Chapter VII Chapter 13

• Jurisdiction: United States

VII. Chapter 13

A. Why File a Chapter 13?

Chapter 13 provides a number of options that are not available in liquidation under chapter 7. Perhaps most significantly, chapter 13 offers the opportunity to save a residence from foreclosure by allowing the debtor to cure delinquent mortgage payments over time while maintaining current mortgage payments. Chapter 13 also allows a debtor to reschedule other secured debts and extend their repayment over the life of the chapter 13 plan, possibly resulting in lower payments. A codebtor liable with the debtor on a consumer debt is protected by a stay while the debtor is in chapter 13.⁴⁴⁸ Finally, as a practical matter, chapter 13 offers benefits similar to a consolidation loan in that a debtor makes a single periodic payment to a trustee, who then distributes proceeds to creditors.

B. Requirements of the Plan

Only the debtor has the authority to propose a chapter 13 plan.⁴⁴⁹ Many courts, by local rule, have prescribed a standard form chapter 13 plan, which should be used. The national chapter 13 plan, Official Form 113, went into effect on Dec. 1, 2017, but the majority of districts have initially opted to use their own Local Form plans in conformance with the new Rule 3015.1 in lieu of the national chapter 13 plan.⁴⁵⁰

1. Time for Filing

The plan must be filed with the petition or within 14 days thereafter. The time for filing the plan may not be extended except for cause.⁴⁵¹

2. Pre-Confirmation Payments

Within 30 days after filing the petition, the debtor must commence making plan payments.⁴⁵² It is the responsibility of the trustee to ensure that the debtor begins making the required interim pay-ments.⁴⁵³

a. To the Trustee

Payments are held by the trustee until confirmation or denial of confirmation.⁴⁵⁴ If no plan is confirmed, any interim payments are returned to the debtor.⁴⁵⁵

b. Personal-Property Lessors

Regularly scheduled post-petition lease payments may be paid directly to the lessor. Payments to the trustee should be reduced by the amount of the payments made to the lessor; however, evidence of payment, including date and amount, must be provided to the trustee.⁴⁵⁶

c. Secured Creditors

The most common types of secured loan payments are home mortgages and auto loans. In some districts, monthly payments to secured creditors may be paid directly to the creditor. However, in other districts, payments for secured debt must be made through the chapter 13 trustee. In either situation, evidence of payment, including date and amount, must be provided to the trustee.⁴⁵⁷

d. Modification of Payments

The court may, upon notice and hearing, modify, increase or decrease the amount of the payments required, pending confirmation of the plan.⁴⁵⁸

3. Applicable Commitment Period

The applicable commitment period is the time over which a debtor must make plan payments. It is generally equated with plan duration.

a. Above-Median-Income Debtors

If the current monthly income of the debtor and the debtor's spouse (whether or not filing jointly), combined and multiplied by 12, exceeds the median income of the applicable state for a family of the same or smaller size, the applicable commitment period is five years, unless the plan provides for payment in full of all allowed unsecured claims over a shorter period.⁴⁵⁹

b. Below-Median-Income Debtors

If the current monthly income of the debtor and the debtor's spouse (whether or not filing jointly), combined and multiplied by 12, is not more than the median income of the applicable state for a family of the same or smaller size, the applicable commitment period is three years, unless the plan provides for payment in full of all allowed unsecured claims over a shorter period.⁴⁶⁰ The court may, for cause, extend the period to more than three, but not longer than five, years.⁴⁶¹ While not required, it is not uncommon for below-median debtors to propose five-year plans. Such extended terms may make it more affordable for the debtor seeking to cure a large mortgage arrearage claim or to satisfy, for example, tax or domestic support obligation claims.

4. Contents of a Plan

a. Mandatory Provisions

A chapter 13 plan must provide for:

i. submission of future income, as is necessary for performance of the plan, to the control and supervision of the trustee;⁴⁶²
ii. payment in full, normally without interest, of all claims entitled to priority, except that a domestic support obligation assigned or owed to a governmental unit need not be paid in full so long as all of the debtor's projected disposable income is devoted to the plan for five years;⁴⁶³ and
iii. the same treatment of all claims within the same class, if the plan classifies claims.⁴⁶⁴

b. Optional Provisions

A chapter 13 plan may provide for the payment on any unsecured claim concurrently with payments on any secured or other unsecured claim; the curing of any default; assumption, rejection or assignment of any executory contract or unexpired lease; the payment of all or part of any allowed claim from property of the estate; the vesting of the property of the estate, upon confirmation or thereafter, in the debtor or any other entity; and any other appropriate provision not inconsistent with the Code.⁴⁶⁵

