§ 101.3     Methods of Paying Unsecured Claims
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 101.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

The Bankruptcy Code does not mandate that unsecured claims be paid in any particular manner through the confirmed plan. Section 1322(b)(4) provides that the plan can “provide for payments on any unsecured claim to be made concurrently with payments on any secured claim or any other unsecured claim.”1 This is a circuitous statement of broad discretion in the design of Chapter 13 plans but not a road map for any particular methodology. Bankruptcy Rule 3021 adds that after confirmation, distributions “shall be made to creditors whose claims have been allowed.”2 Rule 3021 tells us nothing about what the distribution scheme looks like. It is not surprising that many different protocols for paying unsecured claims have developed over the years. Not all were created equally.

[2]

For many years, the most common method of calculating and describing payment of unsecured claims was to provide that unsecured claim holders will receive a fixed percentage of allowed claims. If the plan is an extension plan, it will pay 100 percent of allowed unsecured claims. If the plan is a composition plan, it will pay a specific portion less than 100 percent of allowed unsecured claims. Payments under the plan are completed when allowed unsecured claim holders have been paid the stated percentage and all other payments required by the plan have been made.

[3]

Sometimes a fixed-percentage plan is also a pro rata plan. Pro rata describes the method of calculating the actual amount of payment to each unsecured claim holder. If the plan has $100 per month available to pay unsecured claim holders and if there are two allowed unsecured claim holders—one with a claim of $100 and one with a claim of $900—under pro rata distribution, the $100 claim holder will receive one-tenth of available funds, or $10, and the $900 claimant will receive nine-tenths, or $90. Under pro rata distribution, all unsecured claim holders will be paid in full about the same time because each will receive the same percentage of available funds as its claim bears to the total pool of allowed unsecured claim holders.

[4]

Occasionally, Chapter 13 plans call for per capita distribution to unsecured claim holders. A per capita distribution scheme pays the same amount to each allowed claim in each distribution period. In the example above, in the first month each claim holder would receive $50, one-half of the available funds. Per capita distribution pays smaller claims more quickly than larger claims. Before computers, per capita distribution was simpler to administer. All allowed unsecured claim holders receive the same amount each distribution, and fewer monthly checks are required because smaller claims are more quickly paid in full than under pro rata distribution. Per capita distribution is flawed for the same reason it is simpler—creditors with identical rights receive unequal treatment. And if the plan craters before completion of all payments, smaller unsecured claim holders walk away with a greater percentage of repayment than larger claims. These inequalities are avoided by using pro rata distribution.

[5]

Without regard to whether creditors are paid pro rata or per capita, a percentage Chapter 13 plan creates problems at confirmation because of the disposable income test. Discussed in detail elsewhere,3 upon objection to confirmation, § 1325(b) requires the debtor to commit to the plan all projected disposable income for at least three years. Depending on the filing of claims and the accuracy of calculations, a fixed percentage plan may violate § 1325(b) by completing payment of the fixed percentage before the debtor has contributed 36 months of projected disposable income and before allowed unsecured claims have been paid in full.4

[6]

The modern and preferable scheme for paying unsecured claims is the base plan or pot plan and its variations. In a simple base plan, the total of all payments that will be made by the debtor during the life of the plan is the base amount against which progress under the plan is measured.5 For example, if the debtor is to pay $100 a month for 36 months, the base of the plan would be $3,600. When the debtor has paid $3,600 into the plan, the plan is consummated and the debtor is entitled to a full-payment discharge. The amount that will be paid to unsecured claim holders from the base is mathematically calculated by subtracting all other payments that must be made to secured claim holders, priority claim holders and so forth. If the sum of all such other payments is $2,000, then the amount that will be paid to unsecured claim holders through the plan is $1,600.

