CHAPTER 4, D. Does the Bankruptcy Code Allow Tiered Chapter 13 Plans?

• Jurisdiction: United States

D. Does the Bankruptcy Code Allow Tiered Chapter 13 Plans?

ABI Journal

March 2019

Timothy J. Anzenberger

Adams and Reese LLP

Jackson, Miss.

Richard P. Carmody

Adams and Reese LLP

Birmingham, Ala.

Under 11 U.S.C. § 1325, a chapter 13 plan must pay secured creditors the value of their claims. If a plan proposes to pay those claims in periodic payments — as most do — § 1325(b)(iii)(I) requires that those payments be in equal monthly amounts. However, the Bankruptcy Code is silent on when those payments begin. Section 1326(b)(1) requires that debtors pay priority administrative claims (such as attorneys' fees to debtors' counsel) before or at the time that general creditors are paid. As a result, many debtors propose "tiered" plans. These plans pay small adequate-protection payments to secured creditors while debtor's counsel is paid in full, with larger equal monthly payments to secured creditors following later.¹

This trend is significant. Only 38.8 percent of chapter 13 debtors complete repayment plans.² While the Code requires debtors to pay secured creditors equal monthly payments sufficient to pay off secured claims, it is more likely that a chapter 13 case will be dismissed or converted before those equal monthly payments begin or are satisfied.

So, does the Code permit tiered plans? Bankruptcy courts are divided,³ and even courts within the same federal districts have reached different results.⁴ Given this uncertainty and split of authority, there is an obvious problem in § 1325 that Congress must resolve.

Background of §§ 1325 and 1326

Before 2005, chapter 13 plans could propose creative payment structures to secured creditors, but this caused two perceived abuses.⁵ First, chapter 13 had no express requirement that secured creditors receive adequate-protection payments.⁶ This permitted debtors to propose plans with payment moratoriums, allowing debtors to use collateral for months without payment.⁷ These debtors could then convert their cases to chapter 7 or modify their plans to surrender the now-devalued collateral before payments began.⁸ Second, chapter 13 plans could propose small payments over the plan's life with large balloon payments at the end.⁹ Debtors could even propose quarterly or semi-annual payments or reduce payments during certain months of the year.¹⁰

When Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), it amended two provisions of chapter 13 to solve these issues.¹¹ First, BAPCPA amended § 1325(a)(5)(B) to require that debtors pay secured creditors equal monthly payments.¹² Second, BAPCPA amended § 1326(a) to require debtors to pay adequate-protection payments to secured creditors holding liens on personal property, with those payments starting no later than 30 days after the petition date.¹³ Congress intended these amendments to eliminate fluctuating payment schemes and protect secured creditors from the threat of devalued collateral and early plan termination.

However, these amendments created a new problem. While BAPCPA required equal monthly payments to secured creditors, Congress failed to identify when those payments begin. For example, may a plan pay a secured creditor in full over the course of 12 months, but provide that monthly payments begin in year two of the plan after debtor's counsel is paid, or does the Code require that payments begin right after confirmation? Some bankruptcy courts have confirmed tiered plans, holding that payments may begin at any time, but other courts have rejected tiered plans, holding that equal monthly payments must begin just after confirmation.

Argument for Tiered Chapter 13 Plans

Bankruptcy courts that have confirmed tiered chapter 13 plans have generally done so for three reasons. First, the Bankruptcy Code contains no express requirement that equal monthly payments begin at confirmation.¹⁴ Some courts reason that these payments may begin at any time, so long as the payments are in equal monthly amounts when they begin, and so long as these payments continue until secured claims are paid in full.¹⁵

Second, § 1325 (b)(iii)(II) requires that debtors make adequate-protection payments to creditors with claims secured by personal property starting 30 days after the petition date, so any delay in paying equal monthly payments will not harm these creditors. Adequate-protection payments must equal the amount of depreciation to a creditor's collateral so that these creditors "will not be left...