Cite as: Keith M. Lundin, Lundin On Chapter 13, § 44.6, at ¶ ____, LundinOnChapter13.com (last visited __________).
Section 1326 was amended by BAPCPA to mandate that Chapter 13 debtors commence payments within 30 days of the petition and to require preconfirmation payments to some secured creditors and lessors. Sloppy draftsmanship and awkward use of terms of art could make the preconfirmation period complicated and dangerous for Chapter 13 debtors.
In a single sentence that speaks volumes about the lobbyists who rewrote the Bankruptcy Code in 2005, the opening sentence of § 1326(a)(1) requires Chapter 13 debtors to commence making payments “not later than 30 days after the date of the filing of the plan or the order for relief, whichever is earlier.”1 Is there a judicial district where Chapter 13 debtors file plans before the petition? Despite the nonsense, § 1326(a)(1) will require all Chapter 13 debtors to commence making payments not later than 30 days after the petition without regard to whether or when a plan is filed.
Perhaps the more important part of new § 1326(a)(1) is the introductory phrase, “unless the court orders otherwise.” As detailed below, BAPCPA requires Chapter 13 debtors to make payments to certain creditors and lessors before confirmation of a plan. Unless the court orders otherwise, the new statute contemplates that these payments will be made directly by debtors to creditors and lessors. Asking the bankruptcy court to order otherwise avoids direct payments by debtors to creditors and lessors. There are many good reasons why Chapter 13 debtors, creditors and trustees should embrace the option for payments through the trustee.
Direct payments by debtors before confirmation is a bad idea. Direct payment has always been allowed by the Bankruptcy Code in Chapter 13 cases, but the practice is disfavored.2 Direct payments to some secured creditors and lessors in every Chapter 13 case is an invitation to disaster.
Direct payments in the first month after filing the Chapter 13 case will immediately interfere with the commencement of payments to the trustee to fund the proposed plan. Payments directly to creditors or lessors will preclude starting an income deduction order in the correct amount through the debtor’s employer.3
Direct payments by a debtor to a creditor are difficult or impossible to account for. Debtors don’t keep adequate records. Creditors are often incorporeal and have no obligation to report the receipt of payments to Chapter 13 trustees. There is no ready mechanism for informing the Chapter 13 trustee exactly what payments have been made or how the money was allocated before the trustee must administer a confirmed plan.
Direct payments disable the claims allowance process. As demonstrated below, creditors entitled to preconfirmation payments must quickly file a proof of claim. The amount of debt stated on that proof of claim will be calculated as of the petition and will not reflect payments that the debtor might make directly to the creditor between the petition and confirmation. After confirmation, the Chapter 13 trustee typically will be responsible for paying the balance of the claim, but the trustee has no way of knowing what payments were made or how those payments were credited against the debt indicated on the proof of claim. Creditors that receive preconfirmation payments directly from the debtor may have to file amended claims—a process that is time consuming and expensive.
That the bankruptcy court can order otherwise is an opportunity for enlightened courts, trustees and Chapter 13 practitioners to intercept the misguided direct payment process with a first-day order or local rule that makes preconfirmation payments through the Chapter 13 trustee. Redirecting preconfirmation payments through the Chapter 13 trustee will allow the trustee to keep track of which creditors and lessors are paid and how much. The trustee can then adjust claims to reflect payments before confirmation. The amount of payment by the debtor to the trustee before confirmation will more accurately reflect the debtor’s obligations under the plan, starting the debtor in the right direction. An income deduction order can be issued at the commencement of the case to begin deductions from the debtor’s pay and remittance to the trustee in the correct amount. The first-day order or local rule can authorize the trustee to make the preconfirmation distributions to creditors and lessors contemplated by new § 1326(a)(1).