[7]

The simple base or pot plan has a fatal defect: Because it does not require a minimum percentage repayment of unsecured claims, the plan will often fail the best-interests-of-creditors test for confirmation.6 This will be true whenever the hypothetical liquidation value of the estate would produce a dividend for allowed unsecured claims that is greater than the percentage of allowed unsecured claims that can be paid from the base or pot. In districts that confirm plans before the claims bar date,7 the actual distribution to allowed unsecured claim holders under a simple pot or base plan can’t be known at confirmation. Because it is the debtor’s burden to prove the conditions for confirmation in § 1325(a)—including the best-interests-of-creditors test in § 1325(a)(4)—a simple pot plan cannot be confirmed over objection, except perhaps when the hypothetical liquidation value of the estate is clearly zero or when the pot is clearly large enough to pay a percentage of unsecured claims that will always be greater than the distribution in a hypothetical Chapter 7 case even if all unsecured claims are ultimately allowed. There will always be a substantial percentage of Chapter 13 cases that fall in the gray area where satisfaction of the best-interests-of-creditors test can’t be determined with any assurance before the claims bar date when the plan provides nothing more specific than a simple base or pot amount.

[8]

Improving on the simple base plan, in some jurisdictions plans must propose a base or percentage payment to unsecured claim holders. For example, the plan might provide “a base of $3,600 or 75% of allowed unsecured claims.” Under this plan, payments are completed when the sum of $3,600 has been paid to the trustee or unsecured claim holders have received 75 percent of allowed claims. This sort of plan can have odd outcomes. For example, when allowed unsecured claims turn out to be less than expected at confirmation, the “or 75%” condition will be satisfied before the debtor has paid $3,600 into the plan. This outcome is inconsistent with the disposable income test in § 1325(b).8 The base or percentage plan was popular for a while but is now discouraged by most courts.

[9]

To avoid problems with base or percentage plans, the base or percentage, whichever is greater plan evolved and is now the predominant form of Chapter 13 plan.9 Especially in jurisdictions that reach confirmation before the claims bar date,10 at confirmation it is not possible to know the precise percentage of repayment of unsecured claims that will be accomplished by most Chapter 13 plans. However, debtors and trustees typically can calculate an approximate percentage of unsecured claims that will be paid by the plan, and the plan can be stated as, “a base of $3,600 or 75% of allowed unsecured claims, whichever is greater.” This plan is completed when the disjunctive condition is satisfied—when unsecured claim holders have received 75 percent of allowed claims or the debtor has paid $3,600 to the Chapter 13 trustee, whichever is greater. If allowed unsecured claims turn out to be larger than indicated in the schedules, the amount that the debtor will have to pay to complete payments will be greater than $3,600. If allowed claims are smaller than anticipated, the payment of $3,600 into the plan will still be required but will result in the payment of a greater percentage than 75 percent. The debtor may complete the plan by paying all claims in full with total payments less than $3,600. This scheme maximizes the recovery for creditors based on the debtor’s financial circumstances.

[10]

The base or percentage, whichever is greater, plan has many advantages. It permits confirmation in advance of the bar date for filing claims because the actual amount of allowed unsecured debt does not affect confirmation except in the rare case in which the debtor’s estimate of claims is so mistaken that even the minimum percentage of payment is financially impossible. The experience in districts that have used base or percentage, whichever is greater, plans for many years is that debtors do a good job of estimating debt and the base protects creditors even when the estimated percentage is off somewhat.

[11]

The base or percentage, whichever is greater, plan automatically compensates for the allowance or disallowance of claims. When a claim is disallowed, the money that would have been paid to that creditor is redistributed through the base or pot and paid to other creditors holding allowed claims. As a result, claims allowance issues are unnecessary to any condition for confirmation and can be addressed when time permits, after confirmation.

[12]

Also, the base or percentage, whichever is greater, plan is not held hostage by avoidance or recovery litigation in the Chapter 13 case. If a lien is avoided after confirmation, the money that would have been paid to that lienholder as a secured claim holder is simply redistributed through the base and paid to other creditors according to the priorities stated in the plan. Again, this permits early confirmation in Chapter 13 cases while reserving what can be protracted litigation for quiet contemplation after confirmation.

[13]

The base or percentage, whichever is greater, plan dovetails nicely with the projected disposable income test in § 1325(b).11 Debtor’s counsel has to calculate the projected income available for at least three years to begin the § 1325(b) calculation. Projected disposable income is the income remaining after reasonable and necessary expenses of the debtor and the debtor’s dependents.12 Some deductible expenses will actually be paid through the plan—for example, a car note or home mortgage payment. The base for the plan will be projected disposable income plus the expense components that are being paid through the plan plus administrative expenses, priority claims and the trustee’s commission. Netting from the base the amounts that will be paid to secured claim holders, priority claim holders, administrative expenses and the trustee leaves the amount that will be available to unsecured claim holders. The “greater than” percentage can then be easily calculated using the debtor’s estimate of total unsecured claims.13 Unsecured claim holders simply receive the amount that falls out of the bottom of the plan after everyone else has been paid.

