[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.”
[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.
[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). 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 function 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 case or is co-signed by a nondebtor.
[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. “As of the effective date of the plan” appears several other places in Chapter 13 and is universally interpreted to mean present value. 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, 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). In the alternative, courts might use the rate that is applicable in the jurisdiction at cramdown of allowed secured claims under § 1325(a)(5).
[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).
Martinez v. Viegelahn, 581 B.R. 486, 493–97 (W.D. Tex. Oct. 26, 2017) (Ezra) (Language in plan required by bankruptcy judge at request of trustee—that any modified plan must pay 100% of unsecured claims—is inconsistent with debtors’ rights to modify after confirmation under § 1329(a)(1). Debtors had excess disposable income and offered plan that paid unsecured creditors in full over 60 months notwithstanding financial ability to pay more quickly. Trustee objected and bankruptcy court added language that restricted right of debtors to seek modification of the plan. Debtors appealed confirmation. “[T]he Plan met all requirements under Section 1325(a), and one of the requirements under Section 1325(b). . . . [I]t was within the bankruptcy court’s broad judicial discretion to determine that the Chapter 13 Plan would be better served if the Conditional Language was added. . . . [T]he inclusion of any conditions that contravene the express provisions of the Bankruptcy Code are not appropriate. . . . [T]he clear purpose of Section 1329(a)(1) is to allow debtors, trustees, and approved unsecured creditors to request modification of the total amount paid should financial circumstances change following confirmation of the Chapter 13 plan. . . . [T]he plain meaning of [the conditional language] provides that the debtors cannot seek modification of the Plan, unless the modification will continue to result in a 100% dividend paid to their unsecured claims. . . . [T]he bankruptcy court directly contravened the Debtors’ right to modify a plan, which is an express right granted to the Debtors in Section 1329(a)(1). . . . If Debtors eventually did file a request for modification, the Trustee would then have a strong argument against modification due to a lack of good faith on the part of the Debtors, because it is undisputed that Debtors are presently failing to pay 100% of their disposable income to unsecured creditors.”).
Molina v. Langehennig, No. SA-14-CA-926, 2015 WL 8494012, at *2 (W.D. Tex. Dec. 10, 2015) (Hudspeth) (Not abuse of discretion for bankruptcy judge to add provision to confirmation order that debtors cannot modify plan to pay less than 100%. Debtors proposed a five-year, 100% plan with payments less than all projected monthly disposable income. Trustee objected. Bankruptcy court confirmed with additional language that forbid debtors to seek modification unless any modification also paid 100% dividend. "The disputed language did not deny confirmation; it merely established some ground rules for future conduct on the part of the Debtors.").
In re McKinney, No. 18-70417-BHL-13, 2018 WL 4378655, at *3 (Bankr. S.D. Ind. Sept. 13, 2018) (Lorch) (Acknowledging split of authority, plan that pays unsecured claims in full with less than all of debtor’s projected disposable income need not pay postpetition interest to satisfy § 1325(b)(1)(A). “This Court agrees that the placement of the phrase ‘as of the effective date of the plan’ is the key to interpreting this statute. . . . [B]y placing that phrase at the end of 1325(b)(1), Congress intended that it apply to both subsection (A) and (B). . . . ‘[t]he only interpretation of “as of the effective date of the plan” which makes sense to this Court, as applied to both subsections (A) and (B), is the date as of which the court is to determine whether either (A) or (B) is applicable and satisfies a trustee’s objection.’ . . . [T]he lead-in phrase ‘as of the effective date of the plan’ indicates the date on which the Court measures projected disposable income. It simply makes no sense to suggest that Congress intended that phrase to mean something altogether different as it relates to subsection (A).”).
In re Boisjoli, 591 B.R. 468 (Bankr. D. Colo. June 18, 2018) (Tyson) (Projected disposable income test can be satisfied when plan pays unsecured creditors in full without interest in 60 months with less than all projected disposable income. Not appropriate to condition future modifications that debtor maintain 100% payment of unsecured creditors when plan pays 100% over 60 months with less than all projected disposable income. That condition would violate the right to modify under § 1329 and would run afoul of limitations imposed by Supreme Court in Law v. Siegel, 571 U.S. 415, 134 S. Ct. 1188, 188 L. Ed. 2d 146 (Mar. 4, 2014).).
