Myth 2: Adding secured claim to confirmed plan takes a long time for the creditor to start receiving payments from the trustee
The plan provides for the direct payment of a secured claim. The debtors default; motion for stay relief is filed and by agreed order, the future payments will be made by the trustee. The trustee office has no problem with that; in fact, we insist on it. The “miss” comes in the order.
- Some orders give the debtors 30 days to amend their plan/file a motion to modify the confirmed plan to provide for the claim to be paid through the trustee and thereafter the creditor has 30 days in which to file an amended proof of claim, which will include the post-petition arrearage on the loan.
ISSUE: The claim will be at least 90 days further in default by the time an order is entered to authorize the trustee to pay the claim. If the plan is not confirmed, the filing of an amended plan shouldn’t take the full 30 days, and the filing of the amended proof of claim shouldn’t take a full 30 days, but the amended plan must go out on notice and be set for hearing. If the hearing is set and held before the amended proof of claim is filed, the hearing will need to be continued and the claim, particularly the arrearage claim, won’t be paid until the plan is confirmed.
If the plan has been confirmed, then a motion to modify is filed. Creditors are given an opportunity to object and a hearing is set. This claim isn’t going to be paid until the modification is approved.
- Some orders correctly bypass the above scenarios and state that the entry of the order amends/modifies the plan and authorizes the trustee to pay a post-petition default in the amount of $X and to make payments on the ongoing obligation in the amount of $Y for the remaining months of the plan.
ISSUE: These orders state that the trustee will calculate the increased plan payments and notify the debtors. My office will do that and we file a Notice of Increased Plan Payments and Increased Gross Base, but we may not have the money to make payment on the added claim until the increased payments are made.
Best solution: Instead of the paragraph that the trustee will calculate and let the debtors know, substitute the following:
Plan payments will increase to the sum of $_____________ beginning with the (month) payment and continue for the remainder of the plan. If plan payments are made by wage withholding, debtor’s counsel is responsible for amending the wage withholding. Debtors are responsible for making the increased plan payments to the trustee pending the employer adjusting the wage withholding.
Meagan or I will fill in the blanks before we sign off on the proposed order and send it back to you.
A form order has been added to the WHERE.
The form order is not written in stone. We encourage you to make the necessary changes that suit your particular case. We do ask that you include the blanks for the plan payments and start date as we think this will be more efficient for all parties, and we ask that the last paragraph regarding the material default be included in the order as well.
Myth 1: It costs more to pay secured claims through the trustee
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.
MISS: Failing to take advantage of paying all secured claims through the trustee:
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.
MISS: Failing to reduce the interest rate
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.
MISS: Filing unnecessary amended plans
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.