[14]

The principal criticism of the various base-plan approaches is that the precise percentage of payment of unsecured claims cannot be known at the beginning of the case. If the court waits until after the claims bar date before holding the confirmation hearing,14 the precise amount of allowed unsecured claims can be known, and a fixed percentage plan is easily calculated. In a jurisdiction that confirms before the claims bar date, unsecured claim holders can know only the minimum percentage of claims that will be paid from the base. This is a rare instance when less information is not worse for creditors. The base or percentage, whichever is greater, plan may be less precise than, say, a fixed-percentage plan, but errors by debtors in estimating claims do not reduce the minimum percentage provided by the plan, and errors by creditors in not filing claims benefit diligent creditors, which are then guaranteed a larger share of the base.

[15]

To make a base or percentage, whichever is greater, plan work, the debtor must estimate total allowed unsecured claims and then calculate the percentage of repayment that will result if the base is paid in full. If allowed claims ultimately are higher or lower than the debtor’s estimate, then the final percentage that can be paid from the base will vary accordingly. If the debtor overestimates unsecured debt or, more typically, when allowed unsecured claims total less than expected because creditors fail to timely file claims, the base amount automatically increases the percentage payment to allowed unsecured claim holders. Slight underestimation of unsecured claims will simply extend the plan for a few months to meet the minimum percentage in the plan. If allowed claims are significantly higher than estimated, the plan may exceed the statutory maximum of five years15 to complete payment of the minimum percentage to unsecured claims. In jurisdictions that routinely confirm base or percentage, whichever is greater, plans before expiration of the claims bar date, the trustee reviews confirmed plans soon after the claims bar date and moves to modify or to dismiss plans that cannot be completed as confirmed.

[16]

As the bankruptcy court recognized in Kerney v. Capital One Finance Corp. (In re Sims),16 the base or percentage, whichever is greater, plan creates appropriate incentives for debtors to review claims and object to claims that are untimely filed or filed in an unexpected amount. As explained in Sims, “if allowed unsecured claims turn out to be larger than indicated in the schedules to the point where the base amount will not pay the minimum percentage, the debtor will have to pay more to satisfy the percentage.”17 This added diligence serves other legitimate interests: allowable unsecured claim holders get more money when the debtor successfully objects to a claim; and the trustee is assisted in carrying out the responsibility to review and object to claims.18

[17]

Although rare, debtors occasionally propose to pay a fixed dollar amount to each unsecured claim holder—for example, the “$1 plan,” that pays $1 to each allowed unsecured claim. Such a plan is difficult to confirm. It may violate the proscription against classifications that unfairly discriminate.19 It may fail good-faith analysis.20 It may violate the requirement that all members of a class be treated the same.21 Any debtor who can propose a fixed dollar amount per claim can also propose a base or percentage plan. Whether the proposal is to pay 1 percent or $1, the amount being paid to unsecured claim holders is de minimis, and scrutiny at confirmation can be expected.

[18]

In some jurisdictions, it is the practice to state in the plan the exact dollar amount that will be paid to unsecured claim holders during each distribution period. For example, some courts expect the plan to provide that unsecured claim holders will receive “$X per month.” It is difficult but not impossible to precisely calculate the amount that will be available each month for distribution to unsecured claim holders—assuming that the debtor makes all payments required by the plan in time for the trustee to make a complete distribution every month.

[19]

More commonly, for many obvious good reasons, the plan provides the amount that will ultimately be paid to unsecured claim holders without specifying a particular amount each distribution period. The Code permits the Chapter 13 debtor to control the order in which creditors will be paid.22 Counsel is safest to leave the actual amount of unsecured debt that will be paid in any month to the mathematics of how much money has been received, what preferred payments must be made to secured or priority claim holders and so forth. Specifying an exact amount for unsecured claim holders creates one more potential default under the plan—a trip wire not required by the Code.


 

1  11 U.S.C. § 1322(b)(4). See § 204.2 [ Order of Payments to Creditors ] § 113.7  Order of Payments to Creditors before BAPCPA.

