Taking sides with Collier but disagreeing with two other treatises, Bankruptcy Judge John E. Waites of Columbia, S.C., ruled that a chapter 13 debtor is not required to pay interest on unsecured claims when the plan pays creditors in full, even if the debtor commits less than all disposable income to the plan.
Faced with a final judgment for almost $50,000, the debtor filed a chapter 13 petition on the eve of a contempt hearing in state court. The debtor filed a five-year plan to pay unsecured creditors in full, but without interest.
The debtor’s income was above median, but his monthly plan payments were about $1,500 less than his projected disposable income.
The judgment creditor objected to confirmation, contending that the plan was not filed in good faith and that Section 1325(b) requires interest when the debtor is not committing all disposable income to creditor payments.
Judge Waites overruled the objections in his November 23 opinion.
Good Faith
Filing on the eve of a hearing in state court was not dispositive on the question of good faith. Judge Waites said that “[m]any debtors file bankruptcy cases for the purpose of staying actions in state court.” Furthermore, the debtor was not using bankruptcy to avoid payment of an admitted debt.
The plan to pay all creditors in full was “strong indication of good faith,” Judge Waites said.
Judge Waites therefore held that the plan was filed in good faith.
Committing All Disposable Income Not Required
The judgment creditor argued that the failure to commit all disposable income to the plan did not comply with Section 1325(b)(1).
When a creditor or the trustee objects to confirmation, the section does not permit confirmation unless:
(A) the value of the property to be distributed under the plan . . . is not less than the amount of such claim; or (B) the plan provides that all of the debtor’s projected disposable income . . . will be applied to make payments to unsecured creditors under the plan.
For Judge Waites, the question was an issue of first impression in his district.
Judge Waites said that a majority of cases around the country permit confirmation if the debtor is paying less than all disposable income, as long as creditors are paid in full. He cited more than a dozen decisions to that effect.
Subsection 1325(a)(1)(A) is written in the disjunctive and is controlling, Judge Waites said. The debtor is not required to satisfy both subsections (A) and (B).
Judge Waites held that that debtor “does not have to commit all of his projected disposable income to plan payments for the duration of the plan” because he “has proposed to pay unsecured creditors in full over 60 months, satisfying the requirements of § 1325(b)(1)(A).”
Interest Isn’t Required
The judgment creditor argued that under Section 1325(b)(1)(A), the debtor could not confirm the plan without paying interest. On that score, Judge Waites said that the courts “vary.”
Judge Waites cited four opinions not requiring interest when the debtor is paying claims in full but is not devoting all disposable income to the plan. Among those cases is In re Gillen, 568 B.R. 74 (Bankr. C.D. Ill. 2017). To read ABI’s report on Gillen, click here.
On the other hand, Judge Waites cited six cases, along with the Lundin and Norton treatises, that require interest.
In short, Judges Waites agreed with Gillen and concluded that “value” as used in the subsection does not mean “present value.” He noted that the Collier treatise and three other cases concur with Gillen.
If Congress had intended to require interest, Judge Waites said that it would have “drafted § 1325(b)(1) to match the other subsections of § 1325 with present value requirements.” He said that placement of “the phrase ‘as of the effective date of the plan’ prior to the word ‘value’ should be regarded as a purposeful policy decision by Congress requiring a different interpretation than the phrase’s meaning in § 1325(a)(4) and (a)(5)(B)(ii).”
Judge Waites overruled the objection and confirmed the plan six days later.
Taking sides with Collier but disagreeing with two other treatises, Bankruptcy Judge John E. Waites of Columbia, S.C., ruled that a chapter 13 debtor is not required to pay interest on unsecured claims when the plan pays creditors in full, even if the debtor commits less than all disposable income to the plan.
Faced with a final judgment for almost $50,000, the debtor filed a chapter 13 petition on the eve of a contempt hearing in state court. The debtor filed a five-year plan to pay unsecured creditors in full, but without interest.
The debtor’s income was above median, but his monthly plan payments were about $1,500 less than his projected disposable income.
The judgment creditor objected to confirmation, contending that the plan was not filed in good faith and that Section 1325(b) requires interest when the debtor is not committing all disposable income to creditor payments.
Judge Waites overruled the objections in his November 23 opinion.