c. Discrimination

Although a plan may discriminate among classes of claims, it may not do so unfairly.⁴⁶⁶ Courts apply a four-factor test for unfairness: "(1) whether the discrimination has a reasonable basis; (2) whether the debtor cannot carry out a plan without the discrimination; (3) whether the discrimination is proposed in good faith; and (4) whether the degree of discrimination is directly related to the basis or rationale for the discrimination."⁴⁶⁷ For example, courts have generally prohibited debtors from placing, without a reasonable basis, ordinarily nondischargeable general unsecured student loans in a separate class to be paid in full, while returning less than full payment on other general unsecured debts that will be discharged.

5. Residential Mortgages

Special provisions apply to a mortgage secured solely by the debtor's principal residence.

a. No Modification

An obligation secured solely by the individual debtor's principal residence may not be modified.⁴⁶⁸

i. Despite the prohibition on modification of loans securing a debtor's principal residence, a majority of courts allow modification of a wholly unsecured mortgage, such as a second or third mortgage, on a home whose fair market value is less than the amount owing on the senior mortgages. In such a case, the debtor should file a motion to strip off the junior, wholly unsecured lien or liens. If successful, any allowed claim for the stripped off mortgage will be treated as an unsecured claim during the bankruptcy.⁴⁶⁹
ii. Short-term mortgages where the final payment comes due before the end of the plan may be modified to extend the repayment period through the life of the plan, so long as the plan complies with 11 U.S.C. § 1325(a)(5).⁴⁷⁰

b. Cure of Arrearage

Any arrearage may be cured over time, not to exceed the duration of the plan.⁴⁷¹ Arguably, the cure of an arrearage may extend over the life of the plan, even if the last payment under the contract is due before that date.⁴⁷²

c. Interest on Arrearages

Interest on arrearages is a complicated matter and depends on whether the contract between the parties, including any renewal or refinancing agreement, was entered into before or after Oct. 22, 1994.

i. For a contract entered into after Oct. 22, 1994, interest on arrearages is paid as determined by reference to the underlying agreement and otherwise applicable state law.⁴⁷³
ii. If the contract was entered into before Oct. 22, 1994, the plan must provide for payment of pre-petition interest to an oversecured creditor pre-confirmation on its arrearages under 11 U.S.C. § 506(b) and post-confirmation under 11 U.S.C. § 1325(a)(5)(B)(ii), even if the contract does not so provide.⁴⁷⁴

6. Retirement Savings Plan Loans

A chapter 13 plan may not materially alter the repayment terms of a loan from an ERISA-qualified plan to the extent that the loan complies with the requirements of 29 U.S.C. § 1108(b)(1).⁴⁷⁵

7. Requirements for Confirmation

The court, after notice to all interested parties and a hearing, must approve the proposed plan before it will be effective. Any party in interest may object to the confirmation of a plan.⁴⁷⁶ The hearing on confirmation may be held not earlier than 20 and not later than 45 days after the date of the meeting of creditors unless the court determines that it would be in the best interests of the creditors and the estate to hold such hearing at an earlier date and there is no objection to an earlier date.⁴⁷⁷

The court may not confirm a plan that does not meet certain minimum requirements, including:

a. Compliance with Code

The plan must comply with the requirements of the Bankruptcy Code.⁴⁷⁸

b. Best Interest of Creditors

Under the "best interest of the creditors test," payments to unsecured creditors under the plan may not be less than the amount the unsecured creditors would receive in a chapter 7 liquidation.⁴⁷⁹

c. Ability to Make Payments

The plan must be feasible, meaning that the debtor must be able to make the payments required under the plan.⁴⁸⁰ The starting point for any feasibility analysis is the debtor's budget. Feasibility is lacking when:

i. the debtor fails to establish that income is sufficient for the maintenance and support of the debtor and his or her dependents, including payments made "outside the plan," and to make the proposed payments under the plan;⁴⁸¹
ii. the debtor's employment history is irregular or sporadic, making it impossible to determine with any realistic degree of certainty that the debtor will realize the projected income; or
iii. the successful completion of the plan is dependent on a speculative or contingent future event.

If the plan payments otherwise required by the means test for an above-median family income debtor are not feasible, a debtor may seek approval...