CHAPTER 13 – PART II Prior to the 2005 Act Chapter 7 contained a 6 year bar to obtaining a subsequent discharge Policy conventional morality suggests that a discharge should not be too frequent an occurrence and Congress drew the lines at 6 years Chapter 13 initially did not contain a limitation Theory: because chapter 13 debtors are paying at least a portion of their debts there is no reason to thwart debtors by imposing a time bar. Theory did not work out in practice Example: Johnson v. Vanguard Holding Corp. [Pg. 542 Text] Facts: After defaulting on a mortgage, on 12/07/81 Debtor filed a chapter 13 plan providing for a cure of the default by paying the defaulted amount over 36 months. The plan was confirmed on 2/3/82. When debtor failed to make any payments under the plan the Creditor – mortgagee applied for dismissal. Although Debtor had counsel no appearance was made on debtor’s behalf and the case was dismissed. After the Creditor-mortgagee began foreclosure, Debtor filed a 2nd Chapter 13 case through her attorney. The creditor moved to either deny confirmation, dismiss or convert the case to chapter 7. The bankruptcy court dismissed the case having found lack of good faith. The D.C. affirms and Court of appeals reverses with instructions to determine if bona fide change in circumstances. Section 109(g) addresses the repeated filing issue as one of eligibility to file chapter 13. Under 109(g)(1) an individual who has been a debtor in a case pending within the preceding 180 days that was dismissed for willful failure of the debtor to abide by court orders or to appear before the court in proper prosecution of a case is in eligilbe to file a chapter 13. 109(g)(2) was intended to deal with multiple filings following stay relief and addresses a different concern.
Commencing A Chapter 13 Case • Debtor’s commence a chapter 13 case much like any other chapter by filing a petition. The debtor must file bankruptcy schedules and other documents required under 11 U.S.C. §521(a)(1). • Debtor must also file his or her chapter 13 plan with the petition or within 15 days thereafter, unless, an extension, upon a showing of cause is granted. FRBP 3015(b) • Debtor must commence plan payments under the plan within 30 days after the plan is filed even though the plan is not yet confirmed. • Payments are made to the standing chapter 13 trustee. The chapter 13 trustee holds the plan payments until the plan is confirmed or confirmation is denied. §1326(a) • 2005 Act amended Section 1326(a) to provide that the debtor must, in addition, pay directly to any personal property lessor the amount of the rentals coming due after the case was filed and to any personal property secured party the amount of adequate protection payments coming due after the filing. The trustee must be provided with evidence of these payments • If the plan is confirmed then the money is disbursed to creditors. If the plan is not confirmed then the money is returned to the debtor, less administrative expenses. 11 U.S.C. §1326(a)(2). • Section 1302 requires that the trustee ensure that the debtor commences making timely payments pursuant to Section 1326. • Failure to commence payments on time is cause for dismissal or conversion to chapter 7.
Chapter 13 Procedure • Meeting of Creditors pursuant to 11 U.S.C. §341(a) • Must be held within 20 to 50 days after the petition is filed. FRBP 2003(a). • Proofs of claim must be filed within 90 days after the first date set for the 341(a) meeting. FRBP 3002(c). • The OUST or its designee presides at the 341(a) meeting (FRBP 2003(b)), the court ultimately decides whether to confirm the plan and the gatekeeper in the chpater 13 process is the standing chapter 13 trustee. • The standing trustee’s staff examines the debtor’s plan before the 341(a) meeting and uses the meeting to raise any deficiencies in the plan with debtor’s counsel. If Issues arise and can be resolved at the 341(a) meeting, the standing trustee may place the debtor’s case on what amounts to a consent calendar and unless there are valid creditor objections, confirmation will follow. • Creditors do not have a right to vote on chapter 13 plans. • Money to fund the plan is paid directly by the debtor to the standing trustee. • After confirmation the standing trustee disburses the money to creditors • Unlike a chapter 7 trustee, the chapter 13 trustee’s duties are limited and prescribed in section 1302(b). The trustee does NOT take control of the debtor’s assets or business but rather, functions as a disbursing agent and keeps records. Debtor remains in control of estate property. §1306(b). The OUST appoints the standing chapter 13 trustee. • Compensation of the chapter 13 trustee is limited to 10% of all payments received by the trustee under the plan. • Accelerated hearing practice validated under the 2005 Act. §1324(b).
