The Journal of The DuPage County Bar Association

Back Issues > Vol. 21 (2008-09)

Chapter 13 Repayment Plans: Development and Drafting Considerations
By Glenn Stearns

The Bankruptcy Code1 was revamped in 2005 with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act - now routinely referred to as "BAPCPA" (pronounced bap-see-puh). After BAPCPA, the Bankruptcy Code retained its two major consumer provisions: Chapter 7 and Chapter 13, with some important changes. Chapter 7 deals with liquidations and is typically a short proceeding which produces a discharge in exchange for liquidation of a debtor’s non-exempt assets. Chapter 13 is typically used to pay creditors some or all of what they are owed under a court supervised plan that can last as long as 5 years. This article addresses issues involved in planning and drafting a Chapter 13 Plan.

2. Overview:

In Chapter 13, a debtor proposes a plan of repayment. The plan must pay secured creditors one hundred percent of their allowed claims, but unsecured creditors can see their claims modified to something less. When a plan is adequate, it is typically recommended for confirmation by the Chapter 13 Trustee. The court has the ultimate decision-making power and when it approves of a proposed plan, the plan is called "confirmed". After confirmation, the Debtor makes payments in accordance with the plan and receives a discharge at the end of the plan.

When proposing a Chapter 13 Plan to the court, to the creditors and to the Chapter 13 Trustee there are certain guidelines to keep in mind. Lawyers who follow these strategies will ultimately have more success in obtaining court confirmation of their plans. The most important thing to keep in mind when drafting a plan, is that it’s all about the money. The real function of the plan is to dictate how the money flows to the various classes of creditors. The local form plan, known as the Model Plan2, used in the Northern District of Illinois, breaks each category down into sections. There are nine sections (A through I), each covering different aspects of the debtor’s proposed Chapter 13 plan. One of the most important sections is Section E, which itself is broken down into nine subsections (1 through 9). It is Section E that dictates "how" and "when" the Chapter 13 Trustee will pay creditors.

3. Chapter 13 Plan Drafting Considerations:

a. Pre Confirmation Adequate Protection Payments Required: In drafting the various subparagraphs of Section E, it is the job of the debtor’s attorney to manage the flow of money to (1) keep the mortgage and automobile lenders/ creditors happy (or at least avoid their objections); (2) make sure their own fees get paid; (3) try not to let any money flow to the General Unsecured Creditors ("GUC") until the secured creditors have been paid.

Before plan confirmation, adequate protection payments are made (from the debtor’s funds) to secured creditors with Purchase Money Secured Interest ("PMSI") claims provided for in Section E 3 (typically auto lenders). This keeps cash flowing to those creditors during the limbo phase of the plan which is after it is filed and before it gets confirmed, which keeps them happy. The Chapter 13 Trustee disburses these funds once a month and the dates are posted on their web sites (e.g.

After the entry of the confirmation order disbursements are made in accordance with the plan. All money on hand is used to satisfy each level in order of their proscribed priority. If money is left over after satisfying the first level the remainder is applied to the next level. If that level is satisfied the remainder is applied to the next level (e.g E 3, then E 4, the E 5 etc.), and so on. One extremely important section is that pertaining to secured creditors.

b. Calculating Payments to Other Secured Creditors in Section E3: Debtors don’t have any control over the amount of the monthly payment to Section E 2 creditors (Current Mortgage Payments) because those amounts are contractually dictated and must remain current during the plan. But, they do have control over the fixed payments to secured creditors provided for in Section E 3 (Other Secured Claims). It is important to use that control to manage how much money is available each month to pay attorney fees and, after attorney fees are paid, mortgage arrears.

In the good old days (before BAPCPA) you could pay all the secured creditors pro rata (each receiving their percentage share of the "pot" of money each month), this would guarantee that the secured creditors were all paid in full before any money went to the unsecured creditors and the debtor’s attorney didn’t have to do as much math. An easy way to simulate this today is to calculate what the pro rata payments would be if all the E 3 (Other Secured Creditors) and E 5 (Mortgage Arrears) creditors were to be paid at the same level/priority and use those numbers to determine the E 3 fixed payments. If debtor’s counsel wants to pay the car lenders off faster and reduce the client’s interest expense just increase the fixed payment in E 3. Increasing the E 3 fixed payment won’t cause administrative problems like reducing the fixed payment will.

