§ 91.7     Payment-in-Full Option
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 91.7, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Satisfaction of the projected disposable income test in § 1325(b)(1)(B) is one of two methods in § 1325(b)(1) to overcome an objection to confirmation by the trustee or the holder of an allowed unsecured claim. Section 1325(b)(1)(A) states in the alternative that an objection is overcome if “the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim.”1

[2]

To make any sense of this alternative remedy, “such claim” probably has as its antecedent the “allowed unsecured claim” of the objecting claim holder. Section 1325(b)(1)(A) thus seems to say that an allowed unsecured claim holder that is to be paid in full by the plan cannot defeat confirmation under § 1325(b). Any other reading requires explaining how the trustee can be the holder of “such claim” for purposes of satisfying the disposable income test under § 1325(b)(1)(A).

[3]

Just below this surface lurks all sorts of potential for mischief. The section is not worded in terms of paying all allowed unsecured claim holders in full; rather, “such claim”—the claim of the allowed unsecured claim holder that is objecting to confirmation—can be paid in full, and the obstacle to confirmation evaporates.

[4]

From the debtor’s perspective, this alternative for satisfaction of § 1325(b)(1) is an invitation to separately classify the objecting unsecured claim holder for payment in full. Prior to the enactment of § 1325(b) in 1984, the courts were unreceptive to the notion that Chapter 13 debtors could buy their way out of objections to confirmation by favoring the objecting creditor with a special classification.2

[5]

The enactment of § 1325(b)(1)(A) supports the argument that separate classification for full payment of an objecting unsecured claim holder is, at least, not per se unfair discrimination for purposes of § 1322(b)(1).3 In every Chapter 13 case in which the debtor is financially unable to pay all unsecured claim holders in full, the debtor can use § 1325(b)(1)(A) only by separately classifying the objecting unsecured claim holder. Section 1325(b)(1)(A) does not require payment in full of all unsecured claims, thus the section could have no function4 except in cases where separate classification also will be necessary. To give meaning to the alternative in § 1325(b)(1)(A), courts may find that the section supports the fairness of discrimination in a plan that pays an objecting unsecured claim holder in full. Often the objecting unsecured claim holder has other attributes that inspire separate classification—for example, the objecting unsecured claim would be nondischargeable in a Chapter 7 case5 or is co-signed by a nondebtor.6

[6]

To satisfy the payment-in-full option in § 1325(b)(1)(A), the debtor must propose “as of the effective date of the plan” that the value of property to be distributed under the plan is not less than the amount of the objecting claim holder’s claim.7 “As of the effective date of the plan” appears several other places in Chapter 13 and is universally interpreted to mean present value.8 In practical terms, present value translates into the payment of interest to compensate the claim holder for payment over time. Under the alternative in § 1325(b)(1)(A), if the debtor cannot cash out the objecting unsecured claim holder on the effective date of the plan, then the debtor must pay the claim in full with interest through the plan.

[7]

Although not clearly contemplated by Congress, § 1325(b)(1)(A) may be implicated when a Chapter 13 debtor has more than enough projected disposable income to pay all allowed unsecured claims in full within three years. As mentioned above,9 a few courts have held that the Chapter 13 plan must pay interest to allowed unsecured claim holders if projected disposable income is sufficient to pay all allowed unsecured claims in full in less than the three years described in § 1325(b)(1)(B). In that (unusual) situation, if the debtor proposes to apply all projected disposable income to payments under the plan during the three-year period described in § 1325(b)(1)(B), then allowed unsecured claim holders will be paid in full before the end of the three-year period. It might be argued that the debtor is really satisfying the test in § 1325(b) by distributing property under the plan that is “not less than the amount of” all allowed claims for purposes of § 1325(b)(1)(A). If an objecting allowed unsecured claim holder can win this argument, then the effective date language in § 1325(b)(1)(A) will require the debtor to pay interest to all allowed unsecured claim holders.

[8]

There are no reported cases discussing the appropriate interest rate for purposes of § 1325(b)(1)(A). It can be speculated that courts will use the interest rate necessary to satisfy the present value requirement in the best-interests-of-creditors test in § 1325(a)(4).10 In the alternative, courts might use the rate that is applicable in the jurisdiction at cramdown of allowed secured claims under § 1325(a)(5).11

[9]

Chances are, when the debtor separately classifies an objecting unsecured claim holder for payment in full with interest, other unsecured claim holders or the Chapter 13 trustee will pile on with the objecting creditor. The “such claim” language in § 1325(b)(1)(A) might preclude argument by the trustee that the debtor must pay all unsecured claim holders in full, objecting or not, to satisfy § 1325(b). If more than one but not all allowed unsecured claim holders object, at least theoretically the debtor can pay just the objecting group in full with interest to satisfy § 1325(b)(1)(A). If the trustee also objects, and the debtor is financially unable to pay all unsecured claim holders in full, then the debtor’s fallback position is three years of projected disposable income under § 1325(b)(1)(B).12


 

1  11 U.S.C. § 1325(b)(1)(A) (emphasis added).

 

2  See § 158.4 [ To Satisfy an Objecting Unsecured Claim Holder ] § 89.5  To Satisfy an Objecting Unsecured Claim Holder. See, e.g., In re Calvert, 17 B.R. 507 (Bankr. W.D. Mo. 1981); United States Life Credit v. Carter, 9 B.R. 140 (Bankr. N.D. Ga. 1981).

 

3  See § 158.4 [ To Satisfy an Objecting Unsecured Claim Holder ] § 89.5  To Satisfy an Objecting Unsecured Claim Holder.

 

4  See below in this section.

 

5  See discussion of nondischargeable debt beginning at § 88.1  In General.

 

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

 

7  11 U.S.C. § 1325(b)(1)(A).

 

8  See 11 U.S.C. § 1325(a)(4), discussed in § 162.2 [ Discount Rates and Interest If Liquidation Would Produce Dividend ] § 90.5  Discount Rates and Interest If Liquidation Would Produce Dividend; 11 U.S.C. § 1325(a)(5), discussed in §§ 111.1 [ “Value, As of the Effective Date of the Plan” Means Interest ] § 77.1  “Value, As of the Effective Date of the Plan” Means Interest and 112.1 [ Interest Rate Anarchy: Present Value Before Till ] § 77.2  Interest Rate Anarchy: Present Value before Till.

 

9  See § 163.1 [ In General ] § 91.1  In General.

 

10  See § 162.2 [ Discount Rates and Interest If Liquidation Would Produce Dividend ] § 90.5  Discount Rates and Interest If Liquidation Would Produce Dividend.

 

11  See §§ 111.1 [ “Value, As of the Effective Date of the Plan” Means Interest ] § 77.1  “Value, As of the Effective Date of the Plan” Means Interest and 112.1 [ Interest Rate Anarchy: Present Value Before Till ] § 77.2  Interest Rate Anarchy: Present Value before Till.

 

12  See §§ 163.1 [ In General ] § 91.1  In General167.1 [ Debtor Engaged in Business ] § 91.6  Debtor Engaged in Business.