Cite as: Keith M. Lundin, Lundin On Chapter 13, § 159.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
BAPCPA created a new exception to discharge at the completion of payments in a Chapter 13 case for debts described in § 523(a)(2):
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained, by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;
(B) use of a statement in writing—
(i) that is materially false;
(ii) respecting the debtor’s or an insider’s financial condition;
(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive; or
(C)(i) for purposes of subparagraph (A)
(I) consumer debts owed to a single creditor and aggregating more than $500 for luxury goods or services incurred by an individual debtor on or within 90 days before the order for relief under this title, are presumed to be nondischargeable; and
(II) cash advances aggregating more than $750 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order for relief under this title, are presumed to be nondischargeable; and
(ii) for purposes of this subparagraph
(I) the terms “consumer”, “credit”, and “open end credit plan” have the same meanings as in section 103 of the Truth in Lending Act; and
(II) the term “luxury goods or services” does not include goods or services reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.1
Chapter 7 practitioners are intimately familiar with § 523(a)(2). This is one of the so-called “fraud” exceptions to discharge. It is most often used by banks as one ground for objecting to the dischargeability of credit card debt. Credit card litigation was common in Chapter 7 cases prior to BAPCPA but never seen in Chapter 13 cases because § 523(a)(2) was not an exception to discharge in Chapter 13 cases prior to BAPCPA except when the debtor sought a “hardship” discharge before the completion of payments under the plan.2 There are hundreds of reported § 523(a)(2) cases in the Chapter 7 context that will become relevant to Chapter 13 practice after BAPCPA.
At risk of oversimplification, there are two broad classes of § 523(a)(2) cases: those dealing with misrepresentations of financial condition that must be in writing and meet the other specific conditions in § 523(a)(2)(B); and those concerning other misrepresentations that need not be in writing and are actionable under § 523(a)(2)(A). Credit card dischargeability cases can involve written misrepresentations of financial condition, for example, a false credit application; but, more often, credit card dischargeability litigation involves the presumptions of fraud described in § 523(a)(2)(C).
As amended by BAPCPA, a presumption of fraud in the use of a credit card arises when the debtor incurs consumer debts to a single creditor aggregating more than $500 for “luxury goods or services” within 90 days of the petition.3 Similarly, cash advances aggregating more than $750 obtained within 70 days before the petition are presumed nondischargeable.4 Prior to BAPCPA, the luxury goods presumption required debts aggregating more than $1,000 within 60 days and the cash advances presumption required advances of more than $1,000 obtained within 60 days. BAPCPA reduced the amounts and lengthened the time periods within which the presumptions of nondischargeability can arise. In effect, BAPCPA made credit card nondischargeability litigation more likely and easier to win under the presumptions in § 523(a)(2)(C). These changes will increase the volume of credit card nondischargeability litigation in bankruptcy generally, most significantly in Chapter 13 cases where such litigation was not appropriate before BAPCPA.
There will be interesting timing issues with respect to nondischargeability litigation under § 523(a)(2) in Chapter 13 cases after BAPCPA. The misrepresentation exception to discharge in § 523(a)(2) is one of the “fraud” exceptions that is dealt with specially in § 523(c).5 A debt based on misrepresentation or fraud under § 523(a)(2) is nondischargeable at the completion of payments under a Chapter 13 plan only if, on request of the creditor, the bankruptcy court determines that the debt is excepted from discharge. If no timely request is made to the bankruptcy court to determine dischargeability under § 523(a)(2), the debt is discharged under § 1328(a) at the completion of payments.
Quickly after the enactment of BAPCPA, Interim Rule 4007(c) was amended to provide that “a complaint to determine the dischargeability of a debt under § 523(c) shall be filed no later than 60 days after the first date set for the meeting of creditors under § 341(a)” in a Chapter 13 case as well as in cases under other chapters. A complaint to determine the dischargeability of credit card debt or any other debt under § 523(a)(2) must be filed in a Chapter 13 case no later than 60 days after the first date set for the meeting of creditors else the complaint will be time-barred and the debt will be dischargeable at the completion of payments.
