Cite as: Keith M. Lundin, Lundin On Chapter 13, § 72.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
There are three overriding principles in the design of Chapter 13 plans: (1) work backward from the budget; (2) don’t get too cute; and (3) negotiate rather than litigate.
Chapter 13 plans work when the payments to creditors fit within the debtor’s ability to pay. The debtor’s ability to pay is best determined from a realistic budget. Too often Chapter 13 lawyers figure out what they have to pay to make creditors happy and then concoct a budget to fit that plan. It is long-term suicide for the Chapter 13 case to force the budget to fit the plan. Instead, work up a realistic budget first using the debtor’s actual income and expenses1and then design a plan that fits the budget.
The principle of working backward from the budget is perversely challenged after the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).2 Discussed in painful detail in Part 9, the misguided drafters of BAPCPA substituted formulas and sought to straitjacket judicial discretion with respect to key components of the financial calculations that went into designing feasible Chapter 13 plans. For example, after BAPCPA, the expenses allowed Chapter 13 debtors with current monthly income (CMI)3 greater than applicable median family income4 are determined by reference to IRS allowances rather than actual expenses to determine the amount to which unsecured creditors are entitled by the projected disposable income test in § 1325(b).5 In other words, the logic of matching Chapter 13 payments to debtors’ ability to pay that characterized Chapter 13 before BAPCPA was rejected by Congress in 2005. As a practical matter, it is still fundamental that a Chapter 13 plan must be designed backward from a budget that the debtors can afford to maintain during the three to five years of a Chapter 13 case. Incomprehensively, BAPCPA demands a different mathematics at confirmation that has enormously complicated the construction of workable plans.6
Being cute or aggressive in the design of the Chapter 13 plan usually buys the debtor litigation and rarely facilitates confirmation or consummation of a plan. As intriguing as it is to walk the fringes of Chapter 13 practice, success on behalf of a Chapter 13 debtor more typically involves finding the mainstream and proposing treatments of creditors that are familiar to creditors, the trustee and the court. If the debtor’s budget permits the use of average valuations for the debtor’s collateral and the use of interest rates that are generally acceptable to secured claim holders, there is little to be gained by aggressively shaving the value of collateral and seeking less than the district’s standard interest rate.7 Objecting creditors or trustees will force the issues into litigation, and any benefits from the reduced interest rate or collateral value are quickly lost in litigation costs.
Successful Chapter 13 debtors’ counsel must master the mathematics of calculating Chapter 13 plans. Counsel must be facile with a business calculator or a computer—the technology of Chapter 13 plans demands calculating monthly payments, amortizing loans and being able to adjust the relationship between monthly payment, interest rate and value to find the combination that fits the debtor’s budget and debt structure.
For better or worse, many Chapter 13 plans these days are produced by sophisticated computer software that debtors’ attorneys buy from various vendors. The internal calculations within these products are, of course, invisible, and the formulas involved may or may not reflect the protocols or confirmation boundaries in a particular district. The Electronic Case Filing system (ECF) that is ubiquitous in Chapter 13 practice demands the use of computers by debtors’ attorneys, but plan calculations vary dramatically from district to district and from one standing trustee to another, and commercially available software products can only mimic what the designers know about the more than 200 different Chapter 13 programs across the country.
The problems of using commercial software to design Chapter 13 plans were dramatically exacerbated by BAPCPA. Detailed elsewhere,8 BAPCPA requires Chapter 13 debtors’ attorneys to identify, incorporate and manipulate census data and internal IRS charts and formulas. The numbers involved are important because using the right ones or the wrong ones dramatically changes the design and calculation of the Chapter 13 plan. Commercial software does a less than perfect job of finding the right census data and the right IRS numbers, and because those numbers and the calculations based on those numbers are internal to the software, debtors’ counsel has an impossible task to police whether the right numbers are being used and the right formulas applied. Designing Chapter 13 plans using opaque commercial software has been much complicated by BAPCPA.
The macroeconomics of a Chapter 13 plan is something like this:
The plan must exhaust the debtor’s projected disposable income for a period between 36 and 60 months.9
If the debtor is keeping collateral, each secured claim holder must be paid the present value of its collateral or the original contract must be repaired and maintained during the life of the plan.10
Interest is payable to secured claim holders to guarantee present value.11
Unsecured claim holders must receive at least what they would be paid in a hypothetical Chapter 7 case.12
Priority claim holders must be paid in full without interest unless they consent to other treatment.13
Home mortgages, if in default, can be cured and maintained during the life of the plan.14
The combination of all payments to creditors under the plan must fit within the debtor’s budget.15
The statutory framework for designing a plan is in § 1322 of the Code. Section 1322 lists mandatory and permissive provisions of Chapter 13 plans. Confirmation of Chapter 13 plans is addressed in § 1325 of the Code. Although not styled as such, the mandatory and permissive provisions of a plan in § 1322 become tests or criteria for confirmation of plans under § 1325(a)(1).16 When designing a Chapter 13 plan, every debtor’s counsel must have one eye on what § 1322 requires or permits to be in the plan and the other eye on the tests for confirmation in § 1325.
