. LEXIS 2472 (Bankr. N.D. Okla. July 28, 2015) (Michael, C.B.J.). Creditor violated the discharge injunction by failing to properly credit debtor’s chapter 13 plan payments and claiming late charges.
In re Fridley, 380 B.R. 538 (9th Cir. BAP 2007). Held that debtors could not complete their Chapter 13 plan and obtain an early discharge by paying the remaining amounts due early, without first obtaining an order of the court allowing them to do so.
In re Eubanks. 219 B.R. 468 (6th Cir. BAP 1998) This 6th Cir BAP case provides that not only can one spread out the matured debt over the life of the Plan, but insofar as 1322(c)(2) is phrased as a specific exception to 1322(b)(2), the mortgage can be crammed down to the value of the house as may be appropriate under the facts.
OPINION: First Union Mortgage Corporation appeals the bankruptcy court’s orders overruling objections and confirming the Debtor’s Chapter 13 plan. The bankruptcy court held that the 1994 enactment of 11 U.S.C. § 1322(c)(2) created an exception to the protection from modification in § 1322(b)(2) that permitted a Chapter 13 plan to bifurcate an undersecured “short term” mortgage on the debtors’ principal residence. We affirm.
Sample response to objection to plan (from Nebraska):
COMES NOW the Debtors above named, by and through their attorney, and for their Response to (creditor)’s Objection to Confirmation of Plan states as follows:
1. That the Debtors agree with paragraphs 1, 2, and 3 of (creditor)’s Objection to Confirmation of Debtors’ Chapter 13 Plan. Doc. No. 13.
2. That the Debtors’ Chapter 13 Plan provides that (creditor) be paid in full through the Plan pursuant to 11 U. S. C. Section 1322(c)(2), which serves as an exception to the antimodification provisions of section 1322(b)(2), because the loan will have matured prior to the final plan payment.
3. That the clear intention and spirit of section 1322(c)(2) is to allow the Debtors to extend the repayment of the loan at issue over the length of the plan.
4. That case law makes it clear that 1322(c)(2) applies to balloon payments that mature pre-petition. See In re Dorsett, 2004 Bankr. LEXIS 1375 (Bankr. C.D. Ill. Sept. 15, 2004)(citing In re Dasher, 2000 Bankr. LEXIS 2003 (Bankr. M.D. Ga. Oct. 27, 2000); In re Sarkese, 189 B.R. 531 (Bankr. M.D. Fla. 1995); In re Chang, 185 B.R. 50 (Bankr. N.D. Ill. 1995); In re Escue, 184 B.R. 287 (Bankr. M.D. Tenn. 1995); In re Jones, 188 B.R. 281 (Bankr. D. Or. 1995)).
5. That the Debtor requests they be allowed to submit a Stipulated Order Confirming Plan or in the alternative file an Amended Plan.
WHEREFORE Debtors pray the Court allow the Debtors to submit a Stipulated Order
Confirming Plan or in the alternative to file an Amended Plan.
Viegelahn v. Lopez (In re Lopez), 17-50297 (5th Cir. July 31, 2018) Debtors who sell their exempt homestead and lose the exemption because they do not reinvest the proceeds in another home are nonetheless entitled to retain the proceeds on dismissal of their chapter 13 case, the Fifth Circuit held.
The debtors confirmed a chapter 13 plan calling for payments of $1,100 a month for 60 months. About two years into the plan, they sold their exempt home without court authorization. Two years later, they sought approval of the sale. Because they had not reinvested the proceeds in another home within six months, the net proceeds of more than $40,000 had lost their exempt status under Texas law.
The bankruptcy judge gave the debtors a choice. They could remain in chapter 13 and use about half of the proceeds for needed medical care, but the other half would go to the trustee for distribution to creditors. Or, the bankruptcy judge said, they could dismiss the case and retain the proceeds, but they would not receive a discharge. Meanwhile, the bankruptcy judge approved the sale nunc pro tunc but directed the trustee to hold the proceeds for the time being.
The debtors took the second option and filed a motion to dismiss voluntarily. In response, the chapter 13 trustee argued that the debtors’ failure to obtain court approval before the sale showed bad faith, constituting “cause” for overriding the presumption in Section 349(b) and blocking the proceeds from revesting in the debtors.
Bankruptcy Judge dismissed the chapter 13 case without prejudice, found no “cause” for overriding Section 349(b), and directed that the proceeds be turned over to the debtors after deducting the trustee’s commissions. (upheld by Circuit Court – noting that “proceeds from post-petition sales of a debtor’s exempt homestead generally must be returned to the debtor upon voluntary dismissal.” Alluding to Harris v. Viegelahn, 135 S. Ct. 1829, 1835 (2015), she said the Supreme Court firmly rejected the suggestion that a confirmed chapter 13 plan gives creditors a vested right to funds held by a trustee. The trustee who lost in Judge Elrod’s opinion was the same chapter 13 trustee who lost in Harris.
Harris v. Viegelahn, 14-400, The Supreme Court (on May 18, 2015) held that a debtor who converts to a chapter 7 is entitled to return of any post-petition wages not yet distributed by the chapter 13 trustee. In this 9-0 decision, the court ruled that the moment the Chapter 13 plan is terminated, the deal is immediately off with the Trustee and creditors and all money not paid out is due back to the debtor right away.
In re Cohen, 2:14-bk-11079-DPC (AZ Bk Ct, 2/29/16) Subsequent to dismissal of this chapter 13 case, the Arizona Department of Revenue (“AZDOR”) issued a levy against the Chapter 13 Trustee, Edward J. Maney, seeking payment from the Trustee of $4,718.85 to AZDOR from the funds paid to the Trustee during the course of Jeffrey Allen Cohen’s (“Debtor”) chapter 13 case. The Trustee filed a motion (“Motion”) to quash the AZDOR levy, contending § 1326(a)(2)1 requires the Trustee to pay such funds only to the Debtor. The Court denies the Trustee’s Motion and directs the Trustee to pay the sum of $4,718.85 from the funds held by the Trustee at the time this chapter 13 case was dismissed.