 

2  Fed. R. Bankr. P. 3021.

 

3  See discussion beginning at § 91.1  In General.

 

4  See In re Jones, 301 B.R. 840, 846 (Bankr. E.D. Mich. 2003) (“Base plan” that only specifies a fixed percentage dividend fails disposable income test. “Because confirmation occurs in this district before the clams bar date, the total amount of unsecured claims is not known. . . . [B]ase plans that provide for a fixed percentage dividend are . . . problematic. Such plans cannot be confirmed because they fail the disposable income test under Section 1325(b)(1)(B).”); In re Bass, 267 B.R. 812, 814, 816–17 (Bankr. S.D. Ohio 2001) (“Percentage plan” of less than 100% fails disposable income test in § 1325(b)(1)(B). “Traditionally, Chapter 13 debtors have filed percentage plans in this Court. Because payments are complete under a percentage plan ‘when allowed unsecured claim holders have been paid the stated percentage and all other payments required by the plan have been made,’ . . . the percentage plan creates a potential conflict with the disposable income requirement.” A percentage plan that requires a 70% dividend and payments of $1,000 a month for 36 months does not necessarily require $1,000 payments for 36 months because the failure of unsecured creditors to file proofs of claim or claims litigation or changes in the payments to secured creditors could pay the 70% dividend before 36 months. “[A] percentage plan cannot be confirmed over a timely objection pursuant to § 1325(b).”).

 

5  See, e.g., Meyer v. Pagano, No. C 01-0848 MMC, 2002 WL 31159110, at *1 n.3 (N.D. Cal. Sept. 25, 2002) (unpublished) (“A ‘pot plan’ is a plan under which the debtor pays a fixed amount, or ‘pot’ of money, into the bankruptcy estate. . . . The percentage of a claim that a creditor ultimately receives from the bankruptcy estate will depend on the total amount of approved claims.”).

 

6  See § 160.1 [ In General: Plan Payments vs. Hypothetical Liquidation ] § 90.1  In General: Plan Payments vs. Hypothetical Liquidation. See, e.g., In re Jones, 301 B.R. 840 (Bankr. E.D. Mich. 2003) (“Base plan” that specifies a base amount and nothing more fails best-interests-of-creditors test in a district that confirms plans before the claims bar date.); In re Bass, 267 B.R. 812, 814, 816 (Bankr. S.D. Ohio 2001) (“Although the base plan takes care of disposable income objections, it creates a problem concerning the best interest test under 11 U.S.C. § 1325(a)(4) because the base plan does not bind the debtor to the repayment of a minimum percentage of debt.”).

 

7  See § 216.1 [ Timing of Hearing on Confirmation ] § 115.1  Timing of Hearing on Confirmation before BAPCPA.

 

8  See § 163.1 [ In General ] § 91.1  In General. See, e.g., In re Stamm, 265 B.R. 10, 12–13 (Bankr. D. Mass. 2001) (Debtors cannot modify plan after confirmation to change a “pot” plan to a “percentage” plan to reflect that filed claims are less than predicted by the debtors. “The Chapter 13 Trustee correctly states the preference in the First Circuit for the ‘pot’ plan over the ‘percentage’ plan . . . . Because the confirmation order in this case expressly provides that the ‘term of the plan is 60 months,’ that ‘the Debtors shall pay to the Chapter 13 Trustee the sum of $431.18 per month commencing August 20, 1997, which payments shall continue through completion of the Plan,’ and the summary of disbursements indicates that unsecured creditors ‘shall receive a dividend no less than 10%,’ the Court finds that this is a pot plan. Accordingly, the Court rejects the Debtors’ contention that payment of the 10% dividend to unsecured creditors as indicated in their proposed First Amended Plan satisfies their obligations under Chapter 13.”); In re Barbosa, 236 B.R. 540, 548–49 (Bankr. D. Mass. 1999) (Plan that provided 59 payments of $1,265.85 and a final payment of $5,993.82 is a “pot plan,” not a percentage plan, that cannot be cashed out at 10% dividend stated elsewhere in plan. “The Court also determines to follow the courts in [In re Witkowski, 16 F.3d 739 (7th Cir. 1994)] and [In re Martin, 232 B.R. 29 (Bankr. D. Mass. 1999)] with respect to percentage and pot plans. . . . ‘A percentage plan, by its very nature does not seem to constitute a plan by which the debtors will contribute all disposable income to the plan because the debtor may retain a portion of disposable income if fewer than anticipated claims are filed.’” On trustee’s motion to modify the plan after confirmation to increase from 10% to 100% the payment of unsecured claim holders and to pay the increased amount from the sale of investment property, court rejects debtors’ response that they can cash out the plan at 10% as originally confirmed.), aff’d on other grounds, 243 B.R. 562 (D. Mass.), aff’d, 235 F.3d 31 (1st Cir. 2000).