Reported decisions have quickly recognized the value of “ordering otherwise” with respect to preconfirmation payments to lessors and allowed secured claim holders. In In re Brown,4 consistent with a local plan form, the Bankruptcy Court for the Northern District of Georgia concluded that § 1326(a) permits a Chapter 13 debtor to make preconfirmation adequate protection payments to the trustee rather than directly to lienholders:
[Section] 1326(a)(1) begins with the language “unless the court orders otherwise.” That language precedes all § 1326(a)(1) and allows a court to revise the requirement that the debtor make pre-confirmation payments directly to a secured creditor. . . . [Section] 1326(a)(3) states that the court may . . . modify . . . payments required under § 1326(a) pending confirmation of a plan. Thus, a court may modify payments called for under § 1326(a)(1)(C). . . . [Section] 1326(a)(2) states that . . . pre-confirmation adequate protection payments made by a debtor to the Chapter 13 Trustee for disbursement to a specific creditor . . . could not be returned to the debtor. Thus, § 1326(a)(2) contemplates that the Chapter 13 Trustee might administer adequate protection payments. Considering the prefatory “unless the court orders otherwise” language in § 1326(a)(1) and the provisions of § 1326(a)(2) and (a)(3), the Court concludes that it can confirm a plan where the debtor makes pre-confirmation adequate protection payments to the Chapter 13 Trustee for disbursement to the secured creditor pending confirmation or dismissal of the case.5
Section 1326(a)(1) requires Chapter 13 debtors to make three kinds of preconfirmation payments. First, the debtor must commence payments to the trustee in the amount “proposed by the plan.”6 Under prior law, payments to the trustee had to start not later than 30 days after the plan was filed.7 BAPCPA mandates that payments begin no later than 30 days after the petition, which, in some Chapter 13 cases, will be before a plan has been filed.
In the absence of a proposed plan, the new statute does not specify an amount for the commencement of payments to the trustee. This is hardly a good outcome for Chapter 13 cases. Trustees can be expected to move to dismiss the Chapter 13 case if no plan is filed within 15 days of the petition.8
The second new mandated preconfirmation payment is “directly to the lessor,” in the amount “scheduled in a lease of personal property . . . for that portion of the obligation that becomes due after the order for relief.”9 Debtors come into Chapter 13 cases with all sorts of personal property leases—including leases for cars, leases for appliances, rent-to-rent contracts and the like. New § 1326(a)(1)(B) is not specific to any particular kind of lease of personal property and is not conditioned that the debtor is using the leased property, has possession of the property or intends to assume the lease through the plan. The word “scheduled” could mean the payment in the lease contract or it could reference Schedule G to Official Form 610 where a lease of personal property must be listed. Typically, the “amount” of a lease payment is not “scheduled” anywhere in the Official Forms, suggesting that the drafters simply used a bankruptcy term of art to refer to something else entirely.
What will be the “portion of the obligation that becomes due after the order for relief” with respect to a lease of personal property? In a sophisticated car lease contract, that amount is probably the monthly payment that becomes due after the petition in each successive month between the petition and confirmation. Would bankruptcy clauses, penalty clauses and other contractual provisions that change the “scheduled” payment be applicable in this context? Keep in mind that this is not about assumption or rejection11—it is a wholly new statutory obligation to make preconfirmation payments without regard to treatment under the plan. What will be the “scheduled . . . obligation” that becomes due under a week-to-week or month-to-month rental contract that requires renewal or other action by the debtor?
Section 1326(a)(1)(B) instructs the debtor to reduce the payments to the trustee proposed by the plan by the amount the debtor pays directly to a lessor of personal property. The debtor is also instructed to provide the trustee “evidence” of the amount and date of payment directly to a lessor. For all the reasons mentioned above, debtors and Chapter 13 trustees should avoid this process by asking the court to order that preconfirmation payments to a lessor of personal property be made to the trustee and then by the trustee to the lessor.
The third new mandated preconfirmation payments are “directly to a creditor holding an allowed claim secured by personal property to the extent the claim is attributable to the purchase of such property.”12 This payment is in an amount “that provides adequate protection . . . for that portion of the obligation that becomes due after the order for relief.”13 There are problems here.
This new preconfirmation payment applies only to a creditor holding “an allowed claim.” Detailed elsewhere,14 the predicate for an allowed claim is the filing of a proof of claim. This payment to a creditor holding an allowed claim is supposed to begin not later than 30 days after the petition. It is unusual for creditors to file proofs of claim that quickly, but only creditors that immediately file proofs of claim will be entitled to preconfirmation payments.
