Cite as: Keith M. Lundin, Lundin On Chapter 13, § 104.4, at ¶ ____, LundinOnChapter13.com (last visited __________).
It has been held that the administrative burden on the Chapter 13 trustee is a factor bearing on the debtor’s good faith in proposing the plan.1 With the widespread use of computers in Chapter 13 trustees’ offices, it is hard to imagine a Chapter 13 plan that burdens the trustee in a manner indicative of a lack of good faith.
Some of the cases listing administrative burden as an element of good faith are concerned whether the plan will generate enough compensation and reimbursement of expenses to cover the trustee’s costs of administering the case. For example, in In re Ristic,2 the debtor, serving a seven-year sentence for arson, proposed a $15-per-month, five-year plan. The bankruptcy court denied confirmation based in part on testimony from the Chapter 13 trustee that the cost of maintaining the case would exceed the fee payable from the nominal payments by the debtor.
Nothing in the Code requires each Chapter 13 case to fully reimburse the standing trustee’s actual expenses of administration. Rather, 28 U.S.C. § 586(e) requires the trustee to deduct a maximum of 10 percent from all payments received by the trustee under plans; and from that maximum 10 percent, the trustee is entitled to compensation and reimbursement of expenses.3 It is inevitable that this methodology overcompensates the trustee in some plans and undercompensates in plans with small payments. It seems to be the contemplation of Congress that the Chapter 13 trustee will, on average, receive sufficient compensation and reimbursement of expenses from all plans in the district, without regard to whether each case carries its administrative burden. Defining good faith under § 1325(a)(3) to require that the debtor pay enough money to reimburse the trustee’s actual costs and expenses imposes a condition that Congress omitted in the construction of 28 U.S.C. § 586(e). There are reported decisions concluding that administrative burden is not an appropriate good-faith consideration.4
After the 1986 amendments to the Code, the debtor can avoid paying commissions and expenses to the Chapter 13 trustee by making payments directly to creditors.5 It is conceivable that a Chapter 13 debtor would propose to make all significant payments directly to creditors and thus avoid trustees’ fees and expenses. The widespread use of such plans in a district could threaten the overall operation of a standing trustee’s office. Trustees are likely to object to confirmation of direct pay plans, but not based on lack of good faith under § 1325(a)(3). Trustees will challenge the feasibility of direct-pay plans under § 1325(a)(6).6 11 U.S.C. § 1326(c) provides, “except as otherwise provided in the plan or in the order confirming the plan, the trustee shall make payments to creditors under the plan.” Upon objection by the trustee, the courts have set limits on a Chapter 13 debtor’s authority to make payments directly to creditors.7
Congress knows how to address administrative concerns in bankruptcy cases and has done so in areas of Chapter 13 practice other than “good faith” under § 1325(a)(3). For example, with respect to the classification of claims under § 1322(b)(1), by cross-reference to § 1122 of the Code, Congress recognized that Chapter 13 debtors might propose separate classes of claims “reasonable and necessary for administrative convenience.”8 Nothing in the Code or legislative history suggests that administrative convenience or inconvenience is a factor bearing on a debtor’s good faith in proposing a Chapter 13 plan.
