At least in the Third Circuit, it’s permissible for a bankruptcy judge to give the debtor a grace period to cure a default beyond the five-year life of a chapter 13 plan, according to a decision by a New Jersey district judge affirming Bankruptcy Judge Rosemary Gambardella of Newark, N.J.

The debtor filed a chapter 13 petition in 2014 and confirmed a plan. As amended, the plan bifurcated the lender’s mortgage into a secured claim of $145,000 plus interest and an unsecured claim of $225,000. The secured claim was to be paid in full by the end of the five-year plan. Upon full payment, the lien was to be released.

The plan provided that the debtor would not receive a discharge if the secured claim were not paid in full.

Apparently, there were arrears in payments on the secured claim when the five-year plan came to an end. The lender evidently agreed to entry of an order after the 60th month, giving the debtor more time to pay off what amounted to about $55,000.

When the debtor did not make payments on schedule, the lender filed a notice of default and a motion to modify the stay. The bankruptcy court adjourned the motion several times and ultimately denied the motion. The lender filed a motion for reconsideration, which the bankruptcy court also denied.

The lender appealed, but District Judge Brian R. Martinotti upheld the bankruptcy court in an opinion on November 24.

Naturally, the lender argued on appeal that the bankruptcy court violated Sections 1322(d)(1) and 1329(c) by effectively allowing the plan to continue for more than five years. The debtor responded by saying that a grace period to complete plan payments is not an extension of the plan under the Third Circuit’s decision in In re Klaas, 858 F.3d 820 (3d Cir. 2017).

Judge Martinotti explained,

The five-year limit contemplated by the Bankruptcy Code refers to the maximum length permissible for confirmation or modification of Chapter 13 plans, not necessarily as well to the overall duration of such plans. Compare 11 U.S.C. § 1329 (“A plan modified under [Chapter 13] may not provide for payments over a period that expires after the applicable commitment period . . . unless the court, for cause, approves a longer period, but the court may not approve a period that expires after five years after such time[]” (emphasis added)).

Judge Martinotti distinguished Klaas and Section 1329 by quoting Klaas, as follows:

“[B]ankruptcy courts retain discretion under the Bankruptcy Code to grant a reasonable grace period for debtors to cure an arrearage.

Id. at 828. Judge Martinotti conceded that the Tenth Circuit had rejected Klaas. In re Kinney, 5 F.4th 1136, 1147 (10th Cir. 2021).

Addressing the facts in the case on appeal, Judge Martinotti said that “the Bankruptcy Judge sought only to allow [the debtor] to complete the plan, rather than confirm or modify a plan beyond the statutorily permissible length.”

Rather than extending a plan beyond 60 months, Judge Martinotti said that the bankruptcy judge was exercising discretion by relying on factors in Klaas “‘to grant reasonable grace periods for the debtor to cure an arrearage.’” He said that granting a grace period was “aligned with the principles motivating Chapter 13 — including a preference for, where possible, reaching discharge . . . and ‘avoid[ing] . . . unnecessary forfeiture.’”

Finding no clear error of law nor manifest injustice, Judge Martinotti denied the appeal.