This new obligation applies only to the extent the allowed claim is attributable to the purchase of personal property. Suppose the allowed claim secured by personal property is a car loan. The amount financed by the car lender might include the purchase price of the car, taxes, an extended warranty, registration fees and credit life insurance. It is unlikely that the proof of claim filed by the car lender will partition the amount claimed into the above categories. What components of the amount claimed are attributable to the purchase of “such property”? What if the claim included the payoff of a prior loan balance or perhaps the debt was refinanced at some time in the past? Does it retain its purchase money character?15 Use of the precise phrase “to the extent the claim is attributable to the purchase of such property” signals that allowed claims secured by personal property must be carefully analyzed to determine the extent of any right to preconfirmation payment under new § 1326(a)(1)(C).
There is no requirement in this new mandate that the debtor is actually using the personal property or intends to keep it through the plan. This new preconfirmation payment requirement may accelerate the surrender of some personal property that Chapter 13 debtors do not intend to keep through the plan.
The amount of the new preconfirmation payment to an allowed purchase money secured claim holder is further conditioned that the payment provides “adequate protection” with respect to the “portion” of the obligation that becomes due after the order for relief. Detailed elsewhere,16 this is either a new conceptualization of “adequate protection” or simply a misunderstanding of that term by the same lobbyists who wrote the first sentence of § 1326(a)(1). Adequate protection is a statutory term of art described in § 361 as an entitlement measured against the decrease in value of an interest in property that results when an automatic stay prevents a creditor from realizing on its collateral or a debtor uses property subject to a lien.17 Adequate protection of the portion of an obligation that becomes due after the petition is a contradictory formulation not easily reconciled with any familiar notion of adequate protection.
Consistent with the new payment to lessors discussed above, § 1326(a)(1)(C) instructs the Chapter 13 debtor to reduce payments to the trustee by the amount paid as adequate protection to a purchase money secured creditor and requires the debtor to provide the trustee with evidence of the amount and date of payment. In bankruptcy courts that choose not to order otherwise, there will be many, many direct payments to purchase money secured creditors in Chapter 13 cases. This will produce a flood of “evidence” into the trustees’ offices in unconfirmed Chapter 13 cases. The Chapter 13 trustee will have to set up a new accounting structure to keep track of direct payments to purchase money secured creditors, and a fair portion of this new accounting work will be wasted in cases that convert or dismiss before confirmation. The allocation of these oddly characterized preconfirmation adequate protection payments between principal, interest and other charges will further complicate both the Chapter 13 trustees’ obligation to pay only allowed claims and the creditors’ burden to file an accurate proof of claim. Chapter 13 trustees can solve these problems for everyone by requesting the court to order all § 1326(a)(1) preconfirmation payments through the trustee.
The preconfirmation payments to the trustee, to lessors and to purchase money secured creditors are subject to court review under § 1326(a)(3): “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.”18
The introductory cross-reference, “subject to section 363” pulls in all of the statutory powers and conditions on a trustee’s use, sale or lease of property. Under § 1303, a Chapter 13 debtor is empowered to use the rights and powers of a trustee under only § 363(b), (d), (e), (f) and (l).19 The cross-reference in new § 1326(a)(3) incorporates all of § 363, including the portions that are not applicable in a Chapter 13 case.
Even among the rights and powers in § 363 that clearly are applicable in Chapter 13 cases, there are provisions that may conflict with the new preconfirmation adequate protection requirement in § 1326(a)(1)(C). For example, creditors routinely use § 363(e) to impose on debtors the duty to provide “adequate protection” of any interest in property the debtor proposes to use, sell or lease during the bankruptcy case. Section 363(e) incorporates the traditional statutory notion of adequate protection in § 361, discussed above. New § 1326(a)(3) contemplates that a creditor (or debtor) could ask the bankruptcy court to apply the § 363 notion of adequate protection to a secured creditor’s claim, perhaps under circumstances and using standards different from the new obligation in § 1326(a)(1)(C). Could a Chapter 13 debtor who is not using, selling or leasing the personal property that is subject to an allowed purchase money secured claim invoke § 1326(a)(3) to cancel preconfirmation payments that would otherwise be required under § 1326(a)(1)(C)? Could a creditor with rapidly depreciating collateral use § 1326(a)(3) to increase the preconfirmation payment calculated under § 1326(a)(1)(C)? Both possibilities seem likely given the strange wording of § 1326(a)(1)(C).
