§ 125.3 — Direct-Pay Orders
Revised: June 8, 2004
When an income deduction order1 is not issued to the debtor’s employer, the debtor funds the Chapter 13 plan by payments directly to the trustee. There is no uniform terminology for this practice; “direct-pay order” works as well as any.
This is not to be confused with the situation in which the plan permits the debtor to make payments directly to a creditor without assistance from the Chapter 13 trustee.2 A direct-pay order requires the debtor to pay the Chapter 13 trustee, and the trustee then makes distributions to creditors.
In some jurisdictions, direct-pay plans are the general rule, and an income deduction order is rarely issued to an employer. In other jurisdictions, direct-pay plans are permitted only when the debtor is self-employed or when there is no employer to whom an income deduction order can be sent.
Plans based on direct-pay orders suffer many of the same problems as plans containing payments directly by debtors to creditors. When the debtor is responsible for making a direct payment to the Chapter 13 trustee, the debtor first has the opportunity to spend income in other ways.3 Direct-pay plans fail more often than plans funded by payroll deduction orders. Sophisticated debtor’s counsel don’t give their clients a choice of funding a plan by direct pay. The probability of success of the plan is dramatically enhanced by insisting on a payroll deduction order.
The only argument heard in support of direct-pay plans is that employers don’t understand income deduction orders and penalize debtors when the order hits.4 There is no empirical evidence to support this claim, and the anecdotal evidence is substantially to the contrary. Districts that routinely issue income deduction orders in all Chapter 13 cases report strong support from employers, who quickly come to understand that a Chapter 13 case is a step in the right direction for a financially troubled employee. Occasionally having to explain Chapter 13 to an employer5 is a small price to pay for the stability that comes from having the employer as an ally in the Chapter 13 case.
There are very few cases discussing income deduction orders directed at the debtor. In one decision, a bankruptcy court ordered a debtor to “immediately notify the Chapter 13 trustee of the amount and terms . . . and . . . turn over to the trustee . . .” any amounts that the debtor might recover by judgment or settlement of a civil rights lawsuit in which the debtor was a plaintiff.6 Direct-pay orders may be necessary when the debtor is engaged in business and the debtor is essentially paying a salary to the debtor.
1 See § 248.1 [ Order to Debtor’s Employer ] § 125.1 Order to Debtor’s Employer.
2 See § 53.10 Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise, § 54.6 Compensation on Direct Payments by Debtor, § 74.8 Direct Payment of Secured Claims by Debtor before BAPCPA, § 74.9 Direct Payment of Secured Debt after BAPCPA, § 85.6 Direct Payment of Mortgage or Payment by Trustee and § 89.1 Direct Payments by Debtor.
3 See In re Capodanno, 94 B.R. 62 (Bankr. E.D. Pa. 1988) (Although wage deduction orders are voluntary and are the exception not the rule, in a particularly tight plan when the debtor has a large family and the probability of extra demands on the debtor’s income is great, court will condition confirmation that a wage attachment be effected to prevent the debtor from utilizing funds necessary for the plan for any other purpose.).
4 See §§ 43.3 [ Employer Problems ] § 44.3 Employer Problems and 73.1 [ Termination of Services to Debtor and Discrimination against Debtor ] § 58.13 Termination of Services to Debtor and Discrimination against Debtor.
5 See § 25.2 [ Explaining Chapter 13 to an Employer ] § 27.2 Explaining Chapter 13 to an Employer.
6 In re Wirmel, 134 B.R. 258 (Bankr. S.D. Ohio 1991).