In re Brown, No. 17-52324-CAG, 2018 WL 2425968 (Bankr. W.D. Tex. May 23, 2018) (Gargotta) (Notwithstanding disagreement among courts within the district with respect to whether Chapter 13 debtor with excess disposable income can be prohibited to modify the plan to pay less than 100% of unsecured debt, bankruptcy court denies motion for direct appeal of confirmation after bankruptcy court required debtor to choose either to pay 100% of disposable income to creditors or agree not to modify plan to less than 100%.).
In re Eubanks, 581 B.R. 583, 585–93 (Bankr. S.D. Ill. Feb. 16, 2018) (Grandy) (Chapter 13 debtor with excess projected disposable income can confirm plan that pays 100% to unsecured creditors in five years notwithstanding ability to pay unsecured creditors faster; plan need not pay interest to satisfy § 1325(b)(1)(A). “The statute is written in the disjunctive: Debtors must either pay unsecured creditors in full or must pay all projected disposable income over the duration of the plan. . . . Debtors may pay less than their disposable income over five years if such payments will pay unsecured creditors in full . . . . The Debtors have chosen the option set forth in § 1325(b)(1)(A), i.e., their monthly plan payments will not include all disposable income, but unsecured creditors will be paid 100% of their claims over a five-year period. . . . [T]he Trustee urges this Court to . . . condition confirmation of the plan on the Debtors’ promise to pay excess disposable income in future plan modifications. . . . Nothing in the Code requires Debtors to make that pledge. . . . [T]he language of § 1325(b)(1)(A) differs slightly from that found in §§ 1325(a)(4) and (a)(5)(B)(ii) . . . . At least three other courts . . . have concluded that § 1325(b)(1)(A) does not require the payment of interest. . . . This Court agrees that the language of § 1325(b)(1)(A) cannot be interpreted to require the payment of interest to unsecured creditors. . . . Unsecured creditors in chapter 13 do not otherwise have a right to immediate payment in full at the front end of the case.”).
In re Gillen, 568 B.R. 74, 77–79 (Bankr. C.D. Ill. May 19, 2017) (Perkins) (Debtor overcomes trustee’s objection to confirmation under § 1325(b)(1)(A) with a plan that proposes to pay 100% of allowed secured claims without interest—notwithstanding excess projected disposable income which would allow payment of unsecured claims in full in less than the applicable commitment period. Debtor indisputably had projected disposable income in excess of the amount proposed to be paid to the trustee through the plan. Unsecured creditors would be paid in full in 60 months without interest. No creditor objected to confirmation, but trustee raised § 1325(b)(1)(A) at confirmation. “A split of authority has developed among bankruptcy courts as to whether debtors electing the full payment option are obligated to pay interest on the unsecured claims. . . . Apart from the exceptional right to interest under section 1325(a)(4) . . . unsecured creditors in a Chapter 13 case have no right to an immediate payment in full at the front end of the case. The source of their payments is not a pot of assets in existence on the petition date or the date of confirmation. Rather, unsecured creditors get paid from the debtor’s future income . . . . The differing juxtaposition of the phrase ‘as of the effective date of the plan’ must be considered to be a purposeful placement by Congress that conveys a distinction from the similar but not identical phrasing of sections 1325(a)(4) and (a)(5)(B)(ii). . . . [I]f Congress had intended to require a debtor to pay interest on allowed unsecured claims under section 1325(b)(1)(A), Congress would have maintained statutory consistency by placing the phrase ‘as of the effective date of the plan’ immediately after the word ‘value.’ . . . The phrase ‘as of the effective date of the plan’ logically identifies the date that that comparison is to be made.”).
In re Edward, 560 B.R. 797 (Bankr. W.D. Wash. Nov. 22, 2016) (Lynch) (Rejecting In re Hight-Goodspeed, 486 B.R. 462 (Bankr. N.D. Ind. Oct. 31, 2012) (Grant), and embracing In re Stewart-Harrel, 443 B.R. 219 (Bankr. N.D. Ga. Jan. 25, 2011) (Hagenau), when plan proposes to pay 100% of general unsecured claims while contributing less than all disposable income, plan can satisfy § 1325(b)(1)(A) without paying interest on unsecured claims. “The problem with Hight-Goodspeed . . . is that while a present value determination makes sense with respect to [§ 1325(b)(1)(A)], it does not make sense with respect to subsection (B). . . . If the Court accepts the Trustee’s argument that subsection (A) must be read as the ‘value [, as of the effective date of the plan,] of the property’ then it must also apply a similar parallel construction of subsection (B), which would render the introductory phrase nugatory (e.g. ‘the plan, “as of the effective date of the plan,” provides that all of the debtor’s projected disposable income . . . ’).”).