Bullard v. Blue Hills Bank, the Supreme Court (On May 4, 2015) issued its opinion in , holding that an order denying confirmation of the debtor’s proposed chapter 13 plan is not a “final” order that the debtor can immediately appeal.
In re Jones, No. 17-40497, 2018 Bankr. LEXIS 1244 (Bankr. S.D. Ill. April 26, 2018) In this Court’s view, attorney fees, which are governed by 11 U.S.C. § 328, should not be intertwined with § 1325(b)(1)’s requirement that debtors pay either 100% of general unsecured claims or all of their disposable income.”
Chapter 13 debtor, Gary Jones, proposed to pay secured creditors directly, and pay into the plan $100.00 per month with that amount going first to pay his attorney’s and the trustee’s fees in full, and then to pay 7.4% to his general unsecured creditors. Despite the fact that the attorney’s fees were below the court-approved no-look fee and that Mr. Jones could not afford to pay more into the plan, the trustee objected to confirmation on the basis that the plan was not filed in good faith.
In re Puffer (1st Circuit) – There is no per se bar to chapter 13 plans that pay only administrative expenses. This holding was followed by the Fifth Circuit in In re Crager Chapter 13 plan requiring lender to notify debtor of changes to mortgage payments.
In re Rodgers, (Bkrtcy.M.D.Fla.) July 1, 2010: Plans – Discrepancy between debtors’ disposable income and proposed plan payments supported finding of bad faith.
A Chapter 13 plan that provided for payment of only $100.00 per month by debtors whose schedules disclosed net disposable income of $2,056.16 per month was not proposed in good faith, though this surplus resulted from exempt income that the debtors received, in the amount of $2,128.00 per month, in Social Security disability benefits. A bankruptcy judge in Florida held that the exempt nature of this income did not alter the fact that it was disposable income available to fund the debtors’ plan.
United Student Aid Funds, Inc. v. Espinosa, 130 S. Ct. 1367 (2010) (3/23/10). Supreme Court Refuses to Void Confirmation of Plan Discharging Student Loan.
In that case Espinosa (9th Cir), a chapter 13 debtor, sought to discharge the accrued interest on his student loan while paying the principle through the plan. He did not initiate an adversary proceeding to determine undue hardship, but included the student loan in his plan. Although the student loan creditor received actual notice of the plan, it did not object to the partial payment. The bankruptcy court confirmed the plan, the debtor complied with it, and the debtor was discharged in 1997. Several years later, USAF attempted to collect the unpaid interest on the loan. Espinosa sought to have the bankruptcy court enforce the discharge and USAF counterclaimed with a motion to void confirmation of the plan under Fed. R. Civ. P. 60(b)(4).
The Supreme Court found that Rule 60(b) relieves a party of a final judgment only in the rare circumstance that the “judgment is premised either on a certain type of jurisdictional error or on a violation of due process that deprives a party of notice or the opportunity to be heard.” The Court began its analysis with the finding that the statutory requirements of undue hardship and the initiation of an adversary proceeding are not jurisdictional. The issue then, was whether USAF received adequate notice to satisfy due process. The Court found that the existence of actual notice, albeit not the type of notice proscribed by the bankruptcy rules, was sufficient to satisfy due process.
The Court addressed USAF and the Amicus, U.S. government’s, argument that the bankruptcy court’s order is void because it went beyond the court’s power. Although the Court found the failure to comply with §§ 523(a)(8) and 1328(a) before confirming the plan was “legal error,” that error did not rise to the level necessary to void a final judgment. This was especially so as the creditor had actual notice and was not permitted to “sleep on its rights.”
The Court disagreed with the aspect of the Ninth Circuit’s decision, however, insofar as it held that a bankruptcy court could confirm a plan which would discharge a student loan without an adversary proceeding so long as the creditor did not object.
CAN STUDENT LOANS BE A SEPARATE CLASS IN CHAPTER 13?
In re Morrison, 18-05791 (Bankr. E.D.N.C. Sept 26, 2019) Debtor-mother cosigned a 12%, $15,000 student loan to finance her daughter’s college education (daughter still in school). Debtor’s plan proposed to classify the student loan separately and pay it in full over the course of her five-year commitment period. If the separate classification were permitted, other unsecured creditors would recover 13%. If the student loan were not separately classified, the recovery for unsecured creditors would rise to 25% because more disposable income would be devoted to the unsecured class.
Absent tangible and measurable benefit, Judge Warren said that separate classification was “inappropriate and cannot survive confirmation.”
In re Engen, Case No. 15-20184 Bankruptcy Court, Dist of Kansas. The Debtors propose a plan in which student loan creditors are paid as a separate class before other general unsecured creditors. The Court’s reference to “separate classification” includes this favorable treatment. The Court, having reviewed the pleadings and counsels’ arguments, overrules the Trustee’s objection. Debtors’ proposed plan satisfies § 1322(b)(1) because Debtors’ separate classification and favored treatment of student loans does not discriminate unfairly, and the student loan claims are substantially similar.
In re Flores, D.C. No. 6:10-29956-MJ, No. 11-55452 (C.D.CA) (9th Circuit 8/29/13) In Maney v. Kagenveama (In re Kagenveama), 541 F.3d 868, 875 (9th Cir.2008), we held that 11 U.S.C. § 1325(b)(1)(B) does not impose a minimum duration for a Chapter 13 bankruptcy plan if the debtor has no “projected disposable income,” as defined in the statute. Today, sitting en banc, we overrule that aspect of Kagenveama and hold that the statute permits confirmation only if the length of the proposed plan is at least equal to the applicable commitment period under § 1325(b)(4). Accordingly, we affirm the judgment of the bankruptcy court.
Hamilton v. Lanning, No. 08-998 (US Supreme Court) decided 6/7/10
BANKRUPTCY (Under Chapter 13 bankruptcy, the court must calculate the debtor’s projected disposable income by the “forward-looking approach.”)
