A chapter 12 family farmer may be allowed to make plan payments directly to the holder of an impaired secured claim, especially if payments continue beyond the life of the plan, according to Chief Bankruptcy Judge Catherine J. Furay of Madison, Wis.
The debtors owed about $400,000 to an agricultural lender. The claim was secured by mortgages and liens on the debtors’ homestead and farming equipment. The lender consented to a modification of the mortgage by restructuring the obligation to be a 30-year conventional mortgage, with interest at 2.375%.
The plan called for the debtor to make payments directly to the lender. Direct payments would avoid paying about $5,000 in fees to the chapter 12 trustee, amounting to about $140 a month. According to Judge Furay, the plan might not be feasible if the debtors were required to pay the trustee’s fees on the mortgage.
Only the chapter 12 trustee objected to the plan. The trustee argued that a chapter 12 debtor cannot avoid channeling payments through the trustee when the secured claim is impaired by the plan.
Judge Furay overruled the objection in an opinion on December 28.
The courts are split three ways, Judge Furay said. Some never allow direct payments, while others permit direct payments regardless of whether the creditor is impaired or not. The majority allow direct payments on a case-by-case basis, Judge Furay said.
Several provisions in chapter 12 informed the result. Primarily, Section 1225(a)(5)(B)(ii) provides that “property to be distributed by the trustee or the debtor under the plan” to the holder of an allowed secured claim may not be less than the allowed amount of the claim. [Emphasis added.]
Together with Sections 1226(c) and 1222(a)(1), Judge Furay read chapter 12 to “imply that if the plan provides otherwise, the trustee will not be making payments to creditors under the plan, thereby contemplating direct payments by debtors.” [Emphasis in original.]
Judge Furay therefore held that the statutory “language permits the possibility of direct payments by the Debtors.” Still, the court must exercise discretion because the right to make direct payments “is not unfettered,” she said.
Applying her discretion to the case at hand, Judge Furay was most persuaded by two factors: The payments will continue beyond the term of the plan, and the lender consented. She noted that the lender was sophisticated and could monitor payments.
Judge Furay adopted the majority approach, weighing factors on a case-by-case basis. She said it “would make little sense to require Debtors to disburse their mortgage payments through the Trustee for three years only to have to arrange direct payments at the end of the plan.”
Note: Judge Furay’s opinion includes a fine summary of how and why chapter 12 is different from chapters 11 and 13.
A chapter 12 family farmer may be allowed to make plan payments directly to the holder of an impaired secured claim, especially if payments continue beyond the life of the plan, according to Chief Bankruptcy Judge Catherine J. Furay of Madison, Wis.
The debtors owed about $400,000 to an agricultural lender. The claim was secured by mortgages and liens on the debtors’ homestead and farming equipment. The lender consented to a modification of the mortgage by restructuring the obligation to be a 30-year conventional mortgage, with interest at 2.375%.
The plan called for the debtor to make payments directly to the lender. Direct payments would avoid paying about $5,000 in fees to the chapter 12 trustee, amounting to about $140 a month. According to Judge Furay, the plan might not be feasible if the debtors were required to pay the trustee’s fees on the mortgage.
Only the chapter 12 trustee objected to the plan. The trustee argued that a chapter 12 debtor cannot avoid channeling payments through the trustee when the secured claim is impaired by the plan.
Judge Furay overruled the objection in an opinion on December 28.