Accelerated Payment in Chapter 13 = Modification
Recent events in Ch. 13 cases have confused debtors as conflicting rulings have been entered regarding whether debtors can pay off creditors in a period less than those statutorily created under 11 U.S.C. §1325.1 In plain English, §1325 is the Ch. 13 provision that requires a debtor to have his/her/their plan exist either a minimum of 36 months or a maximum of 60 months. Part of the confusion arises when certain courts interpret 11 U.S.C. §1325 to apply in all circumstances in Ch. 13, while other courts see a discrepancy arising through a statutory interpretation, determining that §1325 should not be universally applied.2 A lack of decision by any of the U.S. circuit courts on this particular issue has prolonged the conflict. A review of the dichotomy is reviewed below.
Ch. 13 is a world of numerous divisions. Sometimes, there are alternative choices, and other times the division is a legislated creation based upon seemingly arbitrary numbers and dates.
One legislated division is the debtor. In Ch. 13, there are two kinds of debtors: those who earn greater than the median income of their venue and those who earn less than the median income of their venue. The “above-average” earners are compelled to have their Ch. 13 plans be for a period of 60 months — no less and no more.3 The “below-average” earners are allowed to have their plans last for a shorter period of time — but never less than 36 months.4
Ch. 13 has two kinds of plans — those for confirmation and those for modification. Plans for confirmation are filed and proposed before confirmation. Plans for modification are filed and proposed after confirmation.
Ch. 13 commences when the debtor delivers to the court an original plan, sometimes subjected to numerous amendments, which must meet the numerous requirements as provided under 11 U.S.C. §1325(a). In addition to the nine pertinent provisions of §1325(a), the debtor may also be compelled to address 11 U.S.C. §1325(b)(4) which states in pertinent part: “For purposes of the subsection, the ‘applicable commitment period’ … shall be (i) three years; or (ii) not less than five years….” The only clear exception to that particular rule is stated in 11 U.S.C. §1325(b)(4)(B), which allows a lesser period “if the plan provides for payment in full of all allowed unsecured claims over a shorter period.” In short, only full payment will allow a plan to propose an expedited exit from the time periods of §1325(b)(4).
After confirmation, similar, but not identical, parameters exist for modification. Modification only occurs after the original plan has been confirmed and can be requested, “at any time after confirmation of the plan but before the completion of payments under such plan….”5
Modification allows many tools. Modification, for instance, may “increase or reduce the amount of payments on claims of a particular class provided for by the plan”6 ; “extend or reduce the time for such payment”7 ; “alter the amount of the distribution to a creditor”8 ; “reduce amounts to be paid under the plan by the actual amount expended by the debtor to purchase health insurance for the debtor,”9 and more.
Modification has a unique provision — 11 U.S.C. §1329, including §1329(c) — which provides the following clause:
A plan modified under this section may not provide for payments over a period that expires after the applicable commitment period under §1325(b)(1)(B) after the time that the first payment under the original confirmed plan was due, unless the court, for cause, approves a longer period, but the court may not approve a period that expires after five years after such time . (Emphasis added.)
What causes trouble is following clause from §1329(a): “[T]he plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to (1) increase or reduce the amount of payments on claims of a particular class provided for by the plan ….”10
Effectively, §1329(a) of the Bankruptcy Code provides modification of a plan to increase or reduce the amount of payment to claims, and §1329(c) refers to such payment’s increase or reduction to be for a period not in excess of the maximum period under 11 U.S.C. §1325(b)(1)(b) (which would be 36 or 60 months). Unfortunately, the modification provisions of §1329 are silent about whether the modification’s period can be for a period less than the requisite 36 months (below-average earner’s minimum period) or 60 months (above-average earner’s minimum period). From the code’s silence, problems have arisen.
In Ch. 13, trying to expedite payment to creditors is common. Often, debtors obtain money from gifts or other nonassets of the estate,11 Then upon such receipt, the debtors request delivery of the same to the trustee so as to effectively expedite the bankruptcy proceeding. If allowed, everyone benefits. The tendering of the money to the creditors on an expedited basis will deliver a greater real dollar value to creditors; the trustee can pay everyone in bulk; and, the debtor can return himself/herself earlier to non-bankruptcy society. Creditors, unless disingenuous, would gladly receive the money in an expedited fashion.