The 60 days is timed from the “first date set” for the meeting of creditors without regard to whether the meeting of creditors actually takes place on that date and without regard to whether the debtor appears at that meeting. Chapter 13 practitioners who are not experienced in dischargeability litigation will need robust calendaring systems to keep track of the strict deadline in Interim Rule 4007(c). The courts in Chapter 7 cases have strictly enforced the 60-day time period and can be expected to do the same in Chapter 13 cases after BAPCPA.
For Chapter 13 debtors, the 60-day period in Interim Rule 4007(c) creates awkward timing problems. After BAPCPA amendments to § 1324, the hearing on confirmation of a plan in a Chapter 13 case must be held no later than 45 days after the date of the meeting of creditors under § 341(a).6 The 60-day deadline in Interim Rule 4007(c) embarks from the first date set for the meeting of creditors. Even if the first date set and the actual meeting occur on the same day, there will be at least 15 days after a timely confirmation hearing in which a creditor can timely file a complaint objecting to the dischargeability of a debt under § 523(a)(2).
Chapter 13 debtors may not know at the hearing on confirmation whether there are debts that may be nondischargeable under § 523(a)(2). Managing a nondischargeable debt through the Chapter 13 plan can be important to Chapter 13 debtors. When there is doubt, debtor’s counsel may need to continue the hearing on confirmation to allow the 60-day period in Interim Rule 4007(c) to expire.
If a complaint is timely filed to determine the dischargeability of a debt under § 523(a)(2), chances are that litigation won’t be resolved before the mandatory confirmation hearing occurs under amended § 1324(b). If the allegedly nondischargeable debt is significant and other methods of management through the plan are not available, debtors may want to postpone the confirmation hearing until after completion of the dischargeability litigation. This is a bad outcome for creditors that will wait an uncertain period of time for distributions and, depending on the outcome of the dischargeability litigation, either receive less through the plan or find that no plan is confirmed.
Although a determination of nondischargeability under § 523(a)(2) may be significant to the debtor, that outcome is of less certain relevance to confirmation of a Chapter 13 plan. A determination that an unsecured debt is nondischargeable is not likely to be accepted by the bankruptcy court as a basis for separate classification and more favorable treatment through the confirmed plan.7 The unfair discrimination standard in § 1325(b)(1) is a significant barrier to the separate classification of unsecured claims when the only basis for more favorable treatment is the nondischargeable character of the debt.8 In any Chapter 13 case in which the debtor is financially unable to pay all unsecured creditors in full, a determination that a debt is nondischargeable under § 523(a)(2) is not likely to provide the debtor with a successful argument for separate classification of the nondischargeable debt. Delaying confirmation of a plan to complete dischargeability litigation under § 523(a)(2) after BAPCPA is a questionable strategy.
The threat of nondischargeability litigation under § 523(a)(2), if not the actual filing of a complaint, can be significant leverage in a consumer bankruptcy case. That leverage has often been observed in Chapter 7 cases when debtors agree to reaffirm unsecured debts—typically credit card debts—to resolve a threatened dischargeability complaint. The cost of nondischargeability litigation is significant and often becomes the force behind resolution of a debt that might be nondischargeable.
How threats of nondischargeability litigation will play out in Chapter 13 practice is perhaps less certain. Chapter 13 debtors will be somewhat better positioned to finance the expense of nondischargeability litigation because attorneys’ fees can be managed through the Chapter 13 plan. Ironically, the payment of priority attorneys’ fees through a Chapter 13 plan for the defense of dischargeability litigation will come out of the pool available for distribution to unsecured creditors generally. In effect, general unsecured creditors finance the debtor’s attorney’s fees for defense of the dischargeability complaint through reduced distributions.
In a Chapter 7 case, attorney’s fees for the defense of dischargeability litigation are not allowed as expenses of administration. In a Chapter 13 case under § 330(a)(4)(B), the bankruptcy court can allow reasonable compensation to an attorney for “representing the interests of the debtor in connection with the bankruptcy case.”9 Instead of having to come up with cash to pay attorney’s fees in dischargeability litigation, Chapter 13 debtors will sometimes be able to pay attorney’s fees through the plan as priority expenses of administration. This doesn’t reduce the expense of dischargeability litigation; it just suggests the possibility that Chapter 13 debtors will be better able to manage those expenses through a confirmed plan than can debtors under other chapters.
