Michigan Court Allows Curing a Chapter 13 Payment Default After Five Years

On an issue where the lower courts disagree, District Judge George Caram Steeh of Detroit sided with two circuit courts by holding that the bankruptcy court has discretion to allow the debtor to cure a payment default under a chapter 13 plan more than five years after confirmation.

The debtors confirmed a chapter 13 plan in 2013 committing to pay almost $9,000 to their unsecured creditors. On top of payroll deductions to fund the plan, the plan required the debtors to turn over their 2017 tax refund to the chapter 13 trustee for distribution to creditors.

The debtors completed all their payments but had not turned over their 2017 tax refund of some $1,400. About two weeks after the last scheduled plan payment, the trustee filed a motion to dismiss for failure to turn over the tax refund. Four days later, the debtors tendered the entire $1,400 to the trustee. The tender came less than a month after the end of the five years for paying creditors.

Believing he did not have discretion to allow a late plan payment, the bankruptcy judge dismissed the case, even though the debtors had made all required payments to their creditors other than the refund, which they tendered less than one month late.

On appeal, District Judge Steeh reversed in an opinion on June 25, concluding that the bankruptcy court has discretion to allow debtors to cure a payment default.

The lower courts are split on whether a late payment is permissible. However, 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 Steeh adopted the Third Circuit’s approach. He said that Klass “properly accounts for the statutory context in determining that courts are not required to dismiss a case under Section 1307(c) if a debtor has not timely completed all of the plan payments.” [Emphasis in original.] The Bankruptcy Code, he said, “unambiguously gives bankruptcy courts discretion under such circumstances.”

To reach the result, Judge Steeh analyzed the relevant Code provisions. Section 1322(d) prohibits plans from running longer than five years. Congress adopted the limitation, he said, so debtors would not be subjected to involuntary servitude. He quoted Klass for the proposition that Section 1322(d) is a “shield” for the debtor, not a “sword” for creditors.

A debtor is entitled to a discharge under Section 1328 after completing “all payments under the plan.” Like Klass, Judge Steeh noted that the section has no requirement that the payments must be made within five years.

If there is a “material default,” Section 1307(c) provides that the court “may” dismiss the case for “cause.” The provision does not require dismissal.

Like Klass, Judge Steeh concluded that the Bankruptcy Code “gives a court discretion in determining whether to dismiss a case upon a material default,” especially because Section 1328 “does not expressly require that such payments be made within five years.”

Judge Steeh said his conclusion is in accord with the Collier treatise.

Judge Steeh ended his opinion by quoting the five factors laid out in Klass “to guide” the bankruptcy court’s exercise of discretion. Since the bankruptcy court had not addressed those issues, he reversed and remanded the case for the court “to consider these nonexclusive factors.”

Judge Steeh noted lower court cases finding no discretion to allow a late payment, including In re Humes, 579 B.R. 557 (Bankr. D. Colo. 2018). To read ABI’s discussion of Humes, click here.