But the Bankruptcy Code is not accommodating. It is well understood that the strict reading of the Bankruptcy Code prohibits expediting payments if the issue is exclusively about confirmation of the plan. As recited above, 11 U.S.C. §1325 is not flexible about the plan’s period of time being less than that demanded upon a debtor. The 11th Circuit, when confronted with this particular issue, wrote:
§1325(b)(4) clearly says that the applicable commitment period shall be five years for an above median income debtor, such as Tennyson. The word “shall” is ordinarily the language of command. Again Alabama vs. Bozeman , 533 U.S. 146, 153, 121 S. CT. 2079, 2085, 150 L. Ed. 2d 188 (2001) “citations omitted.” The use of the single word “shall” normally creates an obligation impervious to judicial discretion. Lexecon, Inc. vs. Milberg Weiss Bershel Hynes and Lerach , 523 U.S. 26, 35, 118 S. Ct. 956, 926, 104 L. Ed. 2d 62 (1998)12
The 11th Circuit concluded: “We find that the ‘applicable commitment period’ is a temporal term that describes the minimum duration of a debtor’s chapter 13 bankruptcy plan. The only exception to this minimum period, if unsecured claims are fully repaid, as provided in §1325(b)(4)(B).”13 The Bankruptcy Code can effectively hamstring all parties. Even though everyone would want to have the debtor accelerate payment, the above-referenced statutory references prohibit the plan from closing early, the trustee from closing the case, and the file from being removed from the clerk’s files until §1325’s temporal aspect has been fulfilled.
However, as stated above, the concept of confirmation is distinguishable from the concept of post-confirmation’s modification. The plain language of §1329(a)(2) may permit debtors to shorten the length of their Ch. 13 plan, and such modification may not subject the debtor to the temporal requirements of 11 U.S.C. §1325(b). Debtors argue that the lack of reference to the minimal time period in the modification section (§1329)14 of 11 U.S.C. §1325(b)(4) permits a modified plan to be for a shorter period of time.15 of course, bankruptcy courts are not without differing opinions, and a number of courts have found that the provisions of 11 U.S.C. §1329 apply the mandatory temporal aspects of 11 U.S.C. §1325.16
The differences are derived primarily from a few principal arguments: a) the failure to include §1325(b)(4) in §1329(b)(1) means the temporal requirements do or do not apply in a modification, and b) the broad incorporation of 1325(a) does or does not include the minimum plan periods of §1325(b)(4).
Incorporating §1325(b)(1) Is Not the Same as §1325(b)(4)
As stated earlier, a plan must last either 36 months or 60 months. Confirmation of the plan has a provision requiring these minimum time frames, which are established by whether the debtor earns more or less than the median family income in his/her/their venue for a period of time established in 11 U.S.C. §1325(b)(4). One of the principal arguments requiring a modified plan to also last at least three or five years requires a walk through the Bankruptcy Code. The argument asserts that even though §1329 of modification does not specifically incorporate 11 U.S.C. §1325(b)(4),17 There is still reference to the temporal requirements of §1325. The “reference” to those temporal requirements commences with a review of the “maximum payment period” identified in §1329(c), which demands that a “plan modified may not provide for payments over a period that expires after the applicable commitment period under section 1325(b)(1)(B) (the 36-month or 60-month period).” (Emphasis added.) Although this provision is silent about a period less than the 36-month or 60-month period in §1325, it makes a reference to §1325(b), albeit another subsection.18 That reference to §1325(b)(1) is enough reference to §1325(b) for certain courts to demand all of the requirements of §1325 — including §1325(b)(4) — be followed.
The opposing courts do not agree that the reference to §1325(b)(1)(B) in §1329(c) includes any applicable provision of the minimum period of §1325(b)(4). The debtors argue for a less amorphous interpretation of the Bankruptcy Code. They conclude that the failure of §1329(c) — or §1329 anywhere — to incorporate the 36-month or 60-month time period of §1325(b)(4), or to make specific reference to the temporal requirements of §1325(b)(4), support their argument that §1325(b)(4) is not included in §1329, and, therefore, modification’s §1329 is not constrained by the 36-month or 60-month time period of §1325(b)(4).
Broad Interpretation of §1325(a) Incorporated in §1329(b)(1)
The other argument more broadly incorporates all of §1325(b) by one reference to “this section.”
The argument by creditors demands that the reference in §1329(b) to §1325(a) requires §1329(b) also to incorporate §1325(b)(4). Creditors and trustees argue that even though §1329(b)(1) does not specifically refer to the 36-month or 60-month minimum periods in §1325(b)(4), §1329(b)(1) does reference §1325(a), including §1325(a)(1), which specifically allows confirmation if “the plan complies with the provisions of this chapter and with other applicable provisions of this title. ” (Emphasis added.) Those courts demand that the broad language in §1325(a)(1) would include the temporal aspects of §1325(b)(4) [a provision of “this title” or “other applicable provision of this chapter”]; and, therefore, modified plans would effectively be under the same temporal restrictions of original plans.
