Trustee’s
objection overruled
Plan
approved because creditor did not object
By
David Ziemer
david.ziemer@wislawjournal.com
April
16, 2007
| What
the court held Case:
In re Schultz, No. 06-24781 Issue:
Does a Chapter 13 plan providing for monthly payments to a lienholder, followed
by a balloon payment in the final month, provide for "equal monthly" payments,
pursuant to 11 U.S.C. 1325(a)(5)(B)?
Can the plan be confirmed anyway,
if the creditor does not object? Holding:
No. Only if
the recording is made by a person acting under color of law is the recording admissible. Attorneys:
No. The balloon
payment within the term of the plan makes the payments unequal.
Yes. Subsec.
1325(a)(5)(A) provides an alternative means for approval of a plan. |
Chapter
13 debtors have a new means of holding on to their homes, under a recent decision
by Bankruptcy Judge Margaret Dee McGarity. But only if the creditor agrees to
it.
Darrin
J. Schultz filed a Chapter 13 petition, after foreclosure was commenced on his
home, but before confirmation of the sheriff’s sale. More than $78,000 was
required to pay off the mortgage.
Schultz’
plan provided for monthly payments of $533 of principal and interest on the loan,
with the unpaid balance to be paid with a balloon payment at the end of 60 months
by refinancing — roughly $71,000.
The
creditor did not object, but the trustee did, arguing that the plan did not comply
with the equal payment requirement of 11 U.S.C. 1325(a)(5)(B)(iii)(I), recently
enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act
of 2005.
The
statute provides that the holder of a secured claim may retain the lien, if for
each secured claim, the holder receives full value, and the property to be distributed
to it is in the form of periodic payments in “equal monthly amounts.”
The
court agreed with the trustee that equal monthly payments, followed by a balloon
payment, are not “equal,” and thus, the plan does not comply with the
requirement.
A
number of bankruptcy courts have considered the issue since the bankruptcy act
was passed, with most concluding that monthly payments, followed by a balloon
payment, are not “equal monthly payments.”
Schultz
argued that the statute is inapplicable, if the entire debt is paid in full.
But
Judge McGarity disagreed and joined the majority approach, stating, “This
court holds that periodic payments must be equal, period,” regardless of
whether the default is cured and only current payments and the arrearage are paid
off pursuant to the plan, or whether a long-term debt is paid in full.
Other
Options
The
court noted that Schultz had another option available, specifically that approved
in In re Westcott, 309 B.R. 308 (Bankr. E.D. Wis. 2004) — reinstating payments
under the original debt, paying off the arrearage, curing the default, and then
refinancing in month 61, after completion of the plan.
The
court acknowledged that the plan actually proposed by Schultz is more favorable
to the creditor than the one approved in Westcott, speculating, “The merits
of the proposal may indeed be the reason the creditor did not object to its treatment
under this plan.”
Nevertheless,
because the plan did not provide for equal payments during its duration, the court
held that it does not fit within the requirements of subsec. 1325(a)(5)(B).
No
Creditor Objection
However,
the court sua sponte considered another issue — whether the plan can be confirmed,
nevertheless, because the creditor made no objection, and concluded that it could.
Subsection
1325(a)(5) is written in the disjunctive, so that its requirements are met in
one of three possible ways. Subsec. 1325(a)(5)(B) is only one of those ways.
Subsec.
1325(a)(5)(A) provides for approval of a plan if “the holder of such claim
has accepted the plan.”
Interpreting
the creditor’s failure to object to the plan as acceptance, the court held
that subsec. (a)(5) was satisfied, even if subsec. (a)(5)(B) was not, overruled
the trustee’s objection, and confirmed the plan as proposed.
As
a result, debtors in future cases can provide for monthly payments, with a balloon
payment in the final month, provided that the lender does not object. Otherwise,
the debtor will have to establish a plan in accord with Westcott, with refinancing
and final payment after the plan is completed.
David
Ziemer can be reached by email.
