Cite as: Keith M. Lundin, Lundin On Chapter 13, § 113.5, at ¶ ____, LundinOnChapter13.com (last visited __________).
Section 1322(a)(1) requires that the plan “provide for the submission of all or such portion of future earnings or other future income of the debtor to the supervision and control of the trustee as is necessary for the execution of the plan.”1 This requirement has not emerged as a significant obstacle to confirmation of Chapter 13 plans. The section is occasionally cited as an alternative basis for resolution of other issues.
For example, in In re Fulton,2 the plan proposed to repay loans from the debtor’s retirement program in full and less than 100 percent to other unsecured claim holders. The bankruptcy court held that the plan violated the disposable income test because the payment of the retirement loans diverted projected disposable income from payment to creditors under the plan. In an alternative holding, the bankruptcy court found that the plan failed the mandatory requirement in § 1322(a)(1): “The plans before this Court fail to provide for submission of a satisfactory portion of the debtors’ disposable income towards repayment of unsecured creditors . . . . [T]he plans presented here . . . are not in compliance with 11 U.S.C. § 1322(a)(1).”3
The plan in Fulton failed the disposable income test in § 1325(b)4 and was not confirmable for that reason. The bankruptcy court said so. It is hard to fault the court for also citing § 1322(a)(1), but objectively the plan did provide for the submission of that portion of future earnings necessary for execution of the plan proposed by the debtors. Section 1322(a)(1) comes into play only because the court first determined that the disposable income test required the debtors to submit more income than they proposed.
Section 1322(a)(1) has a potentially greater role to play in the debate whether Chapter 13 debtors can make direct payments to creditors. As detailed elsewhere,5 § 1326(c) provides that the trustee shall make payments to creditors, “except as otherwise provided in the plan or in the order confirming the plan.”6 At least one court has found that § 1322(a)(1) is inconsistent with direct payment of creditors by Chapter 13 debtors, reasoning that direct payment is not submitting income to the supervision and control of the trustee.7 Other courts have accommodated §§ 1322(a)(1) and 1326(c) by holding that Chapter 13 debtors are permitted to make some payments directly to creditors subject to case-by-case evaluation by the bankruptcy court.8
If there is meaning to § 1322(a)(1) distinct from its support of other tests for confirmation, it is that Chapter 13 debtors must propose some funding from future income and some payment to creditors.9 But even this statement of § 1322(a)(1) is limited by the wording of the plan itself.10 One court held that a plan that proposed to pay a creditor from the sale of property but that provided no payments from future earnings failed the submission of future income requirement in § 1322(a)(1).11 This holding is questionable statutory interpretation given that § 1322(a)(1) only requires submission of such portion of future earnings or income “as is necessary for the execution of the plan”—a plan that pays creditors from other sources would not be required to submit future income to the control of the trustee. Another court found in § 1322(a)(1) a complement to the feasibility test in § 1325(a)(6)12 that was failed when the income to fund the plan was subject to liens and not really available to pay creditors.13 Finally, one court read § 1322(a)(1) to require that the debtor’s earnings be committed to funding the plan; thus, when a claim was disallowed, the pro rata share of other creditors was increased but no refund was due to the debtor.14
Section 1322(a)(1) has also been used as a back door around the debate whether the disposable income test in § 1325(b) applies at modification after confirmation under § 1329.15 As the bankruptcy court explained in In re Profit,16 on the trustee’s motion to modify to increase payments to creditors under § 1329(a)(1), without resort to § 1325(b), § 1322(a)(1) requires the debtor to submit additional earnings or income to fund the increase in payments to creditors.
1 11 U.S.C. § 1322(a)(1). See also § 198.1 [ Able to Make Payments and Comply with Plan ] § 111.1 Able to Make Payments and Comply with Plan.
2 211 B.R. 247 (Bankr. S.D. Ohio 1997).
3 211 B.R. at 257.
4 See discussion of projected disposable income test beginning at § 91.1 In General.
5 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.
6 11 U.S.C. § 1326(c).
7 See In re Slaughter, 188 B.R. 29, 30 (Bankr. D.N.D. 1995) (Chapter 13 plan that provides debtor will “submit all future income to the supervision and control of the trustee during the pendency of this case” that also calls for direct payment of several creditors by the debtor is internally inconsistent and cannot be confirmed.).
8 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. See, e.g., In re Aberegg, 961 F.2d 1307 (7th Cir. 1992) (Section 1322(a)(1) permits Chapter 13 debtors to make some payments directly to secured creditors, provided that the plan otherwise satisfies § 1325(a).).
9 See In re Cook, 3 B.R. 480 (Bankr. S.D. W. Va. 1980) (Plan must provide for payment of some portion of the debtor’s income and some payment to creditors.). Accord In re Maloney, 25 B.R. 334 (B.A.P. 1st Cir. 1982); National City Bank v. Purdy, 16 B.R. 847 (N.D. Ga. 1981).
10 See In re Case, 11 B.R. 843 (Bankr. D. Utah 1981) (Debtor need only submit that portion of future income necessary for the execution of the plan.). Accord In re Carpenter, 23 B.R. 318 (Bankr. D.N.J. 1982); In re Scher, 12 B.R. 258 (Bankr. S.D.N.Y. 1981).
11 In re Poston, 78 B.R. 308 (Bankr. N.D. Fla. 1987).
12 See § 198.1 [ Able to Make Payments and Comply with Plan ] § 111.1 Able to Make Payments and Comply with Plan.
13 In re Ennis, 178 B.R. 189 (Bankr. W.D. Mo. 1995) (The mandatory requirement in § 1322(a)(1) that the debtor submit sufficient income to fund a plan is not satisfied where plan would be funded by an inheritance, but the debtor’s former spouse has a lien on the inheritance and has been granted relief from the stay to foreclose that lien.).
14 Tri Continental Leasing Corp. v. Gray, 28 B.R. 348 (Bankr. S.D.N.Y. 1983).
15 See § 255.1 [ Does Disposable Income Test Apply? ] § 126.3 Does Disposable Income Test Apply?.
16 269 B.R. 51 (Bankr. D. Nev. 2001), rev’d on other grounds, 283 B.R. 567 (B.A.P. 9th Cir. 2002).