Don’t make the mistake of calculating a 60 month payoff (total amount due divided by 60 month plan term) for the E 3 creditor and using that amount for the fixed payment. Your client will pay more interest and money will flow to the GUC’s before the secured are paid off; it can result in the case staying open longer than required if the plan could otherwise complete in fewer than 60 months.

c. Making sure money is available for E 4 (attorney fees): It is very important that the attorney be paid; you may be required to do a little math to make this happen. Because there is no fixed payment feature in E 4 the attorney fees will be paid in full before any money is paid toward mortgage arrears or any lower level claims. If there are no E 3 creditors you don’t have to do any gymnastics at all. If E 3 fixed payments aren’t large relative to the plan payment you can hit the easy button again. If E 3 fixed payments are large you have to do some more work to get paid early in the case. It is generally accepted that adequate protection payments can be less than the post confirmation fixed payments. You can use sections E 3 and G together to provide for a low initial adequate protection payment, followed by a higher fixed monthly payment beginning at some future date certain. The higher fixed payment can be effective upon confirmation or some specific future date.

Another method is to use Section G to change the priority level assigned to attorney fees. Calculate the set payments for E 3 creditors as discussed above and use Section G to specify the priority level (E 2 or E 3) for attorney fees. You may also provide for payment of attorney fees in a fixed monthly amount in Section G.

d. Other Plan Drafting Considerations: Section C (Direct Payment of Claims by Debtor): Section C is for mortgages only. All other debts that will be paid directly by the debtor are to be provided for in Section G of the plan and or Schedule J of the bankruptcy petition. Don’t forget to include the monthly payment amount. Current homeowner’s association dues don’t belong in the plan, only in Schedule J.

Section D 1 (Initial Plan Term and Payment Amount): The initial plan term should be 36 months for debtors with below median income and 60 months for debtors with above median income3. The term of a plan can never be less than 36 months unless all creditors are paid in full within the initial plan term. Sections E 8 (Percentage paid to General Unsecured Creditors) and G (Special Terms) should be used to provide minimum percent or dollar amount dividends to unsecured creditors for below median income debtors. Above median income debtors will pay the amount dictated by Form 22-C 4. Keep in mind that no matter what happens after confirmation (e.g. your client inherits a million dollars) the minimum amount that must be paid into the plan is the amount in the last field in section D 1 (applicable plan period multiplied by the monthly plan payment).

If the plan payment will change more than one time during the term of the plan then the plan term must be detailed in Section G. The amount to be paid during the initial plan term is entered in Sections D 1 and H 1 (Summary of Plan Details); the terms for the changing plan payments are set out in Section G using the format set out in D 1.

Section E 2 (Current Mortgage Payments): Section E 2 is used when the Debtor proposes to pay his current mortgage payments through the Chapter 13 Plan as part of the monthly plan payment. The benefits of including current mortgage payments in E 2 are: (1) On day one of the plan there is a Payroll Order directing the Debtor’s employer to pay the Trustee directly; (2) Debtor has at least a half a plan payment to mail to the Trustee on day one; (3) All the debtor has to do for the plan to succeed is stay employed; (4) Trustee keeps perfect records regarding post petition payments; (5) Fewer Motions to Lift Stay by Mortgage Companies; (6) Trustee fees on current payments are ultimately paid by unsecured creditors and are probably less than late charges and creditor attorney fees on stay lift motions.

The school of thought that opposes paying current mortgage payments in E 2 is generally based on: (1) The debtor’s belief that they can really make the payments on time; (2) It is fun defending Motions to Modify the Stay every six months. The creditor name in E 2 should match the creditor name in Schedule D.

Section E 3 (Other Secured Claims): Considerations not addressed above include: The now infamous §1325(a)(9) "hanging paragraph"; PMSI v. non-PMSI and delinquent property taxes. The naming paragraph of §1325(a)(9) requires that a creditor with a PMSI claim secured by a motor vehicle purchased within the 910 days pre-petition, or a creditor with a PMSI claim secured by other personal property purchased within one year pre-petition be paid the full balance owed them at the petition date. For motor vehicle loans, the case of In Re Till 301 F.3d 583 (7th Cir. 2002), cert. granted, Till v. SCS Credit Corp., 123 S.Ct. 2572 (Mem), 156 L.Ed. 601 (June 16, 2003) (No. 02-1016) still controls as to the interest rate paid on these claims which is: prime rate plus a risk factor of up to 3%.

Unless a Section E 3 creditor is specifically identified as "non-PMSI" they will receive pre confirmation adequate protection payments. Not all secured creditors are entitled to adequate protection. If the lender did not finance the purchase of the property they aren’t entitled to pre-confirmation adequate protection payments. Some creditors, notably Best Buy and Home Depot, that may be entitled to PMSI status do not file secured claims, they usually file as unsecured.

With real estate property taxes, if there is no escrow there are likely to be delinquent taxes. Be sure to give the county where the debtor lives notice by listing them on Schedule D of the bankruptcy petition. The county will hold the property taxes out of sale if they have notice of the Chapter 13. You can quickly and easily check the amount owed via the county’s web site.

Section E 6 (Allowed Priority Claims): Of course the most common priority creditor is IRS. §1322(a)(2) requires that the plan must provide for full payment of all claims entitled to priority under section 507 unless the creditor agrees to a different treatment. In my experience the IRS will not agree to any other treatment. The IRS generally files claims before the original confirmation hearing so getting the number correct should not be a problem. The most common error here is the misclassification of student loan debt as a priority debt. Student loans are non dischargeable but they are not entitled to priority under section 507.

