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Chapter 13 Plan Confirmation

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Chapter 13 Plan Confirmation CHAPTER 13 PLAN CONFIRMATION THE TRUSTEE’S ROLE The Chapter 13 Trustee’s role in the confirmation procedure is to recommend confirmation of debtor’s plans where the debtors and their plan comply with all the applicable code provisions; or to seek dismissal in those cases where the debtors are not in compliance. In most cases the Trustee first advises the debtor and their counsel of his (or her) objections to the plan at the §341 meeting; the trustee may also request amendments to schedules and forms at that time as well. In routine cases, where the debtor has not made the required plan payments or the debtor has failed to amend their plan and or schedules the Trustee will simply seek dismissal for failure to pay or amend rather than file an objection to confirmation. In cases where the disagreement is over interpretation of the statute the Trustee will write a formal objection leading to a written opinion resolving the issue. COMMON CONFIRMATION ISSUES Best Interest of Creditors Test. Section 1325(a)(4) requires the debtor to propose a plan that pays unsecured creditors at least the amount they would be paid in a Chapter 7 liquidation. The most common assets that trigger this code provision are real estate and automobiles. The Chapter 13 Trustee always reviews the debtor’s schedules for assets and performs this calculation prior to the §341 meeting. If the best interest test applies the Trustee will look to section H of the debtor’s plan to see if the debtor’s is in compliance. To be in compliance the debtor must pay an amount equal to the net (of transaction costs and Chapter 7 Trustee fees) non exempt equity in their property to the unsecured creditors. If the result of this test is that all unsecured creditors must be paid in full then the plan must pay interest to those creditors to compensate them for waiting up to sixty months to receive that payment. Secured Creditors Object. Section 1325(a)(5) and the unnumbered paragraph after §1325(a)(9), (along with §1322(b)(2)(3)(5) and §1322(c)) govern what the debtor’s plan must provide to secured creditors for the plan to be confirmed. Because the model plan controls as the amount and timing of payments to secured creditors they frequently object to confirmation. Mortgage Company Objections: If the mortgage company asserts a claim for arrears higher than the amount in the plan they must object to confirmation or be bound by the terms of the confirmed plan. If the lender objects, the debtor has two options. One, agree with the mortgage company and amend their plan to resolve the objection. Two, file a response to the objection as a means to contest the claimed arrears amount. Mortgage companies often fail to properly document and itemize their calculation of the arrears amount on their proof of claim providing debtor attorneys an opportunity to attack the claim. Automobile Lender Objections: See the materials on “The Hanging Paragraph”. Automobile lenders must object if they disagree with their treatment in section E 3 or section G of the plan. The binding effect of §1327 force them to accept the treatment provided under the confirmed plan so objections are routine, at least by those creditors that pay attention; the burden is on the creditor to read all of section E 3 and section G before confirmation. §1325(a)(5)(B)(iii)(I)and (II) require that payments through the plan for creditors secured by personal property must be paid in equal monthly installments and those equal monthly installments must adequately protect the creditor. This doesn’t mean you have to spread their payments our over 60 months. A 60 month term inflates the interest expense and paying secured and unsecured creditors simultaneously can cause the trustee administrative problems. Adequate protection has been defined many different ways. Judge Goldgar, in the matter of Thompson v. GMAC 08 A 182 (08 B 02560) defined adequate protection as the amount the value of the vehicle declines in value the first month post petition and used NADA as the source for the change in value. Domestic support obligations: §1325(a)(8) requires a debtor with a DSO obligation to document that they have made all post petition payments as a condition of confirmation. This documentation can take the form of a letter or fax from the DSO recipient or copies of post petition pay advices showing the periodic deductions. The Means Test: Pursuant to §1325(b)(3) disposable income is determined under §707(b)(2)(A)&(B) for debtors whose annualized current monthly income is above the applicable median income level. Above median income Debtor’s plans must pay general unsecured creditors a minimum of the monthly disposable income on Form B22C line 59 multiplied by 60. This requirement is independent of the §1325(a)(4) best interests tests and may require debtors with no net non exempt equity in property to pay their creditors in full. If the means test alone results in a 100% plan there is no requirement that the debtor pay interest to the unsecured creditors. Applicable Commitment Period: Pursuant to §1325(b)(4)(A)(ii) debtors with income above the applicable median income level are required to propose a 60 month plan unless all creditors are paid in full over a shorter period. Plan Payments: Of course, the debtors must be current or very close to current with plan payments at the time of the confirmation hearing for the trustee to recommend confirmation. This is where payroll deduction come in handy, if the debtor is not current the trustee is much more likely to recommend confirmation if payments are coming in via payroll deduction than directly from the debtor. PLAN DEVELOPMENT AND DRAFTING CONSIDERATIONS The most important thing to keep in mind when drafting a plan is it’s all about the money. The real function of the plan is to dictate how the money flows. It is the job of the attorney to manage the flow of money to (1) keep the auto creditors happy (or at least avoid their objections); (2) make sure their own fees get paid; (3) try not to let any money flow to the GUC’s until the secured creditors have been paid. The trustee disburses once a month, the dates are posted on their web sites. Before confirmation, adequate protection payments are made to secured creditors with PMSI claims provided for in Section E 3. After confirmation, at the disbursement date all money on hand is used to satisfy each level in order. If money is left over after satisfying the first level the remainder is applied to the next level. If that level is satisfied the remainder is applied to the next level, and so on. You don’t have any control over the amount of the monthly payment to E 2 (continuing mortgage payments) creditors but you do have control over the fixed payments to secured creditors provided for in Section E 3. It is important to use that control to manage how much money is available each month to pay attorney fees and, after attorney fees are paid, mortgage arrears. Section E 3.1 Secured Claims Claims other than mortgage claims will be paid as secured only if the plan provides for them as secured. The amount a creditor will be paid as secured is determined by the amount provided in Section E 3.1. Secured claims filed for amounts greater than the amount provided for in Section E 3.1 will be bifurcated. Secured claims filed for amounts less than the amount provided for in the plan will be paid the lower amount. Claims filed as unsecured will be paid as unsecured even if provided for as secured in the plan. The plan must provide interest on automobile loans as required under Till (Supreme Court, May 17, 2004). Fixed payments must adequately protect the creditor after confirmation to satisfy §1325(a)(5)(B)(iii)(II). Creditors that did not finance the purchase of the asset are not entitled to pre confirmation adequate protection payments so the non-PMSI box must be checked for those creditors only. Section E 3.1 Calculating Fixed payments on secured claims In the good old days you could pay all the secured creditors pro rata, this would guarantee that the secured creditors were all paid in full before any money went to the unsecured creditors and debtor attorneys didn’t have to do as much math. An easy way to simulate this is to calculate what the pro rata payments would be if all the E 3 and E 5 creditors were to paid at the same level and use those numbers to determine the E 3 fixed payments. If you want to pay the car off faster and reduce your client’s interest expense just increase the fixed payment. Increasing the E 3 fixed payment won’t cause administrative problems like reducing the fixed payment will. Don’t make the mistake of calculating a 60 month payoff for the E 3 creditor and using that amount for the fixed payment. Your client will pay more interest and money will flow to the GUC’s before the secured are paid off; it can result in the case staying open longer than required if the plan could otherwise complete in fewer than 60 months. Section E3.2 Secured claims treated as unsecured Any creditor, typically a junior mortgage, that is to be paid as unsecured because they are secured by collateral that either has no value or that is fully encumbered by liens with higher priority must be provided for in Plan Section E 3.2.
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