Debtors counter with two responses. First, they describe this as a strained reading of §1329. Section 1329 has four identifiable and distinct clauses within it, and to merely incorporate all of §1325 via §1325(a)(1) would undermine, and maybe make moot, the pertinence or value of the four unique clauses of §1329. Therefore, debtors argue that interpreting §1325(a)’s reference to “this title” to include §1325(b)(4) is overly ambitious.
Furthermore, debtors refer to the language of §1325(a) as being pertinent to “a plan.” This is a term distinguishable to a “modified plan” or a “plan as modified,” both of which are terms used in §1329. As originally discussed, the term “plan” applies to the preconfirmation, while “modified plan” is a term applicable to postconfirmation. As stated above, these are distinguishable aspects of Ch. 13. And, the differences of those terms of the statute are agreed to have similar importance. The debtors claim not to be asking too much when they request a plain reading of the statutory terms “plan” versus “modified plan.” And, such a request may appear mild when contrasted to the incorporation of §1325(b)(4) through inclusion of the term “this title” in §1325(a).
Creditors also note that §1329(b)(1) also incorporates §1325(a), which lists nine factors that require a court to confirm a plan if each factor is met. They also argue that §1325(a)’s incorporation includes §1325(b)(4).
The code again has another division in Ch. 13 — this time as to how to read and apply §§1325(a) and 1325(b). Subsections (a) and (b) of 1325 are distinguishable lists. Section 1325(a) delivers a list of requisites. If all are met, the debtor may demand confirmation from the court. Section 1325(b) is not a list of requisites. If any of the items contained therein are not met, the trustee, creditor, or court may seek to deny confirmation unless the requirements of §1325(b) are met. In short, if a plan meets all of the requirements of §1325(a), but fails to comply with some of the requirements of §1325(b), the plan could still be confirmable if no one objects to confirmation. Alternatively, a plan that does not meet all of the requirements of §1325(a) is nonconfirmable — with or without objection.
The differences between §1325(a) and §1325(b) are deemed relatively pronounced, especially when one represents the debtor as opposed to the trustee or a creditor. As one court stated:
[Section] 1325(b) is not a “requirement.” Rather than a prerequisite for confirmation, §1325(b) is an exception to the confirmation that §1325(a) otherwise mandates. Section 1325(a) states that courts must confirm a plan that meets its nine requirements; §1325(b) has the potential for preventing that result. Nothing in §1325(b) is required for confirmation. No party is required to object to confirmation under that subsection, and even if grounds for objection are present, a plan may be confirmed if the objection is not made. See In re Storey , 392 B.R. 266, 273 (B.A.P. 6th Cir. 2008).19
Need for Appellate Ruling
Ultimately, it appears to be a clashing of reasonable minds differing on the interpretation of the statute. And, the arguments are each well founded and supported, which ultimately will deliver parties to higher courts for ultimate decisions. Since the quandary and conflict continue to hamper certain debtors in certain jurisdictions, solutions have been offered by various parties.
One suggestion is to avoid the absurdity. Debtors could offer to make a lump sum payment equal to what would be required in the original plan, with numerous months at the end of the plan delivering zero dollars to the trustee, and thereby complying with even the strict interpretation by the minority of the courts. In effect, one would have made the applicable payments, and the temporal aspects would be complied with even though no payment may be attributable to those later months — the remaining monthly period better identified as “waited out.”20 However, this solution becomes less palatable when debtors seek to gather new credit in the near future. Debtors seeking to expedite credit repair often ask relatives or other sources to deliver the necessary funds to satisfy creditors. Leaving the case open would defeat this purpose.
Even though the prepaid plan arrangement may benefit all, statutes cannot be ignored. When a debtor proposes to make life easier for others by accelerating the plan’s payments, the only objecting party to such motions, too often, will be the trustee — pursuant to a duty — who will refer to cases like In re Tennyson 611 F.3d. 873 (11th Cir. 2010). That decision directs courts in its jurisdiction (in that case the issue was under §1325 alone, as opposed to modification under §1329) to require completion of the full term or “applicable” period.