Section E 8 (General Unsecured Claims ("GUCs"): A percentage dividend in E 8 is a minimum, if the initial term in section D 1 is less than 60 months, Sections D 2 and E 8 work together to extend the term of the plan until the minimum dividend is reached, or up to 60 months.

Section E 9 (Interest): If §1325(a)(4) requires that all unsecured creditors be paid in full then they must be provided interest on their claims and it is then stated here.

Section G (Special Terms and Other Provisions): None of the text anywhere in the model plan can be altered, but special, non standard provisions may be made using plan Section G. Common section G provisions and suggested language include the following:

· Regarding late filed claims: Unsecured claims filed after the bar date are hereby disallowed and shall not be paid by the Trustee.

· Regarding direct payment of loans secured by personal property: The debtor will make current monthly payments, as listed in debtor’s Schedule J of the bankruptcy petition directly to the following creditors holding claims secured by a perfected lien on debtor’s personal property:

Creditor: _________________

Collateral: ________________

Final payment due date: ______

Fixed monthly payment: ______

· Regarding direct payment of student loans: The debtor will make current monthly payments, as listed in debtor’s Schedule J directly to the following creditors for student loans that mature after 60 months from the date of filing:

Creditor: _________________

Final payment due date: ______

Fixed monthly payment: ______

· Regarding delinquent Property Taxes or direct redemption of Property Taxes: The debtor will redeem sold real estate taxes by reserving the amount listed in debtor’s Schedule J of the bankruptcy petition each month for the plan’s first ________ months. Debtor’s plan payment increases as shown in section D 1 upon redemption.

Redemption amount: ________

The debtor will pay past due real estate taxes directly by reserving the amount listed in debtor’s Schedule J of the bankruptcy petition each month for the plan’s first ________ months. Debtor’s plan payment increases as shown in section D 1 upon payment.

Past due amount:___________

· Increasing Section E 3 (Other Secured Claims) set payments after attorney fees have been paid: Beginning with the Month, Year disbursement, the set payment to Creditor Name E3(a) in Section E 3 (a) shall increase to $xxx per month and the set payment to Creditor Name E3(b) in Section E 3 (b) shall increase to $xxx per month.

· Changing the priority level of payment of attorney fees through the plan: Debtor attorney fees allowed by court order shall be paid at a priority level equal to creditors provided for in section E " " in fixed monthly payments of $" ".

· Regarding surrender of personal property that secures a debt: Debtor hereby surrenders Description of Asset to Creditor Name.

· Regarding multiple step payments, increasing the plan payments when 401(k) and (or) other direct pay obligations complete:

1. Initial plan term. The debtor will pay to the trustee $____ monthly for____ months and $____ monthly for an additional ____ months, and $____ monthly for an additional ____ months, and $____ monthly for an additional ____ months, for total payments, during the initial plan term, of $____ . [Enter this amount on Line 1 of Section H.]

Section H (Summary of Plan and Payments): Section H is used to verify that the plan is mathematically feasible. All the lines must be completed. If the initial term is less than 60 months the number in H(5)(c) must equal or exceed the number in H(4)(g). If the initial term is 60 the number in H(4)(g) must be zero or negative.

Section I (Payroll Control): A check in this box indicates that the debtor consents to entry of a payroll deduction order and the Trustee will immediately prepare an order, forward it to the judges’ chambers for entry and send it to the employer for execution. The attorney need not prepare a payroll order if Section I is used.

Chapter 13 is not a science. There are many nuances and methods to a successful Chapter 13 Plan. The flexibility of Chapter 13 remains intact, even after the passage of BAPCPA. For attorneys seeking to save their client’s homes from foreclosure or their automobiles from repossession, there is no greater tool. Following the guidelines herein to draft the Chapter 13 Plan will promote the client’s chances of a successful outcome.

1 All references to the Bankruptcy Code relate to Title 11 United States Code.

2 See an online version of the Model Plan at: Calculating_rev_090106.pdf

3 Median income is an integral part of the "means test" which was a well publicized aspect of the BAPCPA amendments in 2005. In a nutshell, a household that has more income per month than the median income for a household of equal size in the same geographic area may be required to file a Chapter 13 case rather an a Chapter 7. Debtors who are below the median can still choose to file Chapter 13 if their situation requires it (such as to save a home from foreclosure).

4 See Official Form 22C:

Glenn Stearns is the standing Chapter 13 Trustee for the counties of DuPage, Grundy, Kane, Kendall, Lake, LaSalle, and Will. Mr. Stearns is a graduate of DePaul University (MBA in Finance 1992) and the University of Wisconsin-Madison (BBA 1983).

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