As discussed previously here, Chapter 13 Bankruptcy is referred to as a wage earner’s Plan. It enables individuals with regular income to develop a repayment plan for all or part of their debts. Under this chapter, debtors propose a plan to make installments to creditors over three or five years. If the debtor ’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause .” If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for five years. The plan must be confirmed by the Bankruptcy Court. Individuals considering Chapter 13 often ask us: under what circumstances will the Court deny confirmation of a Chapter 13 plan?
In short, a Chapter 13 plan must be feasible (meaning the debtor must actually be able to pay what the plan proposes) and understandable to the Court and Trustee. The plan must also treat similarly situated creditors with some degree of fairness. A Michigan bankruptcy judge recently considered these issues in this opinion. In this case, In re: Kari R. Robbins, the debtor sought an order confirming her Chapter 13 Plan, but the Trustee objected. (For an explanation of what the Trustee does in Chapter 13 cases, click here). The Bankruptcy Court denied the plan.
At the confirmation hearing the Trustee refused to recommend confirmation, arguing that the Plan was “equivocal, infeasible and discriminatory” given the treatment of the debtor’s largest creditor, Sallie Mae. The plan put all unsecured creditors, including Sallie Mae, in the same creditor class, but then proposed a different treatment for Sallie Mae.
On the one hand, the Plan provided that all unsecured creditors would receive a 100% dividend, but on the other hand, it also provided that Sallie Mae would receive a pro rata distribution with other unsecured creditors and payments after the Plan’s repayment period ended. The notion that Sallie Mae’s payment rights would continue was consistent with the nature of its claim as excepted from discharge under 11 U.S.C. § 523(a)(8), but inconsistent with the proposition that all unsecured creditors (of whom Sallie Mae is the largest) would receive a 100% dividend. The Court found this confusing, specifically because the plan stated that the claims of Sallie Mae would be paid in full, to be disbursed pro-rata with dividends to allowed general unsecured creditors, until all unsecured creditors have been paid the base or percentage provided or the Plan has continued for 36 months, whichever provides the greater dividend to unsecured creditors. (I am not surprised that the Court found this to be confusing). The debtor was then to pay any unpaid part of these nondischargeable student loans directly to the creditor or its assign after completion of her plan.
Over the life of the Plan, the Debtor would have paid approximately $7,000.00 to unsecured creditors (including Sallie Mae), after attorney and trustees fees, given the $161.00 bi-weekly payments she proposed to make over 36 months. These amounts were clearly not enough to pay Sallie Mae’s $100,000.00 claim in full. Thus, the Trustee argued (and the Court ultimately agreed), the Plan was not feasible.
Over the life of the plan, after taking administrative expenses into account, Sallie Mae would have received roughly $6,728.00 and the other unsecured creditors would have received only about $501.00 — far less than the 100% dividend the Debtor’s Plan promised. Given these dollar amounts, the Court found that it was impossible to apply the Plan literally. This left the Court, and the Trustee, guessing about the debtor’s intent and how to administer the Plan payments, an obviously unacceptable situation.
The Court held that the Plan, as drafted, was neither clear nor feasible. The court would not require the Trustee or the Debtor’s creditors to speculate about its meaning. The Debtor’s counsel was instructed by the Court to consult with the Trustee about options for addressing the claims of Sallie Mae and the other unsecured creditors, so that the debtor could propose a new plan consistent with the Bankruptcy Code. The Court added that the new plan could not unfairly discriminate against any creditors.
The In re: Kari R. Robbins case reaffirms that preparing a viable Chapter 13 Plan can be a very complicated process. In this case, the debtor will probably be required to incur additional attorneys in preparing a new plan and appearing before the Court for confirmation. Many, if not most, Chapter 13 bankruptcies will require the assistance of an experienced bankruptcy attorney in your jurisdiction.