The Third and Seventh Circuits, the only courts of appeals to consider the issue, conclude that a chapter 13 debtor under proper circumstances can complete plan payments and receive a discharge even if the final payment is made after 60 months.
The Third Circuit’s June 1 opinion by Circuit Judge Cheryl Ann Krause lays down flexible rules governing the bankruptcy court’s discretion in allowing a final payment after 60 months.
The debtors confirmed a chapter 13 plan calling for monthly payments of about $3,000, totaling almost $175,000 over five years. After paying about $50 more than the plan required, the trustee notified the debtors in the 61st month that their payments were about $1,100 short because the trustee’s fees were higher than anticipated.
Judge Krause said that the underpayment was not the debtors’ fault because the trustee did not make the calculation and bring the shortfall to the debtors’ attention until after the end of the plan term.
The trustee filed a motion to dismiss but said she would withdraw the motion if the debtors made up the shortfall. Within 16 days of being notified, but after 60 months, the debtors paid the shortfall.
The trustee withdrew her motion to dismiss, but by that time a creditor had joined the motion to dismiss. The bankruptcy judge denied the motion to dismiss, granted a discharge, and was upheld in district court, prompting the creditor’s appeal to the Third Circuit.
The creditor argued that the plain language of the statute required dismissal. The creditor pointed to Section 1322(d) which provides that the court “may not” approve a plan with payments extending beyond five years and to Section 1329(c) which prohibits plan modifications that extend payments beyond five years.
Judge Krause said the creditor was relying on the wrong sections. The relevant provisions, she said, were Sections 1307 and 1328 which govern dismissal and completion discharge. Section 1307 says a court “may” — not “must” — dismiss a case, and Section 1328 requires the court to issue a discharge when all plan payments have been completed, “without an express requirement that such payments were made within five years.”
Only the Seventh Circuit has touched the issue, in Germeraad v. Powers, 826 F.3d 692 (7th Cir. June 23, 2016), according to Judge Krause. She said the Chicago court’s discussion of the issue was dicta and that the circuit assumed, without deciding, that a bankruptcy court has discretion to allow a final payment beyond five years. To read ABI’s discussion of Germeraad, click here.
Judge Krause concluded that the unambiguous language of Sections 1307 and 1328 invest the bankruptcy court with discretion. She bolstered her conclusion by reference to legislative history where Congress said that the Bankruptcy Reform Act’s chapter 13 was intended to remedy similar provisions in the Bankruptcy Act that were “overly stringent and formalized.”
Judge Krause said that chapter 13 was intended to cap plans at five years, where payments might have continued up to 10 years under prior law. The cap, she said, was a “shield” for debtors, not a “sword” for creditors.
To deny discharge, Judge Krause said, “would also produce an absurd result” when the debtors had acted in good faith by making the final payment promptly and had substantially complied with the plan. She said it “would hardly make sense to deny them the benefit of chapter 13 bankruptcy by dismissing the entire proceeding.”
Judge Krause then turned to the question of standards to govern the bankruptcy court’s exercise of discretion in permitting a payment beyond five years. Building on case law from lower and from the circuit’s case law on setting aside default judgments, she laid down a “nonexclusive list” of five factors to guide the court’s exercise of discretion: (1) whether the debtor substantially complied with the plan, (2) the feasibility and time required to complete payments, (3) whether any creditors would be prejudiced, (4) whether the “debtor’s conduct is excusable or culpable,” and (5) the “availability and relative equities of other remedies.”
Judge Krause had “no trouble concluding” that the bankruptcy court properly exercised discretion in denying the dismissal motion and granting a discharge. She said that conversion to chapter 7 or a “hardship discharge would be nonsensical in this situation.”