§ 143.3     Payments Held by Chapter 13 Trustee at Conversion: § 1326(a)(2) after BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 143.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

BAPCPA amendments to § 1326(a)(2) may change the rules for distribution of funds held by the Chapter 13 trustee at conversion to Chapter 7 before confirmation of a plan.1 The possibility of new and increased administrative expenses as a result of BAPCPA amendments to § 5032 could also change entitlements at conversion before confirmation.

[2]

Under § 1326(a)(1), Chapter 13 debtors are required to commence payments to the trustee no later than 30 days after the petition.3 Payments are retained by the trustee until confirmation or the denial of confirmation.4 If no plan is confirmed, the Chapter 13 case is either converted or dismissed. In either case, § 1326(a)(2) provides: “If a plan is not confirmed, the trustee shall return any such payments not previously paid and not yet due and owing to creditors pursuant to paragraph (3) to the debtor, after deducting any unpaid claim allowed under section 503(b).”5

[3]

The instruction to deduct unpaid claims allowed under § 503(b) is familiar. Under pre-BAPCPA law, the same deduction applied at conversion or dismissal prior to confirmation.6 The part of § 1326(a)(2) that is new is the instruction that the trustee must return payments received from the debtor “not previously paid and not yet due and owing to creditors pursuant to paragraph (3).”

[4]

“Not previously paid” has to be interpreted in the context of a Chapter 13 case in which no plan has been confirmed. There is no statutory authority for disbursements by a Chapter 13 trustee prior to confirmation7 though it is common in some districts and will be more common after BAPCPA for bankruptcy courts to authorize preconfirmation disbursements to specific lessors and creditors.8 Payments not previously paid in new § 1326(a)(2) probably means payments to the trustee that have not been paid to a creditor.

[5]

BAPCPA enacted new subparagraphs (B) and (C) in § 1326(a)(1) requiring Chapter 13 debtors to make payments before confirmation to lessors of personal property and to purchase money lenders with allowed claims secured by personal property.9 Lessors are to be paid the amount “scheduled in a lease of personal property . . . that becomes due after the order for relief.”10 Purchase money secured lenders are to be paid an amount that “provides adequate protection . . . for that portion of the obligation that becomes due after the order for relief.”11 Perhaps “previously paid” in § 1326(a)(2) refers to amounts paid to lessors of personal property and to purchase-money-secured lenders prior to confirmation consistent with the new entitlements in § 1326(a)(1)(B) and (C).

[6]

This interpretation loses traction because payments “previously paid” consistent with new § 1326(a)(1)(B) and (C) would no longer be in the possession of the trustee and in some districts will never have been in the trustee’s possession. Under § 1326(a)(1), “unless the court orders otherwise,” the debtor is instructed to make preconfirmation payments directly to lessors of personal property and to purchase-money-secured lenders. Although there are many good arguments why bankruptcy courts should order otherwise and require debtors to make preconfirmation payments in Chapter 13 cases through the trustee even when those payments will then be distributed to lessors of personal property and purchase-money-secured lenders, it is unlikely that all districts will do so. There will be districts where debtors make direct payments to lessors and purchase-money-secured lenders prior to confirmation and then the balance of payments required by the plan is paid to the trustee.

[7]

Section 1326(a)(2) speaks directly to payments “made under paragraph (1)(A).” Payments under paragraph (1)(A) are payments proposed by the plan to be paid to the trustee. Payment to the trustee under § 1326(a)(1)(A) is net of any amount that the debtor is paying directly to a lessor of personal property or to a purchase-money-secured lender prior to confirmation under § 1326(a)(1)(B) and (C). Section 1326(a)(2) directs the trustee to retain only the payments made to the trustee. If the court “orders otherwise” and instructs the debtor to make all payments to the trustee, then the court should also instruct the trustee not to retain those payments to the extent that the money is payable before confirmation to a lessor of personal property or to an allowed purchase-money-secured claim holder pursuant to § 1326(a)(1)(B) or (C).

[8]

When the court has ordered otherwise and the trustee is receiving all the preconfirmation payments, then, depending on the timing of conversion or dismissal, the trustee could be retaining payments from the debtor that have not been “previously paid” to a lessor of personal property or to an allowed purchase-money-secured claim holder, in addition to the payments proposed by the plan that were not to be distributed before confirmation.

[9]

What then does the phrase “not yet due and owing to creditors pursuant to paragraph (3)” mean? There is only one paragraph (3) in § 1326(a), and it says: “Subject to section 363, the court may, upon notice and a hearing, modify, increase, or reduce the payments required under this subsection pending confirmation of a plan.”12 One reading of the cross-reference to paragraph (3) in § 1326(a)(2) would be that the trustee must return payments from the debtor that are not yet due and owing to a lessor of personal property or to an allowed purchase-money-secured claim holder pursuant to a court order modifying, increasing or reducing payments under § 1326(a)(1)(B) or (C) prior to confirmation of a plan. Absent notice, a hearing and a court order under “paragraph (3),” there would be no payment due and owing to creditors pursuant to § 1326(a)(3).

