One of the common myths is that paying secured claims through the trustee costs the debtor additional money. Prior to confirmation, the costs of administration are borne by the unsecured creditors. AFTER confirmation, if a secured claim is added to those to be paid by the trustee, the cost IS borne by the debtors because the distribution to unsecured creditors is set by the confirmation order and there is a post-petition arrearage to be paid which requires additional funds to the case.
Take the following example from an actual unconfirmed case:
The debtors have disposable income of $787.00 which they are committing to the plan for 60 months. Total scheduled unsecured debt is $35,057.00. The debtors are proposing to pay the mortgage, a second mortgage and a car directly. The mortgage payment is $1,082.00 per month (figure taken from plan); the second mortgage payment is $400.00 per month (taken from plan) and the car payment is $400.00 per month (taken from plan.) So, the debtors have a total of $2,669.00 for the plan payments. (Remember: direct payments are part of the plan.)
With payments of $787.00 to the trustee, the unsecured creditors will receive an estimated 100%. If the debtors make payments of $2,669.00 to the trustee, the unsecured creditors will receive a small distribution: an estimated 18%. There is NO CHANGE in what the debtors are out of pocket for the plan payment. There is one disbursing agent.
Assume that the debtors determine to pay the secured claims directly. The plans is confirmed with a 100% distribution to unsecured creditors. Experience says that one of those claims is going to be delinquent within the next 12 months and the creditor will file a motion for stay relief. The plans in both jurisdictions provide that a post-petition default in the direct payments results in the claim and the arrears being paid through the trustee.
Assume that the mortgage payment of $1,082.00 is in default by 3 payments by the time the motion for stay relief is filed. For the remaining 48 months of the plan, the plan payment to the trustee needs to be increased, not just by the $1,082.00 for the on-going mortgage payments, but must include funds to pay the 4 mortgage payments in default (by the time the agreed order is entered) and MUST still provide for the 100% distribution to unsecured creditors as provided by the confirmation order. So, plan payments do not increase to $1,869.00 for the remaining months of the case, but to $2,197.71 to the trustee PLUS the $400.00. to the second mortgage creditor and the $400.00 to the car creditor for a TOTAL of $2,997.71, which is $321.71 more than if the debtors had paid the secured claims through the trustee at the beginning of the plan.
Note: to reduce the percentage to the unsecureds after the confirmation order has been entered requires a motion to modify the confirmed plan, which requires the debtors show substantial, unanticipated change of circumstances.
But where are the debtors getting this extra money—especially since they didn’t remain current on the direct payments before? Probably from the second mortgage or the other car payments. In all probability, within the next year another secured creditor will be filing a motion for stay relief. So, plan payments must go up again.
Most debtors can’t afford these increases and dismiss or convert their cases, losing the advantage that the Chapter 13 plan could have given them.
In the case where the vehicles are being paid through the trustee, interest rate, even for 910 claims, may be changed. So, if the debtors have a 19% interest rate on a vehicle, it can be reduced to the Till rate, which is 1-3% above the prime rate at the time of filing. If the car payment is added after confirmation, the car creditor can insist on the debtors paying contract rate of interest.
At the end of the case in which the trustee is paying the mortgage claim, the trustee files a Notice of Final Cure. Creditors are given 21 days in which to file a response. If there is a response that states additional funds are needed to bring the claim current, a hearing will be set. If no response is filed or if the creditor files a response that it agrees with the trustee’s report, an ORDER is entered designating the claim as current and sets a resumption date for direct payments by the debtors. EVEN IF THERE IS NO PRE-PETITION ARREARAGE, the trustee will file the Notice of Final Cure to obtain the order determining that the debtor is current on the mortgage.
The trustee believes that this is an important component to the debtors’ fresh start. The order provides that the debtor is current as of the discharge, so if the mortgage creditor attempts to come back against the debtor for additional charges, missed payments (during the pendency of the plan), etc., the debtors have an order that allows them to push back against that type of creditor over-reaching.
And paying all secured claims through the trustee will eventually lower the actual trustee fee which will inure to the benefit of the unsecured creditors.
A common miss is failing to reduce the interest rate on secured claims being paid through the trustee. The prior required plans in both jurisdictions provided that secured claims would be paid at prime plus 2% if no interest rate was disclosed. The current required plans provide that the proof of claim will control unless otherwise ordered. If there is no provision for the interest rate in the plan, then there will be no order changing the interest rate, so contract rate will be used by the trustee.
We see a number of cases in which amended plans are filed or proposed to be filed to conform to the trustee’s confirmation recommendation. A rule of thumb: if no creditor is adversely affected by the amendment to confirmation, an oral amendment at the time of the confirmation hearing will probably suffice and the change in the plan can be incorporated into the confirmation order. If the change adversely affects a creditor, then an amended plan is probably needed.