Since Tennyson is about §1325(b)(4), a logical approach may be to avoid a Tennyson prohibition of a lump sum payment of a “plan” by delivering a “modified plan.” Cases like Tennyson tell a debtor not to deliver a lump sum and call it an expedited payment on a confirmed plan. A better argument would be to jump away from 11 U.S.C. §1325 and move into the world of modification’s §1329, which avoids Tennyson. Although modification is not an absolute allowance to the lump sum payment (many of the above-recited decisions fought this approach), the alternative of offering a lump sum payment for a confirmed plan is a lost cause as explained by the 11th Circuit in Tennyson.
Modification, it should be noted, may have other hurdles. A debtor may have to give cause for the delivery of the money. Some jurisdictions, like that of the Sixth Circuit, specifically state that a material or adverse change in the debtor’s financial circumstances may be required in an evidentiary proceeding (especially if it is to reduce payment). But if the payment is for the same amount and the reasons are to help the creditors, the trustee, the court clerk, and the debtor, it would seem to be in the best interests of all parties — who have bargained for and agreed to the same amount of money tendered over a longer period of time — to permit the expedited payment through the gift of a third party.21 The debtor’s proposal to expedite would be most appropriate under most circumstances.
Expedited payment to creditors would be beneficial to the trustee, creditors, court clerk, and the debtor. The mutuality of receipt of the benefit of a third party’s gift to the estate should be encouraged. However, statutory framework cannot permit the same on a confirmed plan. A growing trend, in contrast, will permit expediting payment to the creditors if modification of a plan is proposed. Modification of plans is guided by a separate statutory framework (§1329) that does not specifically include the temporal requirement of §1325(b)(4). Under those circumstances, if a debtor’s counsel is confronted with the request of the client to make payment on an expedited basis to creditors from third-party funds, the most prudent methodology would be to file a modified plan outlining the need to deliver the money, and to then deliver such argument to a judge who follows those opinions that do not compel the modified plan’s payments to be over the temporal requirements of 36 or 60 months recited under 11 U.S.C. §1325(b)(4).
1 Specifically 11 U.S.C. §1325(b)(4).
2 The latter relies upon other provisions of Ch. 13 of the Bankruptcy Code.
3 1 1 U.S.C. §1325(b)(4)(A)(ii).
4 1 1 U.S.C. §1325(b)(4)(A)(i) for three years and §1325(b)(4)(A)(ii) for up to five years.
5 1 1 U.S.C. §1329(a).
6 1 1 U.S.C. §1329(a)(1).
7 1 1 U.S.C. §1329(a)(2).
8 1 1 U.S.C. §1329(a)(3).
9 1 1 U.S.C. §1329(a)(4).
10 1 1 U.S.C. §1329(a)(1) (emphasis added).
11 Sale or refinancing of exempt property is a common source.
12 In re Tennyson 611 F.3d. 873, 877 (11th Cir. 2010).
13 Id. at 888.
14 Specifically 11 U.S.C. §1329(b)(1).
15 In re Sunahara, 326 B.R. 768, 781 (9th Cir. B.A.P. 2005); In re McCully, 398 B.R. 590, 593 (Bankr. N.D. Ohio 2008); In re Young, 370 B.R. 799, 802 (Bankr. E.D. Wis. 2007); and In re Ewers, 366 B.R. 139, 142-43 (Bankr. D. Nev. 2007).
16 In re Gran, 364 B.R. 656, 663 (Bankr. E.D. Tenn. 2007); In re Frederickson, 368 B.R. 825, 829-30 (Bankr. E.D. Ark. 2007); In re Luton, 363 B.R. 96, 101 (Bankr. W.D. Ark. 2007); In re Slusher, 359 B.R. 290, 305 (Bankr. D. Nev. 2007); and In re Cushman, 350 B.R. 207, 212-13 (Bankr. S.C. 2006).
17 1 1 U.S.C. §1329(c) refers to §1325(b)(1)(B).
18 1 1 U.S.C. §1325(b)(4).
19 In re Davis, 439 B.R. 863, 867 (Bankr. N.D. Ill. 2010).
20 In re McKinney, 191 B.R. 866, 879 (Bankr. D. Ore. 1996).
21 Only if a projected disposable income’s increase would increase payment to the creditors would modification be deemed inappropriate.
Robert C. Meyer concentrates in the area of bankruptcy law and is a solo practitioner in the Miami firm of Robert C. Meyer, P.A.
This column is submitted on behalf of the Business Law Section, Mindy Mora, chair, and Melanie E. Damian and Peter F. Valori, editors.