§ 67.2 — Plan Does Not Pay Debt in Full
Revised: May 5, 2004
Relief from the § 1301 stay is required “to the extent that . . . the plan filed by the debtor proposes not to pay such claim.”1 Composition Chapter 13 plans—plans that pay less than the full amount of unsecured claims—allow creditors relief to proceed against cosigners.2 If the debtor’s plan proposes to pay 70 percent of unsecured claims, the creditor with a cosigner is entitled to relief to collect 30 percent from the codebtor.
Section 1301(c)(2) operates independently of § 1301(c)(1)—that the debtor’s plan does not propose full payment is a ground for relief from the codebtor stay even if the cosigner did not receive any of the original consideration.3 It has been held that relief from the codebtor stay is appropriate under § 1301(c)(2) when the plan is a composition plan, notwithstanding that the plan also provides that the co-signed debt will not be discharged at the completion of payments.4
Figuring out the extent to which a plan does not propose to pay a debt is not always simple. For example, some courts have held that a plan that fails to pay postpetition interest is a plan that fails to pay a debt in full for purposes of § 1301(c)(2),5 but calculating the amount of unpaid interest may be impossible until payments are completed under the plan. Some Chapter 13 plans propose to pay a fixed percentage of unsecured claims. In a fixed percentage case, the extent to which the creditor is entitled to relief to proceed against the cosigner would be the percentage of claims not promised through the plan. However, it is increasingly common for Chapter 13 debtors to calculate payments into a plan as the amount of disposable income available after deduction of all ordinary and necessary living expenses.6 When the debtor proposes, for example, to pay “$350 a month for 36 months,” it is not possible to immediately calculate the portion of claims that will be paid because the total of allowed claims cannot be known until after the deadline for filing claims and after resolution of objections to claims.7 The creditor with a co-signed claim need not wait until confirmation or consummation before seeking relief from the codebtor stay; however, it may be difficult as a matter of proof to demonstrate exactly the extent to which a claim will not be paid by the proposed plan.
Courts have struggled to fashion appropriate relief from the codebtor stay even though precise calculation of what is to be paid through the plan is not possible. For example, when the debtor’s plan proposed to pay “either $9,000 or 20 percent of all filed unsecured claims, whichever amount is greater,” the court granted relief to collect from the codebtor but directed that if the creditor collected too much, the codebtor would be subrogated and entitled to reimbursement from the debtor.8 Base plans9 will always present this problem—it will be impossible to calculate the precise percentage of claims that will be paid until months or years into the case. This is not a reason to delay relief from the codebtor stay, but it will require some imagination and careful calculation to determine what is collectible from the codebtor.
Note also that entitlement to relief from the codebtor stay under § 1301(c)(2) is based on the extent to which “the plan filed by the debtor proposes not to pay such claim.” The debtor can modify the proposed plan before10 or after11 confirmation. Calculating the extent to which the plan does not propose to pay claims may include dealing with modifications offered by the debtor in response to the request for relief from the codebtor stay. One common response to a request for relief from the codebtor stay is to propose a classification of claims that pays the co-signed claim in full through the plan.12
It is not clear whether a creditor is entitled to relief from the codebtor stay when the debtor’s plan proposes a balloon payment or reaffirmation.13 A plan calling for balloon payment in full or for reaffirmation does propose to pay the creditor’s claim, but at least one court has concluded that relief from the codebtor stay is warranted because delaying collection from the co-obligor pending a future reaffirmation constitutes irreparable harm under § 1301(c)(3).14
1 11 U.S.C. § 1301(c)(2).
2 In re Schaffrath, 214 B.R. 153, 155 (B.A.P. 6th Cir. 1997) (Bankruptcy court appropriately granted relief from codebtor stay because debtor’s plan did not propose to pay co-signed claim in full. “It is undisputed that the plan filed by this Debtor does not proposed to pay the entire claim of Firestone. 11 U.S.C. § 1301(c) is mandatory, stating that the court shall grant relief from the stay when one of the three enumerated subsections applies.”). Accord Household Fin. Corp. v. Jacobsen, 20 B.R. 648 (B.A.P. 9th Cir. 1982); Wiremen’s Credit Union, Inc. v. Laska, 20 B.R. 675 (Bankr. N.D. Ohio 1982); Old Phoenix Nat’l Bank v. Britts, 18 B.R. 203 (Bankr. N.D. Ohio 1982); Police Fed. Credit Union v. Holmes, 9 B.R. 454 (Bankr. D.D.C. 1981); First Pa. Bank v. Rondeau, 9 B.R. 403 (Bankr. E.D. Pa. 1981); In re Johnson, 6 Bankr. Ct. Dec. (CRR) 12 (Bankr. W.D.N.Y. 1980).
3 In re Rhodes, 85 B.R. 64 (Bankr. N.D. Ill. 1988); In re Lamoreaux, 69 B.R. 301 (Bankr. M.D. Fla. 1987).
4 In re Fink, 115 B.R. 113 (Bankr. S.D. Ohio 1990) (Student loan commission entitled to relief to collect from codebtor when plan proposes to pay only 10%, notwithstanding that plan excepts the student loans from discharge at the completion of payments.).
5 See § 89.1 [ Postpetition Interest, Attorneys’ Fees, Costs and Other Charges ] § 67.3 Postpetition Interest, Attorneys’ Fees, Costs and Other Charges.
6 See discussion of projected disposable income test beginning at § 91.1 In General.
8 First Nat’l Bank v. Garrett, 36 B.R. 432 (Bankr. M.D. Tenn. 1984).
9 Plans in which a minimum amount must be paid by the debtor to complete the plan, not necessarily calculated as a percentage of unsecured claims. See § 170.1 [ Methods of Paying Unsecured Claims ] § 101.3 Methods of Paying Unsecured Claims.
10 See discussion of modification before confirmation beginning at § 114.1 Timing, Procedure and Form.
11 See discussion of modification after confirmation beginning at § 126.1 Standing, Timing and Procedure.
12 See § 150.1 [ Co-signed Debts ] § 87.3 Co-signed Debts.
13 Reaffirmation under § 524 is available in Chapter 13 cases but rarely seen. See §§ 4.7 [ Substantial Reaffirmations Are Probable ] § 8.8 Too Many Reaffirmations and 4.8 [ Debtor Cannot Reaffirm or Redeem Property ] § 8.9 Debtor Cannot Reaffirm or Redeem Property.
14 Police Fed. Credit Union v. Holmes, 9 B.R. 454 (Bankr. D.D.C. 1981). See § 90.1 [ Irreparable Harm ] § 67.5 Irreparable Harm for discussion of 11 U.S.C. § 1301(c)(3).