§ 67.4 — Can Creditor Collect Original Contract Payment from Codebtor?

Revised: May 5, 2004

[1]

At least one court has permitted relief from the codebtor stay to collect the difference between the original contract installment payment and the payment proposed by the debtor’s plan.1 For example, if the original installment sales contract called for payments of $227 per month, and the plan, after splitting the claim into secured and unsecured portions, proposes to pay $133 per month on the secured portion, the creditor would be entitled to collect $94 a month from codebtor.

[2]

This result is not compelled by § 1301(c)(2), which speaks in terms of payment of the creditor’s claim. In the example above, the creditor would not file a claim for each monthly payment due under the contract but would prove a claim for the balance due on the contract with interest accrued through the petition. The U.S. Court of Appeals for the Sixth Circuit recognized in Harris v. Fort Oglethorpe State Bank,2 that relief from the codebtor stay under § 1301(c)(2) is measured against whether the debtor’s plan proposes to pay a creditor in full, not against whether the payments proposed are consistent with the terms of the original contract. If the plan proposes to retire the claim in full during the life of the plan, relief from the codebtor stay is not appropriate simply because the monthly payments through the plan are different from those required by the original contract.

[3]

Allowing relief from the codebtor stay based on a difference in monthly payments under the plan would be particularly suspect when the creditor is undersecured and the secured portion of the creditor’s claim is appropriately retired under § 1325(a)(5) with monthly payments substantially less than the original contract payments.3 To grant relief from the codebtor, just because the monthly payments through the plan vary from the contract, reintroduces the leverage on debtors that § 1301 was intended to remove.


 

1  International Harvester Employee Credit Union v. Daniel, 13 B.R. 555 (Bankr. S.D. Ohio 1981).

 

2  721 F.2d 1052 (6th Cir. 1983).

 

3  See §§ 103.3 [ Partially Secured Claims ] § 74.10  Partially Secured Claims, 104.1 [ The Power to Modify ] § 74.11  The Power to Modify and 114.1 [ Calculating Payments to Secured Claim Holders ] § 78.2  Calculating Payments to Secured Claim Holders.