There is a timing issue in new § 1326(a)(3). The section requires notice and a hearing, and there is an implicit requirement that someone has filed an appropriate motion to modify, increase or reduce a payment required by § 1326(a)(1). After BAPCPA, the hearing on confirmation in a Chapter 13 case may be held not less than 20 days nor more than 45 days after the date of the § 341 meeting of creditors.20 Given that the meeting of creditors in a Chapter 13 case must be scheduled not less than 20 days nor more than 50 days after the petition,21 most Chapter 13 cases after BAPCPA will reach confirmation between 40 days and 95 days after the petition. The adequate protection entitlement in § 1326(a)(1)(C) does not apply until after a purchase money secured creditor files a proof of claim. The hearing after notice contemplated by new § 1326(a)(3) is likely to occur about the same time as the hearing on confirmation. This does not sound like a useful preconfirmation remedy.
If the debtor does not intend to assume a lease of personal property or does not intend to keep personal property that secures an allowable purchase money claim, the debtor may need to move for early relief from the mandatory preconfirmation payments under § 1326(a)(3). This motion might include surrender of the leased property or purchase money collateral (unless some other disposition is contemplated by the plan). Absent early action by the debtor, there is no requirement of court action to create the preconfirmation payment obligations in § 1326(a)(1). In other words, the mandatory preconfirmation payments are imposed by BAPCPA without regard to the entry of court orders and without regard to whether the debtor is using or intends to keep the property to which § 1326(a)(1)(B) and (C) apply. Although hardly clear from the new statute, there may be potential prejudice for debtors or for lessors and secured creditors if the preconfirmation payments required by § 1326(a)(1)(B) and (C) are not made and no Chapter 13 plan is confirmed.22
There is another, almost silly, language problem in new § 1326(a)(1) that will manifest itself at conversion from Chapter 7 to Chapter 13. As amended, § 1326(a)(1) requires a Chapter 13 debtor to commence making payments not later than 30 days after “the order for relief.” At conversion from Chapter 7 to Chapter 13, the date of the order for relief remains the date of the filing of the Chapter 7 case for most purposes.23 There are some exceptions to this rule in § 348(b), but when § 1326(a)(1) was amended by BAPCPA, the drafters failed to amend § 348(b) to reflect the insertion of the term of art, “the order for relief.” The result is a nonsense that at conversion from Chapter 7 to Chapter 13, new § 1326(a)(1) requires the debtor to commence making payments not later than 30 days after the original Chapter 7 petition.24
1 11 U.S.C. § 1326(a)(1).
2 See 11 U.S.C. § 1326(c), discussed in § 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.
4 348 B.R. 583 (Bankr. N.D. Ga. 2006).
5 348 B.R. at 590. See also In re Perez, 339 B.R. 385, 398–401 (Bankr. S.D. Tex. 2006) (Section 1326(a)(2) does not prohibit preconfirmation payments to mortgage holders by the Chapter 13 trustee pursuant to local rule that requires payment of home mortgages through the Chapter 13 trustee. “Payments made by the debtor under § 1326(a)(1)(A) include only the payments proposed under the plan. This section does not cover adequate protection payments to a holder of a lien on real property. . . . Adequate protection payments to real estate lien holders are not payments made under a proposed plan. . . . [A]dequate protection payments are frequently made in the amount of the monthly depreciation of the collateral. . . . [I]t is incongruous to bless adequate protection payments to Chapter 13 residential lien holders in any amount less than the contractual amount required by the promissory note as the routine method to be adopted for adequate protection. . . . [M]aking the contractual monthly payment constitutes an indubitable equivalent under 11 U.S.C. § 363(3).”).
