Disagreeing with the Third and Seventh Circuits, Bankruptcy Judge Elizabeth E. Brown of Denver held that the bankruptcy court lacks discretion to allow a final payment on a chapter 13 plan more than five years after the first plan payment.
A couple confirmed a chapter 13 plan obligating them to pay about $900 a month for five years. Less than a year after confirmation, the husband lost his job. The court approved a modified plan lowering the monthly payment to $10, with a proviso that the couple file amended schedules and an amended plan within 30 days after the husband got a new job.
When the husband was employed again, they informed their bankruptcy lawyer, but he had forgotten about the proviso.
After the couple completed their plan payments, the chapter 13 trustee remembered the proviso, analyzed their tax returns, and calculated a $17,000 shortfall had the couple amended the plan on time.
The debtors and the trustee agreed to a stipulation allowing the couple to pay off the $17,000 over several months after the final plan payment. Without advance approval from the court, the couple went ahead and paid the additional $17,000 so they could obtain a chapter 13 discharge.
In her Jan. 23 opinion, Judge Brown declined to approve the stipulation but converted the case to chapter 7, where the couple nonetheless may obtain a discharge.
Judge Brown tackled two major questions on which the courts are split. First, she was tasked with deciding when the clock on the five years begins to run. If the period begins with the first payment after confirmation, the $17,000 payment would have fallen within the five-year window and she would have approved the stipulation, giving them a chapter 13 discharge.
Unfortunately for the debtors, Judge Brown sided with those courts that start the clock running with the first payment after filing, thus causing the $17,000 payment to occur beyond five years.
If the five years begins running on the first payment after confirmation, debtors would be saddled with “additional burdens,” Judge Brown said, because they would be making monthly payments for more than five years, since confirmation usually does not occur at the first confirmation hearing. We recommend reading Judge Brown’s opinion in full text to appreciate her reasoning for deciding that the clock begins running on the first plan payment after filing.
Judge Brown was therefore required to address the second question: Does the court have discretion to allow a final payment beyond five years?
The Third and Seventh Circuits have found discretion to allow a final payment after five years. See In re Klaas, 858 F.3d 820 (3d Cir. 2017); and Germeraad v. Powers, 826 F.3d 962 (7th Cir. 2016). For ABI’s discussion of those cases, click here and here.
Judge Brown instead adopted the conclusions of the Tenth Circuit Bankruptcy Appellate Panel and several bankruptcy courts that do not permit payments outside of five years. Although Judge Brown was technically not bound by the Tenth Circuit BAP, ruling otherwise would have assured a reversal were she appealed.
Again, we recommend reading the opinion in full on the issue of discretion to make a late payment.
Even if she had sided with the circuit courts, Judge Brown said she would not have changed her ruling.
The debtors were not blameless, she said, because they made lower payments for three years after the plan should have been modified to increase the monthly payments. The debtors, she said, were “not directly culpable for this failure because they timely informed their attorney.”
Nevertheless, she said, the clients “must be held accountable for the acts and omissions of their attorney.”
Judge Brown also said she did not want to “send a message to other debtors that they are free to ignore plan requirements when it suits them and then cure the default . . . if discovered by the trustee or some other party.”