§ 67.3     Postpetition Interest, Attorneys’ Fees, Costs and Other Charges
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 67.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Several courts have held that a creditor is entitled to relief from the codebtor stay to the extent that the plan does not propose to pay postpetition interest.1 The logic of these decisions is that the contract right to collect postpetition interest continues to accrue against the codebtor; thus, to the extent it is not paid by the debtor’s plan, the creditor is entitled to collect from the codebtor. One reported decision allowed relief from the codebtor stay to collect attorneys’ fees and other charges provided for in a note when the plan omitted to pay fees and other charges.2 This court reasoned that attorneys’ fees and other charges are a contractual obligation of the debtor and of the codebtor, just like interest, and to the extent the plan did not actually pay such charges, the creditor was entitled to relief under § 1301(c)(2).

[2]

Are these decisions over-reading § 1301(c)(2)? That section permits relief from the codebtor stay to the extent that the debtor’s plan does not propose to pay a creditor’s “claim.” Claims in bankruptcy cases are determined as of the date of the filing. Claim is a term of art—under § 502(b)(2), a claim for unmatured interest is not “allowable.” Section 506(b) expressly authorizes oversecured claim holders to include postpetition interest, costs, fees and other charges in their claims; there is no similar provision with respect to undersecured or unsecured claim holders. At least three courts have refused relief from the codebtor stay to collect postpetition interest, attorneys’ fees, costs or other charges from the codebtor, even though provided for by contract, when the Chapter 13 plan proposed to pay the creditor the full face amount of its claim at the petition.3 Under this approach, a creditor would be entitled to relief from the codebtor stay to collect matured interest from a codebtor to the extent the plan fails to provide for payment; however, the creditor would not have an allowable claim against the debtor for unmatured (postpetition) interest, fees, costs or other charges, nor would the creditor be entitled to relief from the codebtor stay to collect postpetition accruals from a codebtor.4

[3]

Section 1301(c)(2) is not worded in terms of “allowed claim” but simply “claim”—a creditor is entitled to relief from the codebtor stay to the extent the plan “proposes not to pay such claim.5 Elsewhere in the Code, Congress used the phrase of art “allowed claim” when it meant to engage the claims allowance process in the calculation of a creditor’s rights.6 If Congress intended relief from the codebtor stay to be available only to the extent the plan does not propose to pay an “allowed” claim, § 1301(c)(2) would have said so. The language used is broader—even though postpetition interest, fees, costs and other charges may not be allowable to an unsecured claim holder, these items remain a contractual obligation of the codebtor that will support a request for relief from the codebtor stay. Nothing in the Bankruptcy Code discharges the creditor’s right to collect postpetition interest, fees, costs and other charges from the codebtor. The legislative history of § 1301(c)(2) supports the view that a creditor with a co-signed claim is entitled to relief from the codebtor stay to collect postpetition interest and other charges to the extent the plan does not propose to pay such amounts.7 Several reported decisions conclude that relief from the codebtor stay is required when the plan does not propose to pay postpetition interest provided by the underlying contract.8

[4]

This analysis leads to new difficulties. The Chapter 13 debtor who wishes to protect a codebtor from collection of postpetition interest, fees costs and other charges must propose to pay those postpetition amounts through the plan. Unmatured interest, fees, costs and charges are not allowable as part of an unsecured claim under § 502(b)(2). Upon objection by the trustee or, perhaps, by an unsecured claim holder that does not have a cosigner, any claim for postpetition interest and other charges would be disallowed and would not be paid by the trustee.

[5]

Could the plan propose to pay the codebtor claim with postpetition interest and other charges notwithstanding disallowance of the postpetition components? Collection of postpetition interest and other charges from the codebtor is certainly the sort of leverage that would inspire a Chapter 13 debtor to propose to pay the co-signed creditor more than other unsecured claim holders. That Chapter 13 debtors are permitted by § 1322(b)(1) to treat co-signed consumer debts differently than other unsecured claims is some indication that Congress intended to permit separate classification for more favorable treatment of such claims.9 It might be argued that treating a co-signed consumer debt “differently” than other unsecured claims includes paying postpetition interest, fees, costs and other charges that might not be allowable under § 502(b)(2). Trustees and unsecured claim holders can be expected to object to the use of a debtor’s disposable income10 to pay interest to codebtor claim holders in any case in which all unsecured claim holders are not paid in full through the plan. The fairness of this discrimination would be tested at confirmation under § 1322(b)(1).11

