Lower courts are split when it comes to deciding whether a debtor can pay off a secured claim through a chapter 13 plan even though the time for redemption of the collateral expired under Section 108(b).
Recently, two bankruptcy courts came down on the debtors’ side and held that the power to modify a secured claim under Section 1322(b)(2) permits redemption in stages under a plan. It is not immediately apparent why the same rationale would not also apply in chapter 11 by allowing a debtor to stretch out payments and retain collateral through a plan after the redemption period has elapsed.
Bankruptcy Judge Ashely M. Chan of Philadelphia ruled on May 6 in a case where the debtor’s property was sold in a tax sale. The debtor filed a chapter 13 petition before the nine-month redemption period expired.
Over objection from the purchaser in the tax sale, Judge Chan confirmed the plan allowing the full amount of the redemption payment to be paid in installments over the three-year life of the plan.
Judge Chan disagreed with the Eighth Circuit Bankruptcy Appellate Panel’s holding that Section 108(b), granting a 60-day extension of deadlines, does not allow stretching out a redemption payment. She relied on the principle that a statute like Section 1322(b)(2) explicating governing an issue controls over a more general statute like Section 108(b).
In an opinion on April 29, Bankruptcy Judge John T. Laney III of Columbus, Ga., allowed the debtor to retain the property and pay off the debt in installments under a plan when the time for redeeming pawned property had not expired before the chapter 13 filing.
Judge Laney noted that the Bankruptcy Code “incentivizes” consumer debtors to proceed under chapter 13 by allowing them to modify secured creditors’ rights. He agreed with courts that allow a debtor to modify a lender’s rights under Section 1322 even if the redemption period has expired.
The outcome in Judge Chan’s case might not have been the same were Pennsylvania law different. The title obtained by a purchaser at a tax sale is initially inchoate and defeasible. Title becomes absolute only after expiration of the redemption period.
In addition, and perhaps of more importance, Pennsylvania law does not require the entire redemption amount to be paid before the redemption period expires.
Distinctions based on state law may not have mattered, because Judge Chan held that the purchaser at the tax sale had a claim under the Third Circuit’s expansive definition of claims in Grossman, which overruled the notorious Frenville opinion.
Judge Laney’s opinion might not establish a flat-footed rule on the primacy of Section 1322(b)(2) because the lender in that case had not objected to the plan, which allowed the debtor to retain a car while paying the debt in full with interest. The lender came to court after confirmation seeking to modify the automatic stay and take possession of the property on the theory that it did not belong to the debtor after the expiration of the redemption period.
The opinion does not indicate for sure how Judge Laney would have ruled had the lender mounted an objection to confirmation.
If the issue is resolved in higher courts, it would be beneficial if the outcome were to turn more on the power to modify secured claims under bankruptcy law and less on the peculiarities of state law. If state law concepts of title and redemption rights are not controlling, the result would be uniform throughout the country.
Lower courts are split when it comes to deciding whether a debtor can pay off a secured claim through a chapter 13 plan even though the time for redemption of the collateral expired under Section 108(b).