1 See § 35.10 [ Schedules I and J—Income and Expenditures ] § 36.16 Schedules I and J—Income and Expenditures. After the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23 (2005), designing a Chapter 13 plan also involves use of Official Form B22C—a fantastically difficult form that does not purport to be an actual budget but that functions as a calculator using statutory surrogates for actual income and expenses. See § 36.19 Form 122C-1: Statement of Current Monthly Income, § 36.20 Form 122C-1: Commitment Period Calculation and § 36.21 Form 122C-2: Disposable Income Calculation.
2 Pub. L. No. 109-8, 119 Stat. 23 (2005).
3 See § 468.1 [ Current Monthly Income: The Baseline ] § 92.3 Current Monthly Income: The Baseline.
4 See § 469.1 [ Comparison of CMI to Applicable Median Family Income: § 1325(b)(3) ] § 92.4 Household Size and Comparison of CMI to Median Family Income: § 1325(b)(3).
5 See discussion of expenses for purposes of projected disposable income test beginning at § 94.1 Big Picture: Too Many Issues.
6 See Part 9.
7 The impact of BAPCPA on § 506 valuations of collateral and interest rates at confirmation is discussed in § 73.6 Treatment of Priority Claims Changed by BAPCPA, § 75.1 In General: Modification Without § 506 and § 76.7 Valuation after BAPCPA.
8 See Part 9.
9 Length of plan is discussed beginning at § 112.1 General Rule: Three Years, More or Less; applicable commitment period is discussed in § 100.1 Applicable Commitment Period Calculation; the projected disposable income test is discussed beginning at § 91.1 In General.
10 In cases filed on or after October 17, 2005, BAPCPA created an exception to this general rule for some motor vehicles acquired within 910 days of the petition and other things of value acquired within one year. See discussion beginning at § 75.1 In General: Modification Without § 506.
11 See discussion of present value in § 77.1 “Value, As of the Effective Date of the Plan” Means Interest, § 77.2 Interest Rate Anarchy: Present Value before Till and § 77.3 Present Value after Till.
12 See discussion of best-interests-of-creditors test beginning at § 90.1 In General: Plan Payments vs. Hypothetical Liquidation.
13 See § 73.1 Plan Must Provide Full Payment and § 73.10 Filing Fees. In Chapter 13 cases filed on or after October 17, 2005, BAPCPA amended 11 U.S.C. § 1322(a)(4) to except from the full-payment requirement in § 1322(a)(2) claims entitled to priority under § 507(a)(1)(B)—domestic support obligations that have been assigned to a governmental entity for purposes other than collection. See § 73.6 Treatment of Priority Claims Changed by BAPCPA, § 136.1 Treatment of Priority Claims and § 136.21 Domestic Support Obligations after BAPCPA. BAPCPA also redefined priority domestic support obligation to include accruing postpetition interest. See § 73.3 Priority Claims Added or Changed by BAPCPA, § 73.6 Treatment of Priority Claims Changed by BAPCPA, § 136.1 Treatment of Priority Claims and § 136.21 Domestic Support Obligations after BAPCPA. Postpetition interest may be paid on nondischargeable claims—including priority claims that are also nondischargeable—under conditions described in 11 U.S.C. § 1322(b)(10). See § 73.3 Priority Claims Added or Changed by BAPCPA, § 88.3 Postpetition Interest on Nondischargeable Claims after BAPCPA: § 1322(b)(10), § 136.1 Treatment of Priority Claims, § 136.3 Taxes after BAPCPA, § 136.17 Postpetition Interest on Priority Claims after BAPCPA, § 136.21 Domestic Support Obligations after BAPCPA, § 136.22 The Driving or Boating while Intoxicated Priority after BAPCPA, § 159.1 Taxes, § 159.5 Domestic Support Obligations: § 523(a)(5) and § 159.8 Boating or Flying while Intoxicated: § 523(a)(9).
14 See discussion of home mortgages beginning at § 81.1 Overview: General Rules for Saving Debtor’s Home.
15 This feasibility requirement is discussed in §§ 198.1 [ Able to Make Payments and Comply with Plan ] § 111.1 Able to Make Payments and Comply with Plan and 497.1 [ Feasibility Turned on Its Head ] § 111.2 Feasibility Turned on Its Head after BAPCPA.
16 11 U.S.C. § 1325(a)(1) states that the court shall confirm a plan if “(1) the plan complies with the provisions of this chapter and with the other applicable provisions of this title.” See § 203.1 [ Plan Complies with Bankruptcy Code ] § 113.1 Plan Complies with Bankruptcy Code.