Before Respondent filed for Chapter 13 bankruptcy in 2006 for her unsecured debt, she received a lump sum from her employer that inflated her gross income. Respondent filed a plan to pay $144, but petitioner calculated a mechanical approach that resulted in a $756 payment for 60 months. The Bankruptcy Court endorsed the Respondent’s plan, stating that the projected income should consider the actual income of the debtor.
The Petitioner then appealed to the Tenth Circuit Bankruptcy Appellate Panel, who affirmed the decision. The United States Supreme Court held that the court must calculate a debtor’s projected disposable income with the “forward-looking” calculation of changes that are known, or virtually known, at the time. The court reasoned that the natural language of the word “projected” along with its visibility in federal statutes indicated that it was meant to involve averages.
Ranta v. Gorman, No. 12-2017 In 2005, however, Congress amended the definition of “disposable income” with the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub.L. No. 109–8, 119 Stat. 23 (2005). The Code now defines “disposable income” as “current monthly income received by the debtor” less “amounts reasonably necessary to be expended” for the maintenance or support of the debtor, certain charitable contributions, and certain business expenses. 11 U.S.C. § 1325(b)(2). “[C]urrent monthly income” means the debtor’s average monthly income from all sources during the previous six months, excluding, among other things, “benefits received under the Social Security Act.” Id. § 101(10A). Thus, Social Security income is now excluded from the definition of “disposable income.” In addition, the Code now requires above-median income debtors to use the “means test”—a statutory formula for determining whether a presumption of abuse arises in Chapter 7 cases—when calculating the “amounts reasonably necessary to be expended” for the debtor’s maintenance or support. See id. §§ 1325(b)(3), 707(b)(2). As a result, only certain specified expenses are included in the above-median income debtor’s “amounts reasonably necessary” for maintenance or support. Id. For below-median income debtors, however, the full amount reasonably necessary for maintenance and support is included. See § 1325(b)(2)(A)(i).
Although the Bankruptcy Code defines the term “disposable income,” it does not specifically define “projected disposable income.” However, in Hamilton v. Lanning, the Supreme Court explained that “projected disposable income” should be calculated based on “disposable income,” using a “forward-looking approach.” 130 S.Ct. 2464, 2469 (2010). First, the debtor’s “disposable income” should be multiplied by the number of months in the debtor’s plan, and in most cases the result will be determinative. Lanning, 130 S.Ct. at 2471. However, “in exceptional cases, where significant changes in a debtor’s financial circumstances are known or virtually certain, the bankruptcy court has discretion to make an appropriate adjustment.” Id.; see also In re Quigley, 673 F.3d 269, 273–74 (4th Cir.2012) (noting that under Lanning, bankruptcy courts may account for foreseeable changes in both income and expenses).
The Trustee first claims that the revised definition of “disposable income” applies only to above-median income debtors, not to below-median income debtors, like Mort Ranta. But the Code provides a single definition of “disposable income,” and that definition uses “current monthly income” as a starting point without differentiating between debtors of different income levels. 11 U.S.C. § 1325(b)(2). Although the Code goes on to distinguish between above-median income and below-median income debtors for purposes of calculating the “amounts reasonably necessary” for the debtor’s maintenance or support, id. § 1325(b)(3), there is no distinction on the income side.
DEBTOR OVER MEDIAN, BUT NEGATIVE DMI – CAN PLAN BE LESS THAN 60 MONTHS: APPLICABLE COMMITMENT PERIOD
In re: Cesar Ivan Flores, (Danielson v. Flores) No. 11-55452 9th Cir, 8/31/12)
On August 31, 2012, the court in Flores reconfirmed the decision in Maney v. Kagenveama, 541 F.3d 868 (9th Cir. 2008), that the five year commitment period does not apply when the debtor has zero or negative disposable income. In Chapter 13 proceedings, the bankruptcy court’s order sustaining the trustee’s proposed plan of reorganization with a duration of 60 months, rather than the debtors’ proposed 36-month plan, is reversed and remanded, as Lanning is not clearly irreconcilable with Kagenveama‘s construction of “applicable commitment period,” and the current Ninth Circuit precedent plainly allows debtors with no “projected disposable income” to confirm a plan in shorter duration than the applicable commitment period found in 11 U.S.C. section 1325(b).
Good summary: In re Flores, from the Ninth Circuit. This upholds Kagenveama on the issue of applicable commitment period (ACP) as applied to projected disposable income (PDI) in chapter 13, under section 1325(b). Thus, in the Ninth Circuit, an above-median-income debtor with no PDI can confirm a plan that is shorter than the ACP of five years. The court upheld the approach that ACP doesn’t apply to a debtor with no PDI. This means a split continues between the Ninth Circuit and the Sixth (Baud) and the Eleventh (Tennyson) Circuits. The court found that the Kagenveama decision is not clearly irreconcilable with Hamilton v. Lanningand therefore only the Supreme Court or the Ninth Circuit en banc can negate Kagenveama.
In Re: David Reed and Rebecca Reed (Oregon Case No. 10-38478-elp13)
Judge concludes that debtors’ projected disposable income is less than zero, and that, under controlling Ninth Circuit precedent, they are not required to commit to a five-year plan period. Debtors’ plan as proposed will be confirmed.