1 See, e.g., Kitchens v. Georgia R.R. Bank & Trust Co. (In re Kitchens), 702 F.2d 885 (11th Cir. 1983); In re Torres Lopez, 138 B.R. 348 (D.P.R. 1992) (That the plan did not place an undue administrative burden on the trustee is a relevant factor indicative of good faith.); Smith v. ITT Fin. Serv. (In re Smith), 100 B.R. 436 (S.D. Ind. 1989) (After the Seventh Circuit’s opinion in Smith, bankruptcy courts should no longer look at the amount unsecured creditors will receive as an element of good faith. Court affirms denial of confirmation on the ground that the plan placed an undue burden of administration on the trustee by providing for payments “for 48 months or until all secured claims and 25 percent of allowed unsecured claims are paid.” Bankruptcy court found that the proposed plan provision for termination of payments “is not authorized by the Code and presents an accounting nightmare for the trustee.” The bankruptcy court could properly require the debtor to “convert its percentages to dollar amounts or otherwise make the administration of the case more practical.”); In re Martin, 233 B.R. 436, 448 (Bankr. D. Ariz. 1999) (“No additional burdens are upon the chapter13 trustee in this case any more than he experiences in any other case. For administering this routine matter, the trustee will be compensated at 7%, or $3,675. There are relatively few creditors . . . . The trustee will cut between 14–20 checks each month. For this service, the trustee will receive $66.81 per month. No undue burden on the trustee is noted.”); In re Nottingham, 228 B.R. 316, 320 (Bankr. M.D. Fla. 1998) (That “no unusual burden would be placed upon the Trustee if the Plan is confirmed” is one factor favoring confirmation of 14%, 60-month plan that would compromise large claim that might be nondischargeable in a Chapter 7 case.); In re Games, 213 B.R. 773, 780 (Bankr. E.D. Wash. 1997) (Confirmation denied for lack of good faith when debtor could extend plan from 49 months to 60 months and the additional 11 months would provide $3,080 for distribution to the unsecured creditors: “This is a sufficient amount as not to cause an administrative burden on the trustee.”); In re Anadell, 190 B.R. 309, 312 (Bankr. S.D. Ohio 1995) (That the debtor “is not proposing a plan which would present any administrative burden for the trustee” is one factor in support of the debtor’s good-faith proposal to pay 9% of a $72,302.57 judgment for misappropriation of client funds through a 60-month plan.); In re Lindsey, 183 B.R. 624, 628 (Bankr. D. Idaho 1995) (Confirmation was denied on good-faith grounds based in part on finding that “[t]he amended plan proposed by the debtor would entail extraordinary administrative burdens on the trustee as compared to most Chapter 13 plans because the plan requires the trustee to oversee the sale of commercial real property.”); In re Ristic, 142 B.R. 856 (Bankr. E.D. Wis. 1992) (Plan was not proposed in good faith based in part on testimony from Chapter 13 trustee that plan would create an undue administrative burden.).
2 142 B.R. 856 (Bankr. E.D. Wis. 1992).
3 See discussion of trustee compensation beginning at § 54.1 Standard Percentage Fee and Expenses.
4 In re Snow, 33 B.R. 113 (N.D. Ill. 1983) (Good faith does not require that the plan “support its weight” in administrative costs.); In re Coburn, 175 B.R. 400, 405 (Bankr. D. Or. 1994) (“This court does not see any logical connection between the trustee’s duties in administering this routine chapter 13 plan and the debtors’ alleged bad faith.”); In re Easley, 72 B.R. 948, 955 (Bankr. M.D. Tenn. 1987); In re Harland, 3 B.R. 597 (Bankr. D. Neb. 1980).
5 28 U.S.C. § 586(e). See § 64.4 [ Compensation on Direct Payments by Debtor ] § 54.6 Compensation on Direct Payments by Debtor.
6 See §§ 59.1 [ Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise ] § 53.10 Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise and 198.1 [ Able to Make Payments and Comply with Plan ] § 111.1 Able to Make Payments and Comply with Plan.
7 See §§ 59.1 [ Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise ] § 53.10 Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise, 64.4 [ Compensation on Direct Payments by Debtor ] § 54.6 Compensation on Direct Payments by Debtor, 103.2 [ Direct Payment of Secured Claims by Debtor ] § 74.8 Direct Payment of Secured Claims by Debtor before BAPCPA, 147.1 [ Direct Payment of Mortgage or Payment by Trustee ] § 85.6 Direct Payment of Mortgage or Payment by Trustee and 157.1 [ Direct Payments by Debtor ] § 89.1 Direct Payments by Debtor.
8 11 U.S.C. § 1122(b), incorporated into Chapter 13 cases by 11 U.S.C. § 1322(b)(1).