§ 53.11 — Payments to Creditors before Confirmation
Revised: July 3, 2007
There has long been controversy whether and to what extent a Chapter 13 debtor can make payments directly to creditors after confirmation of a plan.1 Section 1326(c), before and after BAPCPA, provides that the trustee “shall make payments to creditors under the plan” except as otherwise provided in the plan or in the order confirming the plan.2
Prior to confirmation, there is no confirmed plan to control who makes payments to which creditors. Some creditors may have rights to adequate protection payments before confirmation.3 Various schemes have developed over the years to permit debtors or trustees in Chapter 13 cases to make payments to creditors before confirmation.4 BAPCPA creates new rights to preconfirmation payments for secured creditors and lessors that will force every Chapter 13 trustee and bankruptcy court to consider who is going to make payments to creditors before confirmation.
Section 1326(a)(1) was amended by BAPCPA to require Chapter 13 debtors to make payments before confirmation to lessors of personal property and to creditors holding allowed purchase money claims secured by personal property.5 Lessors are entitled to the “scheduled” portion of the obligation that “becomes due after the order for relief.”6 Creditors holding allowed purchase money claims secured by personal property are entitled to payment in the amount that “provides adequate protection” for the “portion of the obligation that becomes due after the order for relief.”7 These amounts may be difficult to calculate, but for current purposes, new § 1326(a)(1) states that “unless the court orders otherwise,” the debtor must commence these new preconfirmation payments within 30 days of the petition “directly” to the lessor and to the allowed secured claim holder.8
There are many good reasons why the new preconfirmation payments to lessors and allowed purchase-money-secured claim holders required by amended § 1326(a)(1) should not be made directly by Chapter 13 debtors to creditors.9 Direct payments by debtors before confirmation interfere with payments to the Chapter 13 trustee to fund the plan. Direct payments complicate getting an income deduction order started through the debtor’s employer in the correct amount. If debtors make some preconfirmation direct payments to lessors and creditors and other payments to the Chapter 13 trustee, the amount paid to the trustee must change at confirmation, requiring a confusing second set of orders to employers and debtors in the first few months of each Chapter 13 case. It is hard enough to get debtors and employers to make deductions and transmit to the trustee the correct amount at the beginning of a Chapter 13 case, much less to do it twice and in different amounts to accommodate a brief period of payments directly by the debtor to some creditors and lessors.
Direct payments are difficult to account for. Although new § 1326(a)(1) requires Chapter 13 debtors to provide the trustee with evidence of any payment made directly to a lessor or to an allowed purchase money creditor, this information won’t be reliable or consistent and will significantly complicate the trustee’s accounting responsibilities. Creditors will necessarily file proofs of claim before confirmation in amounts that will not be correct at confirmation because of direct payments by the debtor. Creditors will not know how to credit direct payments from debtors before confirmation or will account for those payments inconsistently. Trustees will not know how to credit direct payments by the debtor against preconfirmation proofs of claim. These accounting problems will not be solved unless creditors undertake the expense of filing amended claims and debtors or trustees then engage in the (expensive) process of objecting to claims that fail to properly account for preconfirmation payments.
New § 1326(a)(1) permits the bankruptcy court to “order otherwise,” and every bankruptcy court should be encouraged to channel all preconfirmation payments to the Chapter 13 trustee. Orders can be entered authorizing the Chapter 13 trustee to make the preconfirmation payments to lessors and secured creditors required by new § 1326(a)(1)(B) and (C). In this way, lessors and purchase money creditors get the protections that new § 1326(a)(1) contemplates and almost all of the problems with direct payments by debtors are avoided. In particular, the trustee can dependably and accurately account for all payments by the debtor and for all preconfirmation distributions to lessors and secured creditors. The treatment of preconfirmation payments will be uniform within each district and income deduction orders will be as uncomplicated as possible.
It is not obvious that lessors or allowed purchase-money-secured creditors have any compelling argument for direct payments by debtors under new § 1326(a)(1). The automatic stay is, of course, still in effect. Lessors and creditors entitled to preconfirmation payments cannot contact the debtor if payments are not being made or are being made in the wrong amount. If the court “orders otherwise” and authorizes the Chapter 13 trustee to make § 1326(a)(1) payments before confirmation, lessors and secured creditors will get those payments without waiting for confirmation and on at least as regular a schedule as could be expected if Chapter 13 debtors make payments directly. If a debtor is not making payments to the trustee that are supposed to then be distributed to a lessor or allowed purchase money creditor under § 1326(a)(1), the Chapter 13 trustee will move to convert or dismiss the Chapter 13 case. The Chapter 13 trustee should champion that motion as the quid pro quo for the stability and other good consequences that flow from ordering all preconfirmation payments through the trustee. The likelihood of success in Chapter 13 cases is enhanced if a coherent system of payments from debtors to trustees and from trustees to creditors is established at the outset in each Chapter 13 case.