In re: Kagenveama, No. 06-17083 (U.S. 9th Circuit Court of Appeals, June 05, 2008)
In an appeal arising from Chapter 13 bankruptcy proceedings, an order confirming a debtor’s bankruptcy plan is affirmed where: 1) “projected disposable income” means “disposable income,” as defined by Bankruptcy Code section 1325(b)(2), projected over the “applicable commitment period,”; and 2) although the term “applicable commitment period” denotes the time by which a debtor is obligated to pay unsecured creditors, the requirement is inapplicable to a plan submitted voluntarily by a debtor with no “projected disposable income.” Read more…
In re Davis, 348 B.R. 449 (Bkrcy.E.D.Mich. 2006) PHILLIP J. SHEFFERLY, Bankruptcy Judge “Applicable commitment period” determines the length of the chapter 13 plan § 1325(b)(1)(B)
In case where the debtor’s income was over the state median, Chapter 13 trustee objected to debtor’s plan proposing to make payments for 36 months rather than 50 months. The debtor argued that the term “applicable commitment period” found at § 1325(b)(1)(B) does not determine the actual length of the plan but only functions as a multiplier pursuant to § 1325(b)(4). The court rejected this theory primarily based on the dictionary definitions of the words “period” and “commitment,” and concluded “… a debtor’s applicable commitment period, as determined by § 1325(b)(4) does impose a minimum length of a plan, rather than a calculation of a minimum amount…”
In re Fuger, 347 B.R. 94 (Bkrtcy.D.Utah 2006) WILLIAM T. THURMAN, Bankruptcy Judge
Above-median income debtor is required to have a plan of 60 months “The Applicable Commitment Period” § 1325(b)(1)(B)
The trustee argued that the term “applicable commitment period” uses the word “period” and therefore is a measure of time. Debtor argued that the “applicable commitment period” was only a multiplier used in calculating disposable income. While acknowledging that the terms are unclear as used in the BAPCPA amendments, the court looked to Congressional intent and agreed with the trustee, noting that the same word “period” is used in that code section under pre-BAPCPA text to mean a period of time, and was also used in calculating projected disposable income.
“The court concludes that Congressional intent underlying the amendments to § 1325(b)(1)(B) is clear – – – the term ‘applicable commitment period’ is both a monetary and a temporal provision. It is monetary in the sense that it has always required debtors to commit to pay unsecured creditors a set return. It is temporal in the sense that it has always required debtors to determine that return by projecting over a specific time period, and it provides debtors with a time limit for performing under a chapter 13 plan.”In re: Zahn, No. 07-1974 (U.S. 8th Circuit Court of Appeals, May 22, 2008)
A debtor who objects to her own Chapter 13 plan may be an “aggrieved party” and have standing to appeal confirmation of such plan.
In re Demonica, 345 B.R. 895 (Bkrtcy.N.D.Ill. 2006) Debtor’s “projected disposable income” had to be based on schedules I” and “J” rather than an “historical average” § 1325(b)(1)(B), § 707(b)(2)(A) Chapter 13 trustee objected to plan where projected disposable income was based on the code formula, and where debtor’s current monthly income (“disposable income”) was $1,199.55 but his actual “projected monthly income” from the schedules was $2,517.36. The court held that the actual amount that must be paid through the plan was the projected disposable income as shown on the schedules. The court also held that in order to determine the proper expenses to be deducted from projected income, the debtor is allowed to take the full National and Local Standard amounts. Additional expenses for the categories specified by the IRS are only proper if they fall within the additional expense provisions as specified by the IRS or as defined in the Code. In order to claim Other Necessary Expenses, the debtor must itemize, document and provide a detailed explanation of the special circumstances that render those expenses reasonable and necessary.
Most courts analyzing post-petition windfalls, such as an inheritance, have found them to be property of the Chapter 13 estate. See, e.g., In re Bass, 267 B.R. Page 4 812, 814 (Bankr.S.D.Ohio 2001) (“A debtor might receive unanticipated income over the first thirty-six months of the plan that is not reasonably necessary for maintenance or support (e.g., wage increases, tax refunds, inheritances, gifts, lottery proceeds, insurance proceeds, proceeds from causes of action, or proceeds from the sale of property).”); In re Jacobs, 26,3 B.R. 39 (Bankr.N.D.N.Y.2001) (“For purposes of plan modification, an increase in income or the receipt of a large sum of money constitutes a substantial change…. [T]his is so where the debtor acquires property post-confirmation, the likes of which would result in a windfall to the debtor absent plan modification, such as lottery winnings or an unexpected inheritance.”); In re Nott, 26,9 B.R. 250 (Bankr.M.D.Fla.2000) (holding that a $300,000.00 inheritance one year after confirmation was property of the estate pursuant to § 1306(a)); In re Studer, 23,7 B.R. 189 n. 5 (Bankr. M.D.Fla.1998) (“Courts easily have found a substantial or unanticipated change where the debtor’s income drastically increases. Such windfalls include winning the lottery after confirmation of the Chapter 13 plan. Substantial and unanticipated circumstances also include the receipt of a large inheritance.”); In re Euerle, 7,0 B.R. 72 (Bankr.D.N.H.1987) (addressing an increase in debtor’s income through receipt of a large inheritance).
In re Pizzo, 20-01758 (Bankr. D.S.C. May 20, 2021) With qualifications implying that all chapter 13 debtors may not qualify, Chief Bankruptcy Judge Helen E. Burris of Spartanburg, S.C., sided with the majority and allowed the debtor to continue making voluntary contributions to her retirement account. This was a compromise with the trustee.
From ABI (reprint for educational purposes only) Section 541(b)(7)(A), one of the most poorly drafted provisions added in 2005 by the Bankruptcy Abuse Prevention and Consumer Protection Act, provides that property of the estate does not include contributions to 401(k) plans. The end of the subsection includes a so-called hanging paragraph that says, “except that such amount under this subparagraph shall not constitute disposable income as defined in section 1325(b)(2).”
Finally, Section 707(b) provides grounds for dismissal and uses the term “current monthly income.” While charitable contributions are specifically excluded as grounds for dismissal, the statute is silent about contributions to a retirement plan.
There have been four interpretations of the statute, with three results: (1) Retirement contributions can never be deducted from disposable income, even if the debtor was making contributions before bankruptcy; (2) a debtor may continue making contributions, but not more than the debtor was making before bankruptcy; and (3) a debtor may make contributions after bankruptcy up to the maximum allowed by the IRS, even if the debtor was making none before bankruptcy.
So far, only the Sixth Circuit has tackled the split. See Davis v. Helbling (In re Davis), 960 F.3d 346 (6th Cir. 2020). In a 2/1 decision, the majority held that a debtor who was making contributions to a 401(k) before bankruptcy may continue making contributions in the same amount by deducting the contributions from “disposable income.”
