As much as I am a proponent of Chapter 13 cases, there are times when a Chapter 13 case is not available to a debtor. The debtor must be able to fund the plan, and the plan must confirm to the legal requirements of 11 U.S.C. 1325(a). Unfortunately, my office frequently sees plans which are based more on hope rather than fact. Such was a case, Hunter v. Morris 3:20-cv-0159, (S.D. WV 2020) (In re Hunter, 3:19-bk-30308).
In that case, the debtor, an 82-year-old woman who had lived in her home for nearly years, filed a Chapter 7 case, in which she listed the two debts, secured by her home, which she had not paid for some time. The first lien holder filed a motion for stay relief, which was granted, and upon the conclusion of the Chapter 7 case, in which the debtor received a discharge, set a foreclosure sale. The debtor filed a pro se Chapter 13 petition on the eve of the foreclosure sale, didn’t file a plan, didn’t show up for her meetings of creditors, and didn’t make a payment. The case was dismissed, and the bank which held the first lien deed of trust on her residence, set a new foreclosure sale. On the eve of that sale, the debtor once again filed a pro se Chapter 13 petition. She filed incomplete schedules, but showed up at her meeting of creditors. The plan was defective. I filed a motion to dismiss and the bank filed a motion for stay relief and an order lifting the stay, which I signed and the Court entered.
Subsequently, the debtor obtained counsel, who advised the Court that the debtor would be able to make the plan payments and propose a feasible plan.
The Bankruptcy Court set aside the order lifting the stay and allowed the debtor to file an amended plan, which called for step payments, which, I contended even if made, were insufficient to service the debt which the debtors proposed to pay. I again moved to dismiss.
The Bankruptcy Court entered the order of dismissal I prepared, from which the debtor appealed, contending that the Bankruptcy Court’s “conclusionary findings are insufficient to justify a reversal of the bankruptcy court’s earlier decision to ‘let the process play out in the amended plan.’.” Hunter at 4.
In response, I contended that the debtor’s plan failed to comply with five of the requirements for confirmation as set out in 11 U.S.C. 1325(a). The District Court determined that it did not need to address all of the factors and could focus on the debtor’s ability to make payments under the plan. Hunter at 5.
The debtor’s disposable monthly income was $246.44, with total monthly of $1,764.10. The debtor proposed two payments of $77.50, five payments of $471, and then 55 payments of $1,803.13 for a total plan base of $101,682.27. The plan was to cure the prepetition arrearage on the first mortgage of $29,051.65 and pay the ongoing monthly mortgage payment of $924.00. (The actual monthly mortgage payment was $927.63 per the bank’s proof of claim.) In addition, the plan proposed to pay delinquent real estate taxes to the State Auditor in monthly payments, despite the fact the State Auditor will only accept lump sum payments that include the full interest owed at the time of the payment.
The District Court found “ample evidence” that the debtor “would not ‘be able to make all payments under the plan’ as required by 11 U.S.C. 1325(a)(6) and affirmed the Bankruptcy Court’s decision. The District Court noted that the debtor’s proposed plan payments of $1,803.13 were more than her monthly income, the delinquent taxes had to be paid as a lump sum with 12% interest, and that the plan ran for 62 months but only provided for 60 months of mortgage payments at the understated amount. Hunter at 6.
The District Court also found that the bankruptcy court’s willingness to entertain an amended plan did not bind him to confirm a promised plan he had not seen. Hunter at 7.
The District Court declined to rule on the issue of the debtor’s eligibility to be a Chapter 13 debtor. The Court found that even if it remanded the case for a determination by the Bankruptcy Court on that issue, “the fact remains that she simply ‘lacks the resources to promulgate a plan which cures the default in mortgage payments and maintains them during the course of a plan’.” Hunter at 8
I will discuss it further here, however, as I think it is an important concept that is often overlooked. It was my contention in Hunter that the debtor was ineligible for Chapter 13 relief because she had no personal liability. As noted previously, the bank secured by the first lien on the debtor’s residence had obtained stay relief in the Chapter 7 case. Thus, the debtor’s personal liability was discharged with the entry of the discharge order. The two creditors secured by the debtor’s real estate have only in rem relief. I note that the debtor’s other obligation—real estate taxes—is also in rem. Real estate taxes—as the name implies–are assessed against the real estate and are a lien against the land, W.Va. Code 11A-1-2, and remain a charge for any subsequent holder of the property if not timely paid by the record owner when assessed. The statute regarding redemption of land certified to the state auditor for nonpayment of real estate taxes allows redemption by “any other person who was entitled to pay the taxes thereon,” W.Va. Code 11A-3-38(a), which would include the bank holding the mortgage.