Reported decisions have quickly recognized the logic of ordering that preconfirmation payments to lessors and allowed secured claim holders be made through the trustee, not directly by the debtor. In the Northern District of Georgia, a local plan form, consistent with § 1326(a), permits Chapter 13 debtors to make preconfirmation adequate protection payments to the trustee for disbursement to allowed secured claim holders pending confirmation or dismissal of the case.10 The Eastern District of North Carolina approved preconfirmation payments to the Chapter 13 trustee with authority for the trustee to pay 1 percent of value each month as adequate protection to a car lienholder.11 In the Southern District of Texas, a local rule requires Chapter 13 debtors to make preconfirmation mortgage payments to the Chapter 13 trustee for distribution before confirmation.12 These decisions demonstrate that at least some bankruptcy courts are aware of the problems with preconfirmation payments directly by debtors and are exercising the option in § 1326(a)(1) to order otherwise.
BAPCPA amended 28 U.S.C. § 589b to impose on Chapter 13 trustees complicated new data-gathering and reporting responsibilities.13 Among those responsibilities is a new duty to identify and report the date of every default by a Chapter 13 debtor in performance under a plan.14 Chapter 13 trustees cannot perform this new statutory duty with respect to payments by a Chapter 13 debtor directly to a creditor. Payments through the Chapter 13 trustee should be the norm, before and after confirmation of a plan.
1 See § 59.1 [ Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise ] § 53.10 Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise.
2 11 U.S.C. § 1326(c), discussed in §§ 59.1 [ Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise ] § 53.10 Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise, 103.2 [ Direct Payment of Secured Claims by Debtor ] § 74.8 Direct Payment of Secured Claims by Debtor before BAPCPA and 147.1 [ Direct Payment of Mortgage or Payment by Trustee ] § 85.6 Direct Payment of Mortgage or Payment by Trustee.
3 See §§ 48.1 [ Adequate Protection of Lienholders prior to Confirmation ] § 47.1 Adequate Protection of Lienholders before Confirmation, 401.1 [ Preconfirmation Payments ] § 44.6 Preconfirmation Payments after BAPCPA, 404.1 [ Adequate Protection before Confirmation ] § 47.2 Preconfirmation Adequate Protection after BAPCPA and 426.1 [ Adequate Protection Rights before Confirmation ] § 57.3 Preconfirmation Adequate Protection Rights after BAPCPA.
4 See § 48.1 [ Adequate Protection of Lienholders prior to Confirmation ] § 47.1 Adequate Protection of Lienholders before Confirmation.
5 See § 401.1 [ Preconfirmation Payments ] § 44.6 Preconfirmation Payments after BAPCPA.
6 11 U.S.C. § 1326(a)(1)(B), discussed in §§ 401.1 [ Preconfirmation Payments ] § 44.6 Preconfirmation Payments after BAPCPA and 427.1 [ Preconfirmation Rights of Landlords and Lessors ] § 57.4 Preconfirmation Rights of Landlords and Lessors after BAPCPA.
7 11 U.S.C. § 1326(a)(1)(C), discussed in §§ 401.1 [ Preconfirmation Payments ] § 44.6 Preconfirmation Payments after BAPCPA, 404.1 [ Adequate Protection before Confirmation ] § 47.2 Preconfirmation Adequate Protection after BAPCPA and 426.1 [ Adequate Protection Rights before Confirmation ] § 57.3 Preconfirmation Adequate Protection Rights after BAPCPA.
8 11 U.S.C. § 1326(a)(1)(B), (C).
9 Many good reasons are discussed in § 401.1 [ Preconfirmation Payments ] § 44.6 Preconfirmation Payments after BAPCPA.
10 In re Brown, 348 B.R. 583 (Bankr. N.D. Ga. 2006).
11 In re Beaver, 337 B.R. 281 (Bankr. E.D.N.C. 2006).
12 In re Perez, 339 B.R. 385 (Bankr. S.D. Tex. 2006).
13 See § 422.1 [ Trustees’ Final Report ] § 53.20 Trustees’ Final Report.
14 See 11 U.S.C. § 589b(d)(8), discussed in § 422.1 [ Trustees’ Final Report ] § 53.20 Trustees’ Final Report.