RESFL Five LLC v. Ulysse, 16-62900 (S.D. Fla. Sept. 29, 2017) Court permitted continuing contributions into retirement plan (debtors contributed pre-petition and are approaching retirement age.) This record reveals a pre-petition pattern of preparation for retirement. Significantly, it is also undisputed that Mr. Ulysse is nearing his retirement age. There is nothing unusual about an individual making contributions or increasing the amount of such contributions as retirement age draws closer, such as is the case here. Equity dictates that a debtor who is on the verge of retirement should be allowed to continue making voluntary contributions to a retirement account. Otherwise, the debtor would be deprived of the ability to obtain a fresh start. See In re Shelton, 370 B.R. at 869. Based on the record, the Bankruptcy Court’s underlying finding that the Chapter 13 Plan was proposed in good faith was not clearly erroneous
In re Johnson, 346 B.R. 256 (Bkrtcy.S.D.Ga. 2006) Debtor’s payments to their 401(k) and payroll deductions to repay a 401(k) loan need not be included in disposable income: budget for housing and transportation is flexible § 1325(a), 1325(b), 1322(f), 101(10A)(A), 101(10A)(B), § 707(b)(2)(A)(ii)(I), (A)(iii). In its analysis the court in several places cited language in the IRS Manual for clarification or support on certain issues.
Chapter 13 trustee objected to budget that deducted voluntary payments to debtor’s 401(k) pension plan, and also repayments of loan drawn from the 401(k), Court held that § 1325(b)(2) permitted such expenses as a deduction from current monthly income or disposable income.
The court appears to have held that the disposable income that must be paid through the plan is only based only on “disposable income” as prescribed by § 1325(b) and § 707(b)(2), thus excluding actual disposable income from the schedules. However, the court noted “This creates an opportunity for savvy debtors to artificially reduce CMI by intentionally avoiding pre-petition income, citing other authority for “The debtor might take an unpaid leave of absence, quit a job, or refuse overtime the[y] formerly welcomed.” Cite.
Discussing the budget calculation, the court observed ” … debtors who can demonstrate “reasonably necessary” may adjust the allowances for food and clothing by up to 5%.” The debtor may deduct actual expenses for the “Local Standards” for monthly housing and transportation expenses for debts secured by their real estate and vehicles.
Court cited § 707(b)(2)(A)(ii)(I) which states ” … the monthly expenses of the debtor shall not include any payments for debts.” The debtor may only deduct as an expense the difference between the actual payment amount and the IRS guideline amount. However, the court pointed out that notwithstanding that language, the actual expenses for secured debts may be deducted pursuant to § 707(b)(2)(A)(iii). The court disallowed the debtor’s claim for unusually high unreimbursed medical expenses, as well as the claimed amounts of deductions for income taxes because of insufficient documentation to support it. Court held that “gross income” as used in Form B22C is income before tax deductions.
August, 2019: “Haven Act”: Honoring American Veterans in Extreme Need Act of 2019 – income from Social Security, VA or DOD is not included in means test. Chart from ABI
In re Ragos (5th Circuit)– Holding that social security benefits are not disposable income in chapter 13 and it is not bad faith to exclude such income from calculating disposable income. In re Cranmer (10th Circuit) – Same as Ragos.
In re Mason (Bankr.N.D. CAL. 2004) A debtor operating under a confirmed Chapter 13 plan is entitled to return collateral to a secured creditor and modify the Plan to treat the creditor’s claims as unsecured.
WARNING: PRE-BAPCPA
In re Edwards, 13-25698 (Bankr. S.D. Fla. May 22, 2019) As Judge Kimball said in his May 22 opinion, Bateman held that a mortgage lender’s allowed claim for arrears survives confirmation of a plan. If the plan and its underpayment were to control, the Eleventh Circuit said, the plan would “deny the effect of Section 1322(b)(2).” Id. at 822. (Section 1322(b)(2) precludes a chapter 13 debtor from modifying a secured claim that is “secured only by a security interest in real property that is the debtor’s principal residence.”)
Bateman dealt with prepetition arrears, whereas Judge Kimball confronted a case involving post-petition arrears. Despite the factual difference, he said that Bateman would “apply equally” to the case at hand.
Judge Kimball nonetheless declined to follow seemingly binding circuit precedent in light of United Student Aid Funds Inc. v. Espinosa, 559 U.S. 260 (2010). He said that “Espinosadisplaced the Eleventh Circuit’s . . . ruling in Bateman, that the antimodification provision in Section 1322(b)(2) prevails over the binding effect of a confirmed plan under Section 1327(a).”
In Espinosa, the chapter 13 debtor confirmed a plan that discharged student loans, in violation of the debtor’s obligation to file an adversary proceeding and obtain a declaration that the student loans were dischargeable under Section 523(a)(8). Although the plan violated Section 523(a)(8), the Supreme Court ruled that the student loans were nevertheless discharged.
In re: Bateman (05/23/03 – No. 02-11221) (11th Cir) A secured creditor cannot collaterally attack a confirmed Chapter 13 plan, even though the plan conflicted with mandatory provisions of the bankruptcy code, when the secured creditor failed to object to the plan’s confirmation or appeal the confirmation order. A secured creditor’s claim for mortgage arrearage survives the confirmed plan to the extent it is not satisfied in full by payments under the plan.
WARNING: PRE-BAPCPA
NOTE re post petition debt: Pursuant to 11 U.S.C. 1327(b), all property of the estate vests in the debtor upon confirmation “[e]xcept as otherwise provided in the plan or the order confirming the plan….” Most orders confirming in Arizona specifically proide that the property of the estate vests in the debtor.