Chapter 13 practitioners should be aware of § 523(d):
(d) If a creditor requests a determination of dischargeability of a consumer debt under subsection (a)(2) of this section, and such debt is discharged, the court shall grant judgment in favor of the debtor for the costs of, and a reasonable attorney’s fee for, the proceeding if the court finds that the position of the creditor was not substantially justified, except that the court shall not award such costs and fees if special circumstances would make the award unjust.10
Although there is no cross-reference to § 523(d) in § 1328(a), the first sentence of § 523(d) makes the section applicable to litigation of dischargeability under § 523(a)(2) without regard to the chapter within which the adversary proceeding arises. Under § 523(d), a Chapter 13 debtor can recover costs and reasonable attorneys’ fees if § 523(a)(2) litigation is resolved in the debtor’s favor and the court finds the other conditions quoted above. There is thus a risk for creditors under § 523(d) in § 523(a)(2) dischargeability litigation in Chapter 13 cases after BAPCPA.
Chapter 13 debtors with debts nondischargeable under § 523(a)(2) who can’t pay the claim in full through the Chapter 13 plan can still manage the nondischargeable debt during the Chapter 13 case and perhaps accomplish partial payment under the plan. The balance of the debt will survive discharge, but presumably the debtor will be in a better position to handle that debt after the discharge of other dischargeable debts through the Chapter 13 plan.
That the holder of a nondischargeable debt will not be paid in full through the plan is not a sound basis for objection to confirmation unless the claim is also a priority debt entitled to full payment under § 1322(a)(2). The holders of nonpriority unsecured debts that are determined to be nondischargeable under § 523(a)(2) are not entitled to full payment or to even more favorable treatment through a confirmed Chapter 13 plan than unsecured creditors generally. The balance of the nondischargeable debt simply remains a personal obligation of the debtor after the completion of payments under the plan, together with accrued postpetition interest and other charges if allowed by contract or nonbankruptcy law.
It can be anticipated that Chapter 13 trustees will scrutinize agreements by Chapter 13 debtors to allow some or all of a (credit card) debt to be nondischargeable under § 523(a)(2) in a Chapter 13 case. Consumer bankruptcy practitioners have long realized that the cost of dischargeability litigation often drives debtors into settlements that avoid a trial that the debtor simply can’t afford. The addition of § 523(a)(2) to the debts that are nondischargeable in Chapter 13 cases at the completion of payments together with the reduction of amount and lengthening of time necessary to raise the presumption of fraud in § 523(a)(2)(C) are a perfect storm for debtors.
1 11 U.S.C. § 523(a)(2).
2 See discussion beginning at § 160.1 In General.
3 See 11 U.S.C. § 523(a)(2)(C)(i)(I).
4 See 11 U.S.C. § 523(a)(2)(C)(i)(II).
5 11 U.S.C. § 523(c)(1) provides:
(c)(1) Except as provided in subsection (a)(3)(B) of this section, the debtor shall be discharged from a debt of a kind specified in paragraph (2), (4), or (6) of subsection (a) of this section, unless, on request of the creditor to whom such debt is owed, and after notice and a hearing, the court determines such debt to be excepted from discharge under paragraph (2), (4), or (6), as the case may be, of subsection (a) of this section.
6 11 U.S.C. § 1324(b), discussed in § 502.1 [ Timing of Hearing on Confirmation ] § 115.2 Timing of Hearing on Confirmation after BAPCPA.
7 See discussion beginning at § 88.1 In General.
8 See §§ 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1 Power to Classify Unsecured Claims: Tests for Unfair Discrimination and 152.1 [ In General ] § 88.1 In General–156.1 [ Claims That Are or Might Be Nondischargeable Only in a Chapter 7 (Chapter 12, or Individual Chapter 11) Case ] § 88.10 Claims That Are or Might Be Nondischargeable Only in a Chapter 7 (Chapter 12, or Individual Chapter 11) Case.
9 11 U.S.C. § 330(a)(4)(B), discussed in § 515.1 [ Debtors’ Attorneys’ Fees ] § 136.7 Debtors’ Attorneys’ Fees after BAPCPA.
10 11 U.S.C. § 523(d).