To be eligible to be a Chapter 13 debtor, a debtor must have:
regular income, for which Social Security qualifies, and
a limited amount of pre-petition debt. 11 U.S.C. 109(e).
In Hunter, the debtor had no pre-petition debt. Debt is defined in 11 U.S.C. 101 (12) as “liability on a claim.” Claim is defined in 11 U.S.C. 101 (5)(A), inter alia, as “right to payment.”
There is a dispute among courts whether a debt discharged in a Chapter 7 case can be a debt paid in a subsequent Chapter 13 case. The U.S. Supreme Court in Johnson v. Home State Bank, 501 U.S. 78, 84, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991) specifically allowed it. Chapter 20 cases, as they are frequently referred to, are quite common. The Johnson Court allowed a debtor whose personal liability against the mortgage holder had been extinguished to proceed with his Chapter 13 case holding that
A mortgage interest that survives the discharge of a debtor’s personal liability is a ‘claim’ within the terms of §101(5). Even after the debtor’s personal obligations have been extinguished, the mortgage holder still retains a ‘right to payment’ in the form of its right to the proceeds from the sale of the debtor’s property. Alternatively, the creditor’s surviving right to foreclose can be viewed as a ‘right to an equitable remedy’ for the debtor’s default on the underlying obligation.
Johnson, at 84.
It should be noted that the debtor in Johnson, unlike the debtor in Hunter, proposed to pay the entire balance of the in rem mortgage obligation through the Chapter 13 plan.
The case I relied on regarding eligibility was Judge Flately’s decision, In re Pearson, 08-01970 (N.D. W.Va. May 26, 2015), in which the bankruptcy court determined that
An entity left with only a lien against the debtor’s property post-petition does not have a ‘right to payment’ against the debtor or the debtor’s property. Rather, it is left with its right to take possession of its collateral pursuant to its nonbankruptcy rights.. . .Therefore, only debtor who can be called upon to pay prepetition claims may qualify for relief under Chapter 13 of the Bankruptcy Code.
Pearson at 4.
In Pearson, the debtors moved to re-open their Chapter 7 case to add an asset and then convert to Chapter 13. The only creditor to be dealt with in the proposed converted-to-13 plan was a creditor with in rem rights only.
Similarly, the bankruptcy court in In re Hundley, 99 B.R. 306 (Bankr. E.D. Va. 1989), found that the mortgage creditor whose note had been discharged in a previous Chapter 7 case was not a creditor in the Chapter 13 case. The creditor held “only a lien against [the debtor’s] real estate.” Hundley at 307.
The ineligibility issue rarely arises, even in Chapter 20 cases, because most creditors would rather have the cash rather than the collateral. So, the District Court’s conclusion underscores the key element of a successful Chapter 13 plan—the debtor must have the resources to make the plan payments. While my office is willing to work with debtors and their counsel in confirming and/or modifying a plan, we need to know that the debtor is able–and willing–to make the payments.
Crafting a plan that works is not always easy. Circumstances—as this past year has shown—can interfere with the most dedicated debtor’s ability to deal with his/her debts. It is incumbent upon counsel for debtors to be realistic and objective. Having represented debtors in private practice, I know that it is not easy to tell debtors they may have to make some temporary lifestyle changes. (Clients have walked out of my office vowing not to file if they had to change anything they were currently doing.) Although counsel may need to rely on debtors for the initial payments in a plan, a review of the proof of claims will indicate where the debtors may have misremembered a mortgage or car payment amount. Certainly, understating payment amounts to secured creditors may make the initial plan work on paper, but realistic figures—both for income and debt—pave the way for a confirmable Chapter 13 plan—and hopefully, a successful conclusion.