[6]

The reported cases allowing Chapter 13 debtors to pay postpetition interest to co-signed claim holders have struggled to articulate the statutory basis for this practice. In In re Butler,12 the bankruptcy court held that the text and legislative history of § 1301 required the payment of postpetition interest to avoid relief from the codebtor stay, but the court found nothing in Chapter 13 itself addressing the timing of that payment. Looking outside Chapter 13, the court found some indirect support for the payment of postpetition interest after the payment of other claims:

Outside of Chapter 13, the only provision of the Bankruptcy Code that specifically addresses the order for payment of claims is Section 726 . . . . [T]hat section is useful by analogy because to be confirmed a Chapter 13 plan must meet the hypothetical liquidation test found in Section 1325(a)(4). . . . Section 726(a)(5) provides that payment of post-petition interest should be made after payment of all other claims, including unsecured claims both timely and tardily filed in a Chapter 7 case. I hold that the Chapter 13 Trustee may pay claims for post-petition interest only after secured claims, priority claims, and the principal amount of distributions on allowed unsecured claims.13
[7]

A district court from the same district as Butler found “implicit” authority in § 1301 itself to pay postpetition interest on co-signed debts notwithstanding the disallowance of unmatured interest under § 502(b)(2):

[B]ecause the stay must be lifted if post-petition interest is not provided for in the plan, § 1301 must by implication authorize an exception to the prohibition against post-petition interest as stated in § 502. Otherwise, the stay would have no meaning. . . . While this Court is not confident that § 1322 actually provides explicit authorization for treating post-petition interest differently in cosigned loans, the Court does find that § 1322 clearly shows that cosigned loans are unique and can be treated differently in at least a general sense. Given the practical effect of § 1301 and the fact that the Code itself acknowledges that cosigned debts are unique, this Court must find that § 1301 is implicitly excepted from the post-petition interest provisions of § 502.14
[8]

The debtor’s strongest position to avoid relief from the codebtor stay under § 1301(c)(2) is to propose to pay postpetition interest, attorneys’ fees and all other contractual charges through the plan, without regard to the allowance of claims. If the plan proposes to pay all components of the claim, the creditor is not entitled to relief from the codebtor stay under § 1301(c)(2).

[9]

One court allowed relief from the codebtor stay to collect postpetition interest and other charges from a codebtor when the plan proposed to pay 100 percent of the creditor’s claim, but the creditor neglected to include postpetition interest in its proof of claim. In In re Pardue,15 the plan proposed to pay 100 percent of a bank’s claim, but the bank filed a proof of claim for the principal amount of its debt only, omitting any claim for interest and attorneys’ fees provided for by the note. The court found that the bank was entitled to relief from the codebtor stay to collect interest and attorneys’ fees from the codebtor, reasoning as follows:

        While one might argue that it would have been more prudent for Bank to list interest and attorney’s fees in its proof of claim, . . . in the context of a co-debtor debt, the ultimate responsibility for scheduling the debt rests with the debtor. Nothing requires a creditor to seek payment of a debt on which both a debtor and co-debtor are liable solely from the debtor in bankruptcy. In the absence of a proof of claim filed by either the creditor or the debtor the creditor would be entitled to relief from the stay to pursue any co-debtors liable on the debt unrestricted. Therefore, if the debtor wishes to protect his co-debtors, such debtor must take the responsibility for fully paying the debt for which the co-debtor is also responsible.16
[10]

Pardue seems wrongly decided to the extent it holds that relief from the codebtor stay under § 1301(c)(2) is triggered by the failure of a creditor with a co-signed debt to accomplish allowance of a portion of its claim. Section 1301(c)(2) grants relief from the codebtor stay only if the plan filed by the debtor “proposes not to pay such claim.” In Pardue, the plan proposed to pay 100 percent of the co-signed claim. That the creditor disabled itself to actually receive payment by failing to file a proof of claim or by making mistakes in its proof of claim should not entitle the creditor to relief from the codebtor stay.