6 11 U.S.C. § 1326(a)(1)(A).
7 See § 43.2 [ Timing and Form of Payment ] § 44.2 Timing and Form of Payment.
8 See § 55.1 [ Debtor Must File a Plan ] § 51.2 Debtor Must File a Plan.
9 11 U.S.C. § 1326(a)(1)(B).
10 See § 35.8 [ Schedule G—Executory Contracts and Leases ] § 36.14 Schedule G—Executory Contracts and Leases.
11 See §§ 172.1 [ Debtor Can Assume, Assign or Reject Executory Contracts ] § 102.1 Debtor Can Assume, Assign or Reject Executory Contracts–176.2 [ When Purpose of Plan Is to Deal with an Unfavorable Contract or Lease ] § 102.10 When Purpose of Plan Is to Deal with an Unfavorable Contract or Lease and 495.1 [ Leases and Executory Contracts after BAPCPA ] § 102.3 Leases and Executory Contracts after BAPCPA.
12 11 U.S.C. § 1326(a)(1)(C).
13 11 U.S.C. § 1326(a)(1)(C).
14 See § 275.2 [ In General: Filing is Required for Allowance ] § 132.2 In General: Filing is Required for Allowance.
15 This issue recalls the question whether a refinanced debt retains its purchase money character for purposes of the avoidance of liens under 11 U.S.C. § 522(f). See §§ 50.1 [ Available in Chapter 13 Cases ] § 49.1 Available in Chapter 13 Cases and 51.1 [ Limitations on Lien Avoidance ] § 49.3 Limitations on Lien Avoidance. Perhaps more importantly, purchase money character is now at issue under the hanging sentence at the end of § 1325(a) with respect to 910-day PMSI car claims. See § 451.1 [ In General: Modification Without § 506 ] § 75.1 In General: Modification Without § 506.
16 See § 404.1 [ Adequate Protection before Confirmation ] § 47.2 Preconfirmation Adequate Protection after BAPCPA.
17 See §§ 48.1 [ Adequate Protection of Lienholders prior to Confirmation ] § 47.1 Adequate Protection of Lienholders before Confirmation, 404.1 [ Adequate Protection before Confirmation ] § 47.2 Preconfirmation Adequate Protection after BAPCPA and 449.1 [ “Adequate Protection” after Confirmation ] § 74.15 “Adequate Protection” after Confirmation after BAPCPA for further discussion of adequate protection rights of creditors.
18 11 U.S.C. § 1326(a)(3). See In re Brown, 348 B.R. 583, 590 (Bankr. N.D. Ga. 2006) (“[Section] 1326(a)(3) states that the court may . . . modify . . . payments required under § 1326(a) pending confirmation of a plan. Thus, a court may modify payments called for under § 1326(a)(1)(C).”).
19 11 U.S.C. § 1303, discussed in § 44.1 [ Debtor Has Exclusive Control of Estate Property ] § 45.1 Debtor Has Exclusive Possession and Control of Estate Property.
20 See 11 U.S.C. § 1324(b), discussed in § 502.1 [ Timing of Hearing on Confirmation ] § 115.2 Timing of Hearing on Confirmation after BAPCPA.
21 See Fed. R. Bankr. P. 2003, discussed in § 42.1 [ Timing and Procedure ] § 43.1 Timing and Procedure.
22 See §§ 402.1 [ Disposition of Preconfirmation Payments ] § 44.7 Disposition of Preconfirmation Payments after BAPCPA, 404.1 [ Adequate Protection before Confirmation ] § 47.2 Preconfirmation Adequate Protection after BAPCPA and 518.1 [ Failed Adequate Protection ] § 136.13 Failed Adequate Protection after BAPCPA.
23 See § 326.1 [ Effects of Conversion from Chapter 7 to Chapter 13 ] § 148.3 Effects of Conversion from Chapter 7 to Chapter 13.
24 See § 538.1 [ Conversion to Chapter 13 after BAPCPA ] § 148.4 Conversion to Chapter 13 after BAPCPA.