In re Crawford, No. 15-53097-CAG, 2016 WL 4089241, at *3–*4 (Bankr. W.D. Tex. July 22, 2016) (Gargotta) (Debtor with excess disposable income can pay all creditors in full in 60 months or can pay all projected disposable income for less than 60 months, but need not do both. When debtor has excess disposable income that could pay all creditors in full in less than 60 months, court will only confirm a 60-month plan that includes additional conditions that debtor cannot modify the plan to pay less than 100% and debtor cannot modify to pay for fewer than 60 months unless all creditors will be paid in full. “[T]he plain language of the statute only requires full payment of all claims or all disposable income being paid over the ACP. . . . [D]ebtor can either propose full payment of unsecured claims or payment of all disposable income over an ACP of 60 months, but the debtor is not required to do both. It is not bad faith to pay claims over a period of 60 months when there is excess disposable income to pay them sooner.”).
In re McCarthy, 554 B.R. 388, 394 (Bankr. W.D. Tex. July 22, 2016) (Gargotta) (“[A] debtor can either propose full payment of unsecured claims or payment of all disposable income over an ACP of 60 months, but the debtor is not required to do both. It is not bad faith to pay claims over a period of 60 months when there is excess disposable income to pay them sooner.” Court conditions confirmation that the debtor must pay all claims in full to receive a Chapter 13 discharge and debtor cannot modify the plan to pay less than 100% distribution to creditors.).
In re McKenzie, 516 B.R. 661, 663-64 (Bankr. M.D. Ga. Sept. 9, 2014) (Smith) (When debtor has projected disposable income sufficient to pay unsecured creditors in full in one year, but proposes a plan paying unsecured creditors in full in five years at a lesser monthly amount, plan cannot be confirmed unless it also pays interest to unsecured creditors. "The better interpretation is the one found in [In re Hight-Goodspeed, 486 B.R. 462 (Bankr. N.D. Ind. Oct. 31, 2012) (Grant)]. The court found that in cases where the trustee or an unsecured creditor objects, § 1325(b)(1) allows the debtor to choose subsection (B) and devote all of his projected disposable income to the plan or, if the debtor wishes to devote less of his income to the plan, he may chose [sic] subsection (A). The price for doing so, however, is that unsecured claims must be paid in full with interest.").
In re Braswell, No. 13-60564-fra13, 2013 WL 3270752 (Bankr. D. Or. June 27, 2013) (Alley) (When plan pays unsecured creditors in full under § 1325(b)(1)(A) with less than all of a debtor's projected disposable income, plan must pay interest at Till rate.).
In re Hight-Goodspeed, 486 B.R. 462 (Bankr. N.D. Ind. Oct. 31, 2012) (Grant) (When debtor was not devoting all projected disposable income to plan, confirmation would be denied unless unsecured creditors were paid in full with interest.).
In re Richall, 470 B.R. 245, 249-50 (Bankr. D.N.H. May 11, 2012) (Deasy) (After BAPCPA, debtors with CMI greater than applicable median family income can satisfy the confirmation test in § 1325(b) by paying unsecured creditors in full in less than five years using less than all projected disposable income. "After the enactment of BAPCPA, the Bankruptcy Code differentiated the minimum and maximum term for a chapter 13 plan, based on the amount of a debtor's disposable income. . . . All above median debtors are now subject to a uniform term of five years for a chapter 13 plan with only one exception: the term of the plan, or the commitment period, may be less than five years if creditors are paid in full. 11 U.S.C. § 1325(b)(1)(A) and (b)(4). However, BAPCPA did not change the minimum or maximum plan term for below median debtors not paying creditors in full. It remains a minimum of three years, absent cause for a longer term, which cannot exceed five years, unless creditors can be paid in full in a shorter period of time. 11 U.S.C. §§ 1322(d)(2) and 1325(b)(1)(B) . . . . Consequently, after BAPCPA, courts may deny confirmation of a chapter 13 plan proposed by a below median debtor, which stretches beyond a three year period and pays creditors in full but does not commit all disposable income, because a court could find that no cause exists to extend the plan longer than three years when a debtor can pay[ ]off creditors within the commitment period. . . . After BAPCPA, the same is not true for above median debtors. . . . [A]bove median debtors now have an election to either pay all of their disposable income for five years, or until creditors are paid in full, § 1325(b)(1)(B), or to pay less than their disposable income over five years, if such lower payments will pay unsecured creditors in full. 11 U.S.C. § 1325(b)(1)(A). . . . [T]his result is contrary to the intent of Congress in enacting BAPCPA. . . . [I]t is the responsibility of Congress, not the courts, to correct the statute.").