[11]

Some unsatisfying outcomes are possible under § 1301(c)(2). On one hand, the debtor may avoid relief from the codebtor stay under § 1301(c)(2) by proposing to pay postpetition interest, attorneys’ fees and charges through the plan, knowing full well that upon objection from any party in interest (including the debtor?) such claims are not allowable. The codebtor remains protected during the life of the plan, and the debtor does not have to pay postpetition interest or other charges to avoid relief under § 1301(c)(2). On the other hand, if the debtor is only permitted to propose to pay allowable claims for purposes of § 1301(c)(2), then an unsecured creditor with a codebtor will always be entitled to relief from the codebtor stay to collect postpetition interest, attorneys’ fees and other charges that cannot be allowed claims under § 502(b)(2).

[12]

Neither extreme makes much sense. It is likely that Congress did not focus on the interaction between § 1301(c)(2) and § 502(b)(2). The codebtor stay was intended to protect Chapter 13 debtors; it was not designed as a direct protection of nonfiling codebtors.17 The creditor with a contract right to postpetition interest and other charges is entitled to relief from the codebtor stay if the plan does not propose to pay those amounts as they accrue. To realize the protection Congress intended, Chapter 13 debtors must be able to pay postpetition interest and other charges through confirmed plans notwithstanding that allowance of the postpetition components is problematic. To propose to pay postpetition interest and other charges but not actually pay those amounts because they are not allowable leaves the creditor subject to the codebtor stay for the life of the plan but without full payment; and the debtor knows that the codebtor will face all accumulated interest and other charges after the Chapter 13 case. The outcome that seems most consistent with §§ 1301(c)(2), 502(b)(2) and 1322(b)(1) is to allow Chapter 13 debtors to pay postpetition interest, fees, costs and other charges to creditors with codebtors through a confirmed plan. It is admitted that the Code does not comfortably get there.

[13]

Relief to collect postpetition interest from the codebtor is mathematically challenging when the plan proposes to pay less than 100 percent of unsecured claims or to pay a co-signed secured claim with interest at a rate that is different from the original contract. In both situations, some or all of the contract interest is not to be paid through the proposed plan. Calculation of the precise difference in interest rates and determining when the difference accrues and with respect to what balance is difficult.

[14]

For example, if the original co-signed debt of $8,000, secured by a car with a present value of $4,000, was payable in 48 monthly installments of $227 with interest included at the rate of 16 percent, to what extent is the creditor entitled to relief from the codebtor stay if the debtor’s proposed plan values the car at $4,000, retires that $4,000 in 36 monthly installments of $133 with 12 percent interest, and pays the creditor’s unsecured claim ($4,000) over the life of a three-year plan without interest? At the inception of the plan, it cannot be determined when and in what amounts the creditor will receive payments on its unsecured claim. Nor is it obvious how the proposed monthly installments on the secured or unsecured portions of the claim should be apportioned between interest and principal for purposes of calculating the extent to which the plan proposes not to pay the co-signed claim.


 

1  Household Fin. Corp. v. Hansberry, 20 B.R. 870 (Bankr. S.D. Ohio 1982); International Harvester Employee Credit Union v. Grigsby, 13 B.R. 409 (Bankr. S.D. Ohio 1981); West Beneficial Fin., Inc. v. Henson, 12 B.R. 82 (Bankr. S.D. Ohio 1981); Timex Fed. Credit Union v. Di Domizio, 11 B.R. 357 (Bankr. D. Conn. 1981); Commercial Sec. Co. v. Leger, 4 B.R. 718 (Bankr. W.D. La. 1980).

