Lenders Admonished to Demand Nothing More in Plans than the Law Allows

When no one else would bother, Bankruptcy Judge LaShonda A. Hunt of Chicago undertook the role of gatekeeper to prevent a lender from demanding provisions in a chapter 13 plan that were not authorized by the Bankruptcy Code and were in conflict with the district’s standard-form plan.

Judge Hunt’s April 1 opinion inferentially criticizes the debtor’s attorney for acceding to the lender’s unjustifiable demands, ostensibly to avoid a contested confirmation hearing.

The Car Loan and the Plan

The debtor had purchased a car with a 72-month loan. The debtor’s chapter 13 plan proposed to cure the one month of arrears with payments through the trustee. The debtor would make regular monthly payments directly to the lender.

The lender filed a claim setting forth the same arrears and the same monthly payments that were recited in the plan. The lender nonetheless objected to confirmation, demanding the inclusion of additional provisions in the plan. The debtor’s counsel amended the plan to include the provisions sought by the lender.

The chapter 13 trustee, Judge Hunt said, was prepared to recommend confirmation of the plan.

Exercising her “independent obligation to reject confirmation of plans that do not comply with the requirements of Section 1325(a),” Judge Hunt declined to confirm the plan absent excising the objectionable provisions.

Compliance with the Loan Documents

The lender wanted the plan to command the debtor to comply with all of the terms and provisions of the car loan documents.

Debtors are “already obligated by virtue of nonbankruptcy law to pay what they owe contractually,” Judge Hunt said, unless the plan “provides different treatment as allowed under the Code.”

Because the plan mirrored the arrearage, the interest rate, and the monthly payment set forth in the lender’s claim, Judge Hunt said there was “no basis for denying confirmation of a plan merely because a debtor fails to add verbiage reciting contract terms that have not been altered by the plan.”

Although not mentioned by Judge Hunt, the debtor would have been exposed to a charge of contempt were he to default on the auto loan after confirmation and thereby violate a term in the plan saying that he “shall” comply with the loan agreement. Typically, judges do not approve contracts and then order the debtor to comply.

Lien-Retention Language and Nondischarge

The creditor insisted that the plan declare that the lender would retain its lien until the loan was fully paid.

If a lender does not accept the plan and the debtor does not surrender the collateral, Section 1325(a)(5)(B)(i) provides that the lender retains its lien until payment of the debt or discharge under Section 1328, whichever is earlier.

But that is not what the plan said, according to Judge Hunt. At the lender’s behest, the plan provided that the lien would remain and the debt would not be discharged. “That is far different from the ‘lien retention language’ afforded under the Code,” Judge Hunt said.

With regard to lien retention, Section 1328(c)(1) excepts a debt from discharge if the last payment on a secured loan falls after the last payment under the plan.

Because the last payment on the car loan would be due before the last payment under the plan, Judge Hunt said the lender did not qualify for coverage by Section 1328(c)(1). “There is no third option that allows creditors to suddenly deem debts provided for in a confirmed plan [to be] non-dischargeable based on the debtor’s payment history during a plan term,” Judge Hunt said.

Since the plan did not invoke Section 1322(b)(5), Judge Hunt said the creditor had “no right to demand such treatment in the plan.”

Secured Claim Remains Intact on Default

The district’s standard-form plan provides that payments to a creditor will cease, and all secured claims on the collateral shall no longer be treated by the plan, if the lender obtains relief from the automatic stay. The lender was insisting that the plan diverge from standard form by providing that payments would continue after modification of the stay.

Given that Bankruptcy Rule 9009(a) prohibits alteration of official forms, the standard-form provision “must remain intact as written,” Judge Hunt said. Secured creditors are not without remedy, she said, because they can ask the judge for adequate protection.

Additional Attorneys’ Fees

Finally, the lender demanded that the plan add $550 in attorneys’ fees to its allowed secured claim.

Boosting the claim, Judge Hunt said, was “unreasonable” because the lender’s confirmation objection was not “grounded in the Bankruptcy Code or Rules.” If the creditor wanted a larger claim, she told the lender to file a motion under Rule 2016(b) and justify “its request for costs of collection.”