 

9  See, e.g., In re Jones, 301 B.R. 840, 846–47 (Bankr. E.D. Mich. 2003) (Plans that specify a base amount and a percentage, “whichever is greater,” satisfy both the best-interests-of-creditors test and the disposable income test for confirmation. “[P]lans which specify a base amount or a percentage dividend, whichever is greater, will satisfy the Code requirements for confirmation . . . . In order to meet the requirements of the Code and to avoid the problems of unspecified amount base plans, dollar amount base plans, and percentage plans, courts favor plans that provide for a ‘base or percentage, whichever is greater.’”); Hildebrand v. Hays Imports, Inc. (In re Johnson), 279 B.R. 218, 221–22 (Bankr. M.D. Tenn. 2002) (“The plan in this case is sometimes called a ‘base’ or ‘pot’ plan. . . . Starting from the amount of disposable income that the debtors will have during the life of the plan, a base is calculated that is the minimum amount of money that must be paid to the trustee before the plan is completed. . . . The plan also states a minimum percentage of payment (20%) to unsecured claim holders. The plan cannot be completed without satisfaction of the greater of the two conditions.”); Kerney v. Capital One Fin. Corp. (In re Sims), 278 B.R. 457, 483 (Bankr. E.D. Tenn. 2002) (“[T]he debtors’ plans in the instant cases are not simple base plans but are instead, ‘base or percentage, whichever is greater’ whereby unsecured creditors receive under the plan the required percentage or the balance of the base, ‘whichever is greater.’”); In re Pedersen, 229 B.R. 445, 453 (Bankr. E.D. Cal. 1999) (Form plan in district is “base or percentage plan, whichever is greater.” Debtor’s failure to specify length of plan or to insert a percentage payable to unsecured claim holders makes confirmation impossible. “The form plan combines the base and percentage plans and avoids . . . problems. General unsecured creditors receive no less than the percentage dividend promised in the plan. Because this minimum dividend is expressed as a percentage rather than specific dollar amount to be shared on a pro rata basis, the debtor has an incentive to seek the disallowance of objectionable claims. Creditors know what to expect if a plan is confirmed and the dividend can be easily compared to the dividend paid in a hypothetical chapter 7 liquidation. If claims are less than scheduled, creditors filing proofs of claim will receive more than the minimum percentage dividend and the debtor will not be permitted to circumvent his or her promise to pay disposable income to creditors for a specific number of months.”).

 

10  See § 216.1 [ Timing of Hearing on Confirmation ] § 115.1  Timing of Hearing on Confirmation before BAPCPA.

 

11  See discussion beginning at § 91.1  In General.

 

12  See § 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3  Reasonably Necessary for Maintenance or Support. See also § 167.1 [ Debtor Engaged in Business ] § 91.6  Debtor Engaged in Business for discussion of disposable income of a debtor engaged in business.

 

13  See App. UU.

 

14  See § 216.1 [ Timing of Hearing on Confirmation ] § 115.1  Timing of Hearing on Confirmation before BAPCPA.

 

15  See § 199.1 [ General Rule: Three Years, More or Less ] § 112.1  General Rule: Three Years, More or Less.

 

16  278 B.R. 457 (Bankr. E.D. Tenn. 2002).

 

17  278 B.R. at 483.

 

18  See § 62.1 [ Review Claims, Object to Claims and File Proofs of Claim ] § 53.15  Review Claims, Object to Claims and File Proofs of Claim.

 

19  See § 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1  Power to Classify Unsecured Claims: Tests for Unfair Discrimination.

 

20  See discussion of good faith beginning at § 103.1  In General.

 

21  See § 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1  Power to Classify Unsecured Claims: Tests for Unfair Discrimination.

 

22  See § 204.2 [ Order of Payments to Creditors ] § 113.7  Order of Payments to Creditors before BAPCPA.