 

2  In re Pardue, 143 B.R. 434 (Bankr. E.D. Tex. 1992).

 

3  In re Alls, 238 B.R. 914, 918–20 (Bankr. S.D. Ga. 1999) (Creditor not entitled to relief from the codebtor stay to collect postpetition interest from codebtor because postpetition interest is not part of the claim and plan pays principal in full; debtor cannot modify plan to pay postpetition interest but creditor can collect interest from codebtor after completion of payments under the plan. “[A]s a general rule, postpetition interest cannot be paid on an unsecured claim in bankruptcy. . . . Yet the legislative history to section 1301 states that the creditor ‘is entitled to full compensation, including any interest, fees, and costs provided for by the agreement under which the debtor obtained his loan.’ . . . On the one hand, the Code prevents the debtor from paying postpetition interest on an unsecured claim, while on the other hand, the legislative history suggests that if the debt is not paid in full under the plan, including postpetition interest, the stay must be lifted. This apparent inconsistency has led to a split among the courts . . . . This court agrees with those courts that hold that a debtor may not pay postpetition interest on a codebtor, unsecured claim in its Chapter 13 plan. . . . While section 1322(b)(1) does permit separate treatment of codebtor unsecured claims, the section does not authorize payment of postpetition interest on such claims. . . . If there is an objection, as in this case, the court is required to disallow the postpetition interest portion of the claim. . . . Thus, the term ‘claim’ as used in section 1301(c)(2) can consist only of the principal and interest owed on a debt at the time the bankruptcy petition is filed and may not include unmatured interest in the form of postpetition interest. . . . [S]o long as the debtor’s plan proposes to pay the creditor’s allowed claim in full, section 1301(c)(2) is not triggered and, therefore, the Court is without authority to grant the creditor relief from the codebtor stay. . . . The creditor may pursue the codebtor for the unpaid postpetition interest once the stay has expired pursuant to section 1301(a)(2).”); In re Janssen, 220 B.R. 639, 645–46 (Bankr. N.D. Iowa 1998) (Although debtor is prohibited from paying interest to the holder of an unsecured co-signed debt, creditor is not entitled to relief from the codebtor stay because postpetition interest is not part of the claim. Plan proposed to separately classify co-signed claims for payment in full with postpetition interest. “This Court must respectfully disagree with those decisions allowing unsecured creditors to received post-petition interest from a debtor when there is a co-signor. . . . Section 1301(c)(2), which applies to co-debtors, provides: . . . The term ‘claim’ as used in [§ 1301(c)(2)] is not normally considered to include post-petition interest. . . . If Congress intended the term ‘claim’ to include post-petition interest, there would be no need for provisions such as §§ 502(b)(2) or 506(b), both of which deal with the ability of creditors to obtain post-petition interest in addition to the amount of their claim. Post-petition interest results in a lower dividend for the general unsecured creditors and would be unfairly discriminatory if awarded. Accordingly, Debtor’s separate classification of co-signed, unsecured, consumer debts is not entitled to receive post-petition interest under the Plan. Further, the Court finds that when a debtor separately classifies an unsecured creditor allowing it to receive the full amount of its claim, the creditor is not entitled to relief from the co-debtor stay during the life of the plan to obtain post-petition, contractual interest.”); In re Saunders, 130 B.R. 208 (Bankr. W.D. Va. 1991) (Creditor not entitled to collect postpetition interest, attorney’s fees, costs or other charges from codebtor even if provided for in a contract with the debtor when Chapter 13 plan proposes to pay undersecured or unsecured creditor the full amount of its claim. Section 506(b) expressly authorizes secured claim holders to collect postpetition interest, contractual attorney’s fees, costs and charges. There is no similar provision allowing postpetition interest, contractual attorney’s fees, costs or charges with respect to undersecured or unsecured claim holders. An undersecured or unsecured creditor is not entitled to relief from the codebtor stay to collect postpetition interest nor is the creditor entitled to claim postpetition interest or contractual attorney’s fees from the debtor.).

 

4  In re Saunders, 130 B.R. 208 (Bankr. W.D. Va. 1991). See also Friendly Fin. Discount Corp. v. Bradley, 705 F.2d 1409 (5th Cir. 1983) (Creditor is not entitled to relief from codebtor stay to collect unaccrued legal interest from accommodation makers.).

 

5  11 U.S.C. § 1301(c)(2) (emphasis added).

 

6  See, e.g., 11 U.S.C. § 1325(a)(4) (“the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim . . .”) (emphasis added); 11 U.S.C. § 1325(b)(1) (“if the trustee or the holder of an allowed unsecured claim . . .”) (emphasis added).