Property Of The Estate And Automatic Stay • Filing invokes the automatic stay. §362(a). • Stay continues until plan is completed and debtor is discharged. §362(c)(2). • Section 1306 provides that estate property includes not only that which the debtor owned on the petition date but also property, including earnings, that the debtor acquires after commencement of the case. • In chapter 13 the concept of estate property is somewhat artificial as the debtor gets to keep his or her property unlike chapter 7 where property of the estate defines the res available for distribution to creditors. • However, estate property is an important concept in connection with plan confirmation and the best interests of creditors test contained in §1325(a)(4). • Problem with vesting and the automatic stay • Section 1327(b) provides that confirmation of the plan revests property of the estate in the debtor, which includes future earnings. Since pursuant to section 362(c)(1) the stay terminates once property is no longer property of the estate the effect of Section 1327(b) is to terminate the stay at the time the plan is confirmed. However, Section 1327(b) is limited by the phrase, “except as otherwise provided in the plan or in the order confirming the plan.” Courts are divided as to what the plan must contain to prevent future earnings from revesting with the debtor. • One view is 1327(b) revests such property which is not necessary for the plan • Another view is the plan must clearly state which property is to remain estate property.
The Plan • Prior to the 2005 Act a chapter 13 plan had to contain 3 elements: • Payment of all of debtor’s future earnings/income as necessary for plan • Provide for full payment of all 507 priority claims in deferred payments • Provide same treatment for each claim within a class. §1322(a) • The 2005 Act added a 4th requirement regarding the duration of the plan involving DSO claims. §1322(a)(4). • A plan may provide for less than full payment of a DSO priority claim owing to a governmental unit (§507(a)(1)(B) only if all of the debtor’s disposable income for a five year period is applied to payment of this claim. • This 5 year duration is mandated without respect to the debtor’s income. • Duration of a Chapter 13 Plan • Prior to the 2005 Act, under §1322(d) the duration of a plan may not exceed 3 years, unless the court, for cause, approves a longer period, not in excess of 5 years. • 2005 ACT CHANGE. It lengthened the duration of chapter 13 plans to 5 years for debtors whose income are not less than the state median family income for the relevant size. §§1322(d) and 1325(b)(4). • For families with incomes under the median, the duration of the plan may not exceed 3 years unless the court, for cause, approves a longer period not in excess of 5 years. • Note: the plan payment may be less than 3 or 5 years, as the case may be provided the plan pays all allowed unsecured claims, in full, over the shortened period. §1325(b)(4)(B).
NEW TREATMENT OF DSOS IN CHAPTER 13 • The 2005 Act modified the treatment of DSOs to favor the non-debtor spouse • DSO balances owing at the time of filing are accorded first priority which must be paid in deferred cash payments unless the holder agrees to a different treatment. §1322(a)(2). • DSO payments coming due after the filing must be paid in full before the plan can be confirmed. §1322(a)(8). • Failure to keep DSO payments current before or after confirmation is grounds for dismissal of the case. §1307(c)(11). • In calculating the debtor’s disposable income, DSO claims are included as “reasonable necessary” expenses, thus reducing the amount payable to other creditors. §1325(b)(2). DSO claimants may garnish the pay of debtors without violating the automatic stay. §362(b)(2)(C). • DSOs are non-dischargeable, 523(a)(5) and 1328(a)(2), and a discharge cannot be given in chapter 13 unless the debtor certifies that all amounts payable under a DSO that are due on or before the date of certification have been paid. §1328(a).
Disposable Income - §1325(b) • Prior to 2005 Act a controversy in chapter 13 involved how much income a debtor must contribute to a chapter 13 plan. • When the Code was enacted in 1978 there was no guidance other than the best interest of creditors test in §1325(a)(4). • Zero payment plans led to an amendment • 1984 Amendment added §1325(b)(1)(B). That amendment required that the chapter 13 plan must include all of the debtor’s projected disposable income be received over the three year period of the plan • “Disposable Income” was defined as income not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor. Former §1325(b)(2). • Did not solve the problem • 2005 Act New Disposable Income Test : Depends on Current Monthly Income • For current monthly income X 12 months = less than state median for relevant family size determined in much the same as prior to the Act. §1325(b)(2) • For current monthly income X 12 months = to or more than state median for relevant family size disposable income is determined by the means test of §707(b)(2)(A) and (B). §1325(b)(3). In essence all income in excess of IRS standards has to be committed to the plan.
Problem • Problem: • Court confirmed chapter 13 debtor’s plan that proposed to pay 50% of the claims of unsecured creditors out of all of debtor’s disposable income over a three year period. Shortly after confirmation, Debtor sold real property that debtor owned at the time of the petition and after payment of all encumbrances, received payment of $20,000 for the property. Chapter 13 trustee moves to modify the plan to include the sales proceeds as disposable income. Section 1325(b) defines disposable income as meaning “income which was received by the debtor.” • Should the trustee’s motion be granted? • One court held that the $20,000 was proceeds of sale of a pre-petition capital asset and was not income. Hence the trustee could not compel modification to the plan to add this amount to debtor’s disposable income. • See In re Burgie, 239 B.R. 406 (9th Cir. 1999).