If you carefully review Section 362, you will note that the automatic stay does NOT apply to efforts to enforce a post-petition debt against property of the debtor, i.e. property that vested in the debtor upon confirmation. A debtor in Chicago learned this the hard way when the city impounded and crushed her car due to her failure to pay post-petition parking tickets. Because the car vested in the debtor upon confirmation, the District Court found that the automatic stay did not bar the action and she was out of luck. See In re Fisher, 203 B.R. 958 (N.Dist.Ill 1997)
WARNING: PRE-BAPCPA
Enewally v. Washington Mutual Bank, No. 02-57119 (9th Cir. May 27, 2004) A Chapter 13 bankruptcy plan may not provide for dividing a loan into secured and unsecured claims with the debtor satisfying the secured claim beyond the life of the Chapter 13 plan. http://caselaw.lp.findlaw.com/data2/circs/9th/0257119p.pdf
WARNING: PRE-BAPCPA
In re Valenti (9th Cir. BAP. 2004) Fraud discovered after 180-day deadline cannot be raised to deny Plan confirmation. The 180-day period to move for revocation of confirmation for fraud is a strict deadline, even if the fraud is not discovered until after the deadline has passed. Section 105 is not a proper basis for changing the deadline. Rule 60(b) is not a basis for revocation. A timely request for revocation of confirmation cannot be amended, after the 180-day period has expired, to add new grounds not pled within the 180-day period. Where a creditor knows of a basis for challenging confirmation and fails to object, the creditor cannot be permitted to use that basis to claim fraud under after confirmation. Moreover, confirmation is res judicata as to all issues that could have or should have been litigated at the confirmation hearing. An issue “could have” been litigated at the confirmation hearing if a party in interest had the opportunity to investigate and litigate it and the debtor did not prevent it from being litigated by fraud, misrepresentation or concealment.
WARNING: PRE-BAPCPA
Bankruptcy Rule 1016 provides the relevant authority pertaining to the chapter 13 estate of a deceased debtor:
Death or incompetency of the debtor shall not abate a liquidation case under chapter 7…. In such event, the estate shall be administered and the case concluded in the same manner, so far as possible, as though the death or incompetency had not occurred.
If a reorganization, family farmer’s debt adjustment, or individual’s debt-adjustment case is pending under chapter 11, chapter 12, or chapter 13, the case may be dismissed; or if further administration is possible and in the best interest of the parties, the case may proceed and be concluded in the same manner, so far as possible, as though the death or incompetency had not occurred.
The debtor’s attorney needs to discuss the options with the heirs in order to determine the best interest of the parties. A hardship discharge might be an option, depending on the circumstances.
Credit unions typically include cross-collateralization provisions in loans made to their members, and many consumers will not even realize that their loan and security agreements include cross-collateralization provisions. These provisions are sometimes referred to as dragnet, future-advance or all-indebtedness provisions and are usually in the boilerplate wording at the end of a loan or security agreement and are difficult for the consumer to understand. Cross-collateralization provisions allow the credit union to bind the collateral from one loan (such as a vehicle) to secure another debt (such as a credit card or signature loan, or even another vehicle).
In a chapter 7 bankruptcy, most of a debtor’s debts are discharged in exchange for the debtor relinquishing his/her nonexempt property. For a debtor in chapter 7 to keep an asset securing a debt that would normally be discharged, the debtor must reaffirm the debt.
In chapter 13, a debtor could elect to keep his/her vehicle and pay the secured debt through the chapter 13 plan. As long as the debtor is current on his/her bankruptcy plan payments and keeps the car insured, the debtor will likely be able to keep his/her car under bankruptcy law.
However, when a debtor has two vehicles financed from a creditor and the contracts include cross-collateralization provisions as the exhibit demonstrates, the debtor’s options are not as clear as they might appear under § 1325(a)(5), which provides:
1325(a)(5) provides that with respect to each allowed secured claim provided for by the plan –
(A) the holder of such claim has accepted the plan;
(B) [the cramdown option]; or
(C) the debtor surrenders the property securing such claim to such holder….
What happens if the credit union has multiple loans with cross-collaterialized provisions (e.g. two vehicles with separate loans)? The options under § 1325(a)(5) are unclear when dealing with a debtor who has multiple loans containing cross-collateralization provisions. Before Barragan Flores, 585 B.R. 397, 401 (W.D. Tex. 2018), it appears that no reported decisions have addressed a plan proposing a partial surrender and retention of collateral under chapter 13 with two loans that contain cross-collateralization provisions. The results in this case is that the borrowers would have to either pay for both vehicles or surrender both. (Note – this is not a 9th Circuit case).
In re Katina M. Moore, 619 B.R. 35, US Bankruptcy court, W.D. N.Y) (8/4/20) “Mortgage lender was not entitled to charge Chapter 13 debtor-mortgagor any fee, much less a fee of $500, for objecting to form plan that debtor had filed simply on the basis that debtor had misstated amount of pre-petition mortgage arrearage and monthly mortgage payment; any objection to amount of arrearage and monthly payments, as stated in plan, could be resolved simply by filing proof of claim, making any fee for filing a formal plan objection unnecessary, given that debtor’s form plan expressly provided that amount of arrearage and monthly mortgage payments would be in amount stated unless lender’s proof of claim provided to the contrary.”
RECOVERING BANKRUPTCY ATTORNEYS FEES AND GUIDE TO FILING NOTICE OF POST-PETITION MORTGAGE FEES, COSTS, & EXPENSES
By Jason Weber, Sirote & Permutt (as published in Lexology 5-2019)
It is hard to deny the growing sense of uncertainty that has developed since 2011 when the Bankruptcy Rules were amended to add Rule 3002.1 which requires, among other things, a notice to be filed itemizing any post-petition fees, expenses or charges incurred in connection with their claim. With more and more disputes arising between Chapter 13 creditors, debtors and trustees over the reasonableness and entitlement of those fees it is imperative that creditors understand the best practices for recovering the full amount of their fees and how to defend against any unwanted objections. For the purposes of this article, we will focus specifically on attorneys’ fees incurred in connection with the filing of a proof of claim and plan review since these are the two most frequently sought and contested fees.
- Look to the Agreement: does the mortgage provide for collection of bankruptcy related attorney fees?
- Fees for Filing POC: a defective claim could deprive a creditor of the prima facie evidence of the validity and amount of the claim.
