Our thoughts and prayers are with those in eastern Kentucky who have lost so much in the devastating floods. We know that chapter 13 debtors are among those who have been affected by the floods. Debtors – and their attorneys – have already begun to ask what to do if they can’t make their plan payments. For the longer term, what about those cases where debtors are in a chapter 13 case to save a home or retain a vehicle that has been destroyed by the flood?
The first response we give to debtors is to contact their attorney. Here is some information for attorneys to consider in counseling their clients during this rough time.
Missing Plan Payments: I cannot give debtors permission to miss a plan payment. However, unless a debtor is already on “probation,” we generally do not file a motion to dismiss a case until the debtor is 3 or 4 months’ delinquent in plan payments. Unless the debtor is already behind in payments, missing 1 or 2 payments probably will not have immediate consequences from my office, especially if they make an effort to catch up those payments promptly. That might give them some breathing room before they have to deal with their chapter 13 plan payments.
HOWEVER: (1) If a debtor is already subject to a “probation order,” one missed or late payment will result in an immediate dismissal. If there is a probation order in place, file a motion to suspend plan payments as quickly as possible. (2) Creditors whose claims are being paid through the plan may still seek relief from stay if they are not receiving distributions under the plan.
Suspending Plan Payments: Asking to “suspend” plan payments is a local process. It is actually a motion to modify the confirmed plan to suspend the debtor’s obligation to make payments for a specified time period. The motion needs to provide for a way to cure those suspended payments. If the request is to waive the payments completely, explain in the motion that you want to reduce the pool amount by the missed/waived payments, and explain why the debtor should not be required to cure the payments. If the payments are not being caught up or cured, the plan still needs to pay secured and priority claims in full and satisfy the liquidation test within 60 months.
Modifying the Plan to Surrender Collateral: Logically, if the collateral has been destroyed in the flood, it would seem that surrendering the property would make sense. HOWEVER – in the Sixth Circuit, we have the Adkins/Nolan cases essentially stating that any deficiency claim still has to be paid as a secured claim per the original confirmed plan. Keep that in mind as you counsel your clients. Realistically, the issue rarely comes up, but sometimes creditors object to proposed surrenders, and sometimes they file their deficiency claims as secured. You may or may not be able to reduce future plan payments after surrendering collateral, depending on the facts of the case.
Insurance Proceeds: If there are insurance proceeds on collateral that is being paid through the plan, there are two options: (1) Have the insurance proceeds paid to my office to be used to pay off the secured claim, usually with any surplus funds being returned to the debtor (but see an earlier post on insurance proceeds); or (2) file a motion to substitute collateral, which would allow the debtor to use the insurance proceeds to buy a comparable replacement vehicle with the secured creditor taking a lien on the replacement vehicle.
Hardship Discharge: A so-called “hardship discharge” is a discharge granted in a chapter 13 case in which the debtor cannot complete all plan payments. See 11 U.S.C. Sec. 1328(b). The criteria for getting a hardship discharge are:
- (1) the failure to complete plan payments was due to circumstances for which the debtor should not justly be held accountable (I think the flood qualifies as one of those circumstances);
- (2) unsecured creditors have received what they would have received if the case had been filed as a chapter 7 case (i.e., the liquidation test has been met); and
- (3) most importantly, modification of the plan is not practicable.
The fact that the debtor’s property was damaged in the flood will not automatically qualify a person for a hardship discharge. You need to show that going forward, it is not practicable to modify the plan. If you can suspend plan payments, then later resume plan payments (maybe in a reduced amount), a hardship discharge is not a viable option.
A note about the “liquidation test”: The liquidation test is determined based on the value of the debtor’s property at the time of the petition. If that property has been destroyed, a hardship discharge probably will not work if unsecured creditors have not received what they would have received as of the date of the petition. There MIGHT be legal arguments for recalculating liquidation in a plan modification, but be prepared to brief that issue.
Conversion to Chapter 7: If there is no longer a reason to stay in a chapter 13 case, conversion to chapter 7 may be an option. HOWEVER – the debtor must be eligible for a discharge under chapter 7. Measure the 8-year period from the filing date of the chapter 7 case in which the debtor previously received a discharge to the filing date of the chapter 13 case. It doesn’t matter if you are converting more than 8 years after the initial chapter 7 case was filed; count filing date to filing date. Also, remember that a case which started out in chapter 13 can be converted by the filing of a notice. You do not need to file a motion and wait 14 days.
Dismissal: Sometimes, dismissing the case is the best option. If the debtor intends to re-file after dismissal, make sure the debtor is not barred from refiling under section 109(g) (I rarely raise this issue, but a creditor might). Also be prepared in the new case to take the necessary steps under section 362(c)(3) to extend the automatic stay (remember – the stay terminates on the 30th day unless your motion is granted) or to impose the automatic stay under section 362(c)(4).
This is not a comprehensive list of options, nor is it comprehensive description of each of the options presented. Read the relevant statutes and rules. Do your own research. Be prepared with factual statements in support of whatever relief you are seeking. I reserve the right to object – for any justifiable reason – to any motion that is filed. But the overall goal is to assist the debtors in getting their fresh start.