The Bankruptcy Code is a hash when it comes to saying how or whether a chapter 13 debtor must obtain court approval for incurring new debt — for instance, to purchase a car after confirmation.
Two recent decisions underscore the statutory confusion that judges encounter when deciding how or whether they can, should, or must approve post-petition incurrence of debt by chapter 13 debtors not engaged in business.
Bankruptcy Judge Stacey G. Jernigan of Dallas uncovered a cottage industry in her district where auto dealers and lenders were paying debtors’ counsel to obtain approval for purchasing cars at what she called “exorbitant” interest rates.
Judge Jernigan decided in an opinion on March 14 that Sections 363, 364, and 1305 “most likely” mean that court approval is required to incur “significant” post-petition debt “if, for no other reason than because of the possible impact on the debtor’s plan and the debtor’s prospects for rehabilitation.”
On the other side of the fence, Bankruptcy Judge Michael E. Ridgway of Minneapolis studied Sections 1304 and 1305, analyzed Judge Jernigan’s opinion, but concluded in a decision on May 27 that nothing in the Bankruptcy Code requires a chapter 13 debtor not engaged in business to obtain court approval for incurring debt.
In a circumstance where the lender demands court approval, Judge Ridgway explained how and why the debtor could modify a confirmed plan.
Consumer’s lawyers are encouraged to read both opinions for their discussions of the conflicting statutory provisions. Both opinions suggest that a chapter 13 trustee’s approval of a new loan under Section 1305(c) may not afford a safe harbor in all situations.
Whichever method a court requires for approval of a new loan will have the effect of driving up the cost of counsel fees in chapter 13.
In re Fields, 14-40969 (D. Minn. May 27, 2016)
The Bankruptcy Code is a hash when it comes to saying how or whether a chapter 13 debtor must obtain court approval for incurring new debt — for instance, to purchase a car after confirmation.