- Plan review fees: diligent attorney review that would justify the standard $200-$300 plan review fees.
- Detail, Detail, Detail: Creditor attorney should include as much detail as possible is the best method for avoiding a dispute and convincing the debtor and trustee, on the front end, of the reasonableness of their fees.
- “No Look” standard: each district may have a ‘no look’ fee for basic POC and Plan review.
- Best Practices: It is important to describe the totality of responsibilities involved for filing a proof of claim and scope of performing the plan review as well as assert the significant legal risks to creditors and how those risks are substantially reduced when an attorney performs these functions on behalf of the creditor.
Bradley Arant Boult Cummings LLP – Glenn E. Glover
The intersection of Chapter 13 bankruptcy and escrow accounts is complicated and confusing. Since 2011, various bankruptcy rule and form changes have occurred in an effort to eliminate perceived problems with Chapter 13 escrow issues. This article explains how one of these changes – a revised version of a proof of claim attachment form – actually added to the confusion instead of alleviating it, and how that confusion can be costly to servicers.
Official Form B410A
One of the changes was a new form attachment for mortgage proofs of claim effective December 1, 2011 – Official Form B10A (entitled “Mortgage Proof of Claim Attachment”). An accompanying revision to Bankruptcy Rule 3001 mandated use of Form B10A if a security interest is claimed on the debtor’s principal residence. Four years later, effective December 1, 2015, Form B10A was superseded by a new Official Form B410A (also entitled “Mortgage Proof of Claim Attachment”). Unfortunately, Form B410A often causes issues at the end of a successful Chapter 13 case.
Part 3 of Form 410A contains numerous line items to calculate the prepetition arrearage. They include amounts for “Escrow deficiency for funds advanced” and “Projected escrow shortage,” which the Official Instructionsmake relatively clear are the same amounts as “escrow deficiency” and “escrow shortage” as defined by RESPA in Regulation X, 12 C.F.R § 1024.17. The line item for “Principal and interest” must include only the principal and interest component of the missed prepetition payment and cannot include any escrow portion.
The Disconnect Caused by B410A
Unlike former Form B10A, current Form B410A does not allow a servicer to include the escrow component of the missed prepetition payments in the prepetition arrearage. Instead, escrow is severed from those missed prepetition payments and accounted for in the arrearage by including any escrow shortage/deficiency (or surplus) identified by a petition-date escrow analysis as a separate line item(s). Few, if any, servicing systems of record, however, allow a servicer to simply change the escrow amount of missed prepetition payments. Instead, those payments remain fixed after the bankruptcy case is filed and must be satisfied to advance the contractual due date of the loan. Simply put, the end result is that the servicer’s system of record requires one escrow amount to satisfy missed prepetition escrow payments, and Form B410A requires an escrow shortage/deficiency amount that is virtually never the same. This means that at the end of a successful Chapter 13 case, the mismatch of these two amounts presents a situation in which the debtor can never be precisely “current.”
As a hypothetical, suppose the borrower misses six $1,000 monthly payments each containing a required principal and interest component of $800 and a required escrow component of $200. This means he has missed $4,800 of prepetition principal and interest payments and a $1,200 of prepetition escrow payments. Further suppose that the petition-date escrow analysis recognizes an escrow shortage of $1,040. Part 3 of Form 410A will therefore include $4,800 for principal and interest and $1,040 for escrow in the prepetition arrearage, or a total amount of $5,840. The system of record, though, needs $6,000 to fully pay the six missed prepetition payments of $1,000 each. Holding numerous other variables constant for illustration purposes, this means that at the end of the Chapter 13 case the borrower will be $160 short of being current on his payments.
The Potential Financial Impact
At the end of a Chapter 13 case, upon completion of the Chapter 13 trustee’s repayment of the prepetition arrearage, she is required to file a “notice of final cure payment” pursuant to Bankruptcy Rule 3002.1(f). The servicer is then required to file a response pursuant to subsection (g) stating whether or not the debtor is current on his postpetition payments. In situations like the above hypothetical (which may involve “mismatch” amounts much greater than $160), the servicer will often simply bring the debtor current and waive the difference when performing reconciliation in preparation for a response. Less frequently, the servicer will respond that the debtor is not current but end up writing the difference off because of further debtor objection. Either way, bringing the debtor’s loan current when it is not in fact current often causes an actual monetary loss to the servicer. Over time, these losses of course add up.
Conclusion
This issue will become more and more common in the near future, as three-year Chapter 13 plans based on servicer proof of claims filed after December 1, 2015, approach their end date, and continue to be common so long as Form B410A remains in its present form. Servicing bankruptcy departments, specifically staff and management charged with responding to Chapter 13 trustee notices of final cure, must be aware of this issue. It is not difficult to compare the escrow amounts in the Form B410A with the sum of the missed prepetition escrow payments to determine if there is a substantial difference and whether or not the difference is contributing to a debtor’s delinquency at the end of a Chapter 13 case. Proper education of staff and management on this issue can directly assist servicers in avoiding substantial write-offs.
In re Martinez (Ronald Martinez v Wells Fargo) BAP No. CC19-1037-FSTa (9th Cir. 10/8/2019) As a general rule, “[w]hen the bankruptcy court confirms a plan, its terms become binding on debtor and creditor alike. Confirmation has preclusive effect, foreclosing relitigation of ‘any issue actually litigated by the parties and any issue necessarily determined by the confirmation order.’” Bullard v. Blue Hills Bank, 135 S. Ct. 1686, 1692 (2015) (citations omitted). Put another way, we recently stated that “[a] plan is a contract between the debtor and the debtor’s creditors. The order confirming a chapter 13 plan, upon becoming final, represents a binding determination of the rights and liabilities of the parties as specified by the plan.” DerhamBurk v. Mrdutt (In re Mrdutt), 600 B.R. 72, 76-77 (9th Cir. BAP 2019) (citing Max Recovery, Inc. v. Than (In re Than), 215 B.R. 430, 435 (9th Cir. BAP 1997); 8 Collier on Bankruptcy ¶ 1327.02 (Richard Levin & Henry J. Sommer eds. 16th ed. 2019)).