[10]

Read this way, at conversion or dismissal before confirmation, the Chapter 13 trustee would be required by § 1326(a)(2) to return any payments received from the debtor net of three amounts: (1) payments previously paid to lessors of personal property and to allowed purchase-money-secured claim holders under § 1326(a)(2)(B) and (C); (2) payments due and owing to lessors of personal property and to allowed purchase-money-secured claim holders pursuant to any court order under § 1326(a)(3) modifying, increasing or reducing payments required under § 1326(a)(2)(B) and (C); and (3) any unpaid claim allowed under § 503(b).

[11]

Especially after the BAPCPA amendments to § 1324, there will be relatively little time between the filing of a Chapter 13 case and the hearing on confirmation in which to seek a court order under § 1326(a)(3). Section 1324 now requires a hearing on confirmation not later than 45 days after the meeting of creditors under § 341(a).13 The accelerated timing in § 1324(b) should reduce the time between the filing of Chapter 13 cases and a determination that a plan will not be confirmed. The compression of time is likely to reduce the opportunities for motions and orders under § 1326(a)(3).

[12]

BAPCPA expanded the administrative expenses identified in § 503(b). Of particular interest in Chapter 13 cases, BAPCPA enlarged the definition of taxes entitled to administrative expense status under § 503(b)(1)(B). Any tax incurred by the estate, whether secured or unsecured—including property taxes for which liability is “in rem, in personam or both”—is an administrative expense in a Chapter 13 case under § 503(b)(1)(B), as amended.14 Also, the value of goods received by a Chapter 13 debtor within 20 days before the petition when sold to the debtor in the ordinary course of the debtor’s business are a new administrative expense under § 503(b)(9).15 When a Chapter 13 case fails before confirmation, these new expenses when allowed under § 503(b) will be deducted before returning payments to the debtor under § 1326(a)(2).

[13]

The enlarged class of folks who may lay claim to money held by the trustee at conversion or dismissal puts emphasis on the need for notice to creditors before the Chapter 13 trustee returns money to the debtor. In addition to taxing authorities and the debtor’s attorney, all lessors of personal property and all secured creditors with purchase money security interests in personal property are potential suitors for the money held by the trustee. Notice to all creditors at conversion or dismissal before confirmation should be the default position when the trustee is holding payments from the debtor.


 

1  See 11 U.S.C. § 1326(a)(2), discussed in § 402.1 [ Disposition of Preconfirmation Payments ] § 44.7  Disposition of Preconfirmation Payments after BAPCPA.

 

2  See § 523.1 [ Miscellaneous Administrative Expenses and Priority Claims ] § 136.15  Miscellaneous Administrative Expenses and Priority Claims after BAPCPA.

 

3  See 11 U.S.C. § 1326(a)(1), discussed in § 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA.

 

4  11 U.S.C. § 1326(a)(2).

 

5  11 U.S.C. § 1326(a)(2), discussed in § 402.1 [ Disposition of Preconfirmation Payments ] § 44.7  Disposition of Preconfirmation Payments after BAPCPA.

 

6  See below in this section, and see § 316.1 [ In Cases Filed after October 22, 1994 ] § 143.2  In Cases Filed after October 22, 1994.

 

7  See 11 U.S.C. § 1326(a)(2) (“If a plan is confirmed, the trustee shall distribute any such payment.”).

 

8  See 11 U.S.C. § 1326(a)(1)(B) and (C), discussed below in this section and in § 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA.

 

9  See § 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA.

 

10  11 U.S.C. § 1326(a)(1)(B).

 

11  11 U.S.C. § 1326(a)(1)(C).

 

12  11 U.S.C. § 1326(a)(3), discussed in §§ 401.1 [ Preconfirmation Payments ] § 44.6  Preconfirmation Payments after BAPCPA and 426.1 [ Adequate Protection Rights before Confirmation ] § 57.3  Preconfirmation Adequate Protection Rights after BAPCPA.

 

13  11 U.S.C. § 1324(b), discussed in § 502.1 [ Timing of Hearing on Confirmation ] § 115.2  Timing of Hearing on Confirmation after BAPCPA.

 

14  See §§ 513.1 [ Taxes ] § 136.3  Taxes after BAPCPA and 523.1 [ Miscellaneous Administrative Expenses and Priority Claims ] § 136.15  Miscellaneous Administrative Expenses and Priority Claims after BAPCPA.

 

15  11 U.S.C. § 503(b)(9), discussed in § 523.1 [ Miscellaneous Administrative Expenses and Priority Claims ] § 136.15  Miscellaneous Administrative Expenses and Priority Claims after BAPCPA.