 

7  H.R. Rep. No. 95-595, at 122 (1977) (emphasis added):

The section governing [the codebtor stay] also provides for relief from the stay in certain circumstances, in order to protect the creditor’s rights. If the debtor proposes not to pay a portion of the debt under his Chapter 13 individual repayment plan, then the stay is lifted to that extent . . . the creditor is protected to the full amount of his claim, including post-petition interest, costs, and attorney’s fees, if the contract so provides. Thus, if the debtor proposes to pay only $70 of a $100 debt on which there is a co-signer, the creditor must wait to receive the $70 from the debtor under the plan, but may move against the co-debtor for the remaining $30 and for any additional interest, fees, or costs for which the debtor is liable. The stay does not prevent the creditor from receiving full payment, including any costs and interest of his claim. It does not affect his substantive rights. It merely requires him to wait along with all other creditors for that portion of the debt that the debtor will repay under the plan.

 

8  See Southeastern Bank v. Brown, 266 B.R. 900, 905–10 (S.D. Ga. 2001) (Resolving the disagreement between In re Alls, 238 B.R. 914 (Bankr. S.D. Ga. 1999), and In re Butler, 242 B.R. 553 (Bankr. S.D. Ga. 1999), creditor is entitled to relief from the codebtor stay under § 1301(c)(2) when plan does not provide for payment of postpetition interest. “According to the definitions section of the Code, ‘claim’ includes unmatured interest. . . . [A]ccording to § 1301(c)(2), if the plan proposes not to pay ‘all or any part of a consumer debt,’ including the post-petition interest, the stay is lifted so that the creditor may proceed against the cosigner for the remaining amount. . . . [I]f Congress meant for ‘claim’ to actually mean ‘allowed claim,’ it could have explicitly said so . . . . Given the arguable ambiguity, the legislative history of § 1301 proves particularly helpful in this situation. Congress stated: . . . ‘The creditor is protected to the full amount of his claim, including postpetition interest, costs and attorney’s fees, if the contract so provides.’ . . . H.R. Rep. No. 95-595, at 122 (1977).”); In re Butler, 242 B.R. 553, 555–58 (Bankr. S.D. Ga. 1999) (Debtor must pay postpetition interest to holder of co-signed claim to avoid relief from the codebtor stay under § 1301(c)(1). “[P]ost-petition interest on an unsecured co-signed note is a valid claim under 11 U.S.C. § 101 . . . . While under Section 502(b), the claim for post-petition interest which the debtor seeks to pay in the plan is subject to disallowance in most cases, it remains part of the creditor’s ‘claim.’ If this claim is not paid in full, co-debtor relief is appropriate under 11 U.S.C. § 1301(c)(1). . . . Section 1301 employs the term ‘claim.’ It does not limit its scope to situations where the ‘allowed claim’ is not being paid in full. . . . [W]hat must be paid to avoid granting co-debtor stay relief is the ‘claim’ as defined in Section 101 which includes unmatured, post-petition interest, not the lesser, allowable claim which would exclude unmatured interest. . . . [T]he legislative history of Section 1301 . . . provides that the creditor should recover ‘full compensation, including any interest, fees, and costs provided for by the agreement under which the debtor obtained his loan.’ H.R. Rep. No. 95-595, at 426 (1977), reprinted in 1978 U.S.C.C.A.N. 6381.”).

 

9  See § 150.1 [ Co-signed Debts ] § 87.3  Co-signed Debts.

 

10  See discussion of projected disposable income test beginning at § 91.1  In General.

 

11  See §§ 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1  Power to Classify Unsecured Claims: Tests for Unfair Discrimination and 150.1 [ Co-signed Debts ] § 87.3  Co-signed Debts.

 

12  242 B.R. 553 (Bankr. S.D. Ga. 1999).

 

13  242 B.R. at 558–59.

 

14  Southeastern Bank v. Brown, 266 B.R. 900, 909–10 (S.D. Ga. 2001).

 

15  143 B.R. 434 (Bankr. E.D. Tex. 1992).

 

16  143 B.R. at 437–38.

 

17  See § 84.1 [ Cosigners and Joint Obligors Are Protected ] § 65.1  Cosigners and Joint Obligors Are Protected.