In re Winn, 469 B.R. 628, 630-31 (Bankr. W.D.N.C. May 10, 2012) (Whitley) (Without deciding whether § 1325(b) applies at modification after confirmation, plan can be modified to pay unsecured creditors in full in 60 months, notwithstanding that debtors have additional disposable income that could be used to pay unsecured creditors more quickly. After confirmation, debtors proposed to surrender real property and pay a portion of the freed-up income to unsecured creditors. Unsecured creditors would be paid in full in 60 months with less than all available income after surrender. "The Winns' proposed modification will pay all allowed claims in full; thus, it meets the Section 1325(b)(1)(A) confirmation requirement. While the modified plan does not propose to pay all of the Winns' projected disposable income to the plan and fails to meet Section 1325(b)(1)(B), this criterion need not be met. . . . [Section] 1325(b)(4)(B) . . . states that the ' "applicable commitment period" may be less than 3 or 5 years, whichever is applicable under subparagraph (A), but only if the plan provides for payment in full of all allowed unsecured claims over a shorter period.' . . . [I]t appears that a plan that provides for payment of all allowed unsecured claims may be completed earlier than the full length of the plan, but this is by no means necessary.").
In re Stewart-Harrel, 443 B.R. 219, 222-23 (Bankr. N.D. Ga. Jan. 25, 2011) (Hagenau) (Plan satisfies § 1325(b)(1)(A) that pays unsecured creditors in full without interest in 51 months with monthly payments that exceed projected disposable income notwithstanding that monthly net income is available to pay creditors faster and/or with interest; evidentiary hearing is necessary to determine whether good faith bars confirmation when debtor could pay creditors faster. Debtor with CMI greater than applicable median family income proposed to pay 100% dividend to unsecured creditors without interest in a plan that would last approximately 51 months. Monthly payment exceeded projected disposable income on Official Form B22C but was less than available net monthly income on Schedules I and J. Had debtor committed 100% of available net monthly income, plan would pay unsecured creditors in full in 21 months. "[T]he better interpretation is that the phrase, 'as of the effective date of the plan' in Section 1325(b)(1) refers to the date as of which the court is to make the determination of either (A) (payment in full) or (B) (payment of all projected disposable income). . . . '[A]s of the effective date' as used in 11 U.S.C. § 1325(b)(1) precedes the word 'value'. More importantly, the phrase 'as of the effective date' in Section 1325(b)(1) precedes two subsections, either of which will satisfy a trustee's objection. Customarily, when there is a lead-in phrase and then two subsections underneath it, the lead-in phrase must apply to both subsections. . . . Reading the phrase 'as of the effective date of the plan' to require the present value of distributions on the claims may make sense with respect to subsection (A) but would make no sense with respect to subsection (B). . . . In the recent Supreme Court case Hamilton v. Lanning, __ U.S. __, 130 S.Ct. 2464, 177 L.Ed.2d 23, the Supreme Court analyzed how projected disposable income is to be calculated . . . . [T]he court stated, 'Congress' decision to require courts to measure projected disposable income 'as of the effective date of the plan' is more consistent with the view that Congress expected courts to consider postfiling information about the debtor's financial circumstances.' . . . Thus, when applied to subsection (B) of Section 1325(b)(1), the phrase 'as of the effective date of the plan' clearly applies to the date on which the court is to make the determination. It would make no sense for the lead-in phrase 'as of the effective date of the plan' to have different meanings as to each of the following subsections. . . . [T]he Court does not believe that the payment of interest to unsecured creditors is required[.]").
In re Cox, No. 04-04596S, 2005 WL 681464 (Bankr. N.D. Iowa Mar. 21, 2005) (unpublished) (Plan satisfies the disposable income test notwithstanding that a portion of the nonfiling spouse's income will be used to pay a debt to the nonfiling spouse's daughter from a previous marriage on account of a debt that was co-signed by the daughter which the daughter says must be paid by her mother if her mother ever wants to see her grandchildren again. Disposable income test is satisfied notwithstanding the payment to the daughter that is not reasonable or necessary because it appears that all allowed claims will be paid in full through the Chapter 13 plan, thus the inappropriate payment to the daughter is not a bar to confirmation.).
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