To pay a debtor’s attorney in full before other creditors, a chapter 13 plan cannot require a payment default on a home mortgage, according to District Judge Thomas L. Ludington of Bay City, Mich.
The chapter 13 plan called for the debtor to pay $660 a month. Monthly payments on the home mortgage were to cease until the chapter 13 trustee accumulated enough for full payment of the debtor’s counsel fees of $2,900. Once attorneys’ fees were paid, the trustee would resume making regular monthly mortgage payments of $510. Since the debtor would have been paying $660 a month, the pre-petition and post-petition arrears on the mortgage would have been paid off in 48 months under the 60-month plan.
The lender objected to the feature of the plan that was to pay the debtor’s attorney first. The bankruptcy judge confirmed the plan nonetheless.
The case demonstrates the tension between subsections 1332(b)(2) and (b)(5). While the former provides that a chapter 13 plan may not modify a mortgage on a principal residence, the latter allows the curing of a default on a secured claim “within a reasonable time.”
The Supreme Court’s Nobelman opinion from 1993 was also in play. The high court held that subsection (b)(5) allows curing prepetition defaults. After Nobelman, courts have held that the subsection allows curing post-petition and post-confirmation defaults.
Judge Ludington held in his April 7 opinion that subsection (b)(5) does not authorize a plan itself to create a post-petition default “in order to accumulate cash for a preferred creditor” at “the expense of the homestead mortgagee.”
Judge Ludington overturned confirmation of the plan despite a policy in the Eastern District of Michigan giving preference to debtors’ attorneys’ fees to ensure that bankrupts have adequate representation.