9th BAP Holds that Post-Petition Excess Proceeds (appreciation) from sale of exempt or non-exempt real property is not DMI
In re Black, 609 B.R. 518 (2019) “Excess proceeds that Chapter 13 debtor obtained, beyond those necessary to make final balloon payment contemplated in his confirmed plan and to satisfy his obligations thereunder, as result of post-confirmation sale of his real property, were not “disposable income,” such as had to be devoted to payment of unsecured creditors under plan.”
Debtor had a rental. He valued the non-exempt rental property on his original schedules. It was worth more than what he owed. That equity had to be paid for via his plan payment to satisfy best interest of creditors test.
Plan confirmed and property vested back to debtor upon confirmation. Debtor filed a motion to sell the property. By that time, the rental appreciated beyond the value set forth in the schedules. Trustee wanted the additional excess proceeds contributed to the plan. Court disagreed and said appreciation of the rental was for the benefit of the debtor since the property vested back in the debtor upon confirmation. As such, excess proceeds did not have to be contributed to the plan, even though they were more than what the equity value that was used to determine the original plan payment to satisfy Chapt. 7 reconciliation. Same rule, whether it is exempt or non-exempt property.
9th BAP holds Chapter 13 Debtor Can’t Keep Postpetition Appreciation in Value of Stock Options
Berkley v. Burchard (In re Berkley), 19-1197 (B.A.P. 9th Cir. April 17, 2020) (Same judge as in Black – above) After confirmation, the debtor landed a job as the chief executive of a startup, from which he began receiving stock options. The company received a buyout offer paying the debtor $3.8 million for his options. In the fifth year of the plan, the debtor notified the trustee about his potential receipt of the $3.8 million. The trustee moved to include the post-petition asset in the estate. The bankruptcy judge approved a modification of the plan requiring the debtor to turn over $200,000 of the proceeds from the options, enough to pay unsecured creditors in full.
The BAP and the Ninth Circuit have held that an unexpected increase in income can justify an increase in plan payments. “In other words,” Judge Faris said, “confirmation does not shield increases in the debtor’s postconfirmation income from the reach of the chapter 13 trustee or creditors.” Judge Faris tackled the job of harmonizing the case at hand with Black. After all, Black allowed the debtor to retain the postpetition appreciation in value of a nonexempt, capital asset. So, why couldn’t the debtor retain the appreciation in the value of stock options, which likely had little or no value when issued?
In Black, Judge Faris said, the home that rose in value was an asset of the estate on the filing date and on the date of confirmation. The case on appeal, he said, “is solely concerned with postconfirmation wages.”
Reichard v. Brown (In re Reichard), No. 19-2010 (D. Ariz. March 12, 2020) (unpublished) The Arizona District Court found that the District of Arizona’s Local Plan Form for chapter 13 bankruptcies under which all debtors must automatically submit their tax returns during the life of their plans does not conflict with the Code.
“for plans with no objection, the Code provides no minimum or fixed durations”
In re Sisk, 18-17445 (9th Cir. June 22, 2020)Reversing, the panel held that when there is no objection,a bankruptcy plan need not include a fixed duration because no express provision of Chapter 13, even when viewed in the context of its broader structure, prohibits plans with estimated lengths. The panel concluded that neither 11 U.S.C. § 1322 nor § 1325 points to an express fixed or minimum duration requirement for Chapter 13 plans absent an objection, and neither provision prohibits estimated term plans. Read together, the Bankruptcy Code provides for a
maximum duration for all plans and a minimum duration for objected-to plans. The panel concluded that the clear implication of this framework was that, for plans with no objection, the Code provides no minimum or fixed durations. The panel concluded that the Code’s structure also supported a debtor’s ability to include estimated terms, and allowing estimated terms would not nullify a trustee’s or creditor’s modification rights under 11 U.S.C. § 1329.
Payments after 5-year period are impermissible effort to modify the plan
In re Kinney, Kinney v. HSBC Bank USA N.A. 20-1122 (10th Cir. July 23, 2021) This appeal arises because Ms. Margaret L. Kinney failed to make some of the required mortgage payments within her plan’s five-year period. Shortly after the five-year period ended, however, she made the back payments and requested a discharge. The bankruptcy court denied the request and dismissed the case. The issue on appeal is whether the bankruptcy court could grant a discharge, and the answer turns on how we characterize Ms. Kinney’s late payments. She characterizes them as a cure for her earlier default; HSBC Bank characterizes them as an impermissible effort to modify the plan. We agree with the bank and affirm.
In re Garcia, 219-bk-06454-DPC (AZ Bankruptcy Court, 12/24/20 – COVID arrears) Lienholder’s lawyer entered her appearance on June 3, 2020. Debtors filed their Modified Plan5 calling for, among other things, payment of Debtors’ post-Petition Date arrears on the Lienholder’s loan over 71 months. Although the Lienholder and its lawyer received notice of the Debtors’ Modified Plan, it never filed an objection. However, the chapter 13 trustee, Edward Maney (“Trustee”), did file his recommendations8 on August 10, 2020 requiring, among other things, that the Debtors obtain the Lienholder’s written consent to the proposed treatment under Debtors’ Modified Plan. CONCLUSION: The Court now holds that, notwithstanding the language of § 1322(b)(2), paragraphs (3) and (5) authorize a modified chapter 13 debtor’s plan to cure post-petition arrears on a lien secured only by a lien on that debtor’s residence.
In re Terrell, 21-3059 (7th Cir. July 12, 2022 If the law changes dramatically after confirmation of a chapter 13 plan, the debtor must move within one year of confirmation to amend the plan. Otherwise, the debtor will be stuck with the original plan and a provision no longer reflective of the law. Detailed discussion about 1329, and 60(b)(1), made applicable by BK Rule 9024. The opinion may also apply to modification of chapter 11 within one year of confirmation.
