Chapter 13 bankruptcy involves reorganizing debt (as opposed to liquidating dischargeable debt in Chapter 7) over a period of three to five years and requires filers to pay a percentage (anywhere from 1% to 100%) of their debt by making monthly payments to the Chapter 13 trustee who distributes it to their creditors. In Colorado, filers will generally pay their mortgage and car lenders directly or “outside of the plan”.
Now, you may be asking yourself why it matters when your Chapter 13 plan starts. When a plan starts impacts when a plan ends. The longest a Chapter 13 plan can last is five years. A recent 10th Circuit Bankruptcy Appellate Panel decision, In re Kinney, held that if a filer makes her final Chapter 13 payment after (even one day) the five years, she is not eligible for a discharge. A discharge is the elimination of any debt that didn’t get paid through the Chapter 13 plan. This decision will have a huge impact on the successful completion of Chapter 13 plans and could mean that a filer will either need to file another bankruptcy case or have to deal with people she owes money to coming after her when her case is dismissed.
Since the longest a Chapter 13 plan can be is five years, when those five years start is even more consequential.
When Does a Chapter 13 Plan Commence?
Remarkably, when a plan commences is subject to debate and disagreement. Courts are divided in their holdings as to when the plan commences and fall into one of two camps: plans start when the first payment is due under 11 U.S.C §1326(a)(1) or plans start upon confirmation. Given the consequences in the differing views, it is essential that this Court come to its own conclusion. Frustratingly, the Bankruptcy Code fails to explicitly set forth the start date of the plan. Instead, courts are forced to sift through the Code to fashion a rationale to support when they believe the plan is supposed to start.
Judge Brown of the District of Colorado bankruptcy court provides a well-reasoned analysis of this issue in In re Humes, 579 B.R. 557 (Bkrtcy.D.Colo. 2018). First, she allows that there is a split of opinion on this issue and cites two cases out of the Fourth Circuit for the position that the plan starts upon confirmation.
The Fourth Circuit appears to be the only circuit holding that the beginning of the plan’s term is the first date a plan payment comes due after confirmation. In a 1987 decision, the court finds that, “Although Costen filed his original plan on May 4, 1981, and the bankruptcy court ordered him to (on May 12) to start making payments with the next pay period, the plan was not confirmed until September 4, 1981. The due date of the first payment after September 4 was “the time that the first payment under the original confirmed plan was due (emphasis added).” West v. Costen, 826 F.2d 1376, 1378. Bafflingly, the court provides little analysis for its holding, satisfied that the language of 11 U.S.C. §1329(c) provides all the support it needs for its holding.
Judge Brown begins her analysis for the contrary position by looking at 11 U.S.C §1326. Under §1326, “the debtor shall commence making payments not later than 30 days after the date of filing of the plan or the order for relief, whichever is earlier.” While an order for relief may enter earlier than the filing of the plan in the case where a chapter 7 is converted to a chapter 13, most often a plan will be filed at the same time as the order for relief. The result is the majority of chapter 13s will require first payments to be due 30 days after the order for relief.
Judge Brown then pivots to 11 U.S.C. §1329(c), which states, “A plan modified under this section may not provide for payments over a period that expires after the applicable commitment period under section 1325(b)(1)(B) after the time that the first payment under the original confirmed plan was due, unless the court, for cause, approves a longer period, but the court may not approve a period that expires after five years after such time.”
Judge Brown dovetails §1329(c) with §1325(b)(1)(B), which provides that “all of the debtor’s projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan.” Again, §1326(a)(1) specifies that the first payment is due 30 days after the order for relief or filing of a plan, whichever is earlier.
Judge Brown concludes that, despite clear guidance in the Code as to when the plan commences, §§ 1326(a)(1), 1329(c), and 1325(b)(1)(B) provide waypoints to ultimately decides that the plan starts when the first payment is due under §1326(a)(1).
I tend to agree with Judge Brown’s analysis over the Fourth Circuit’s. First, I am not confident in the Fourth Circuit’s analysis. I don’t think §1329(c) provides the direction the court says it does. I also think that the Fourth Circuit’s decision could lead to filers gaming the system to extend their plans beyond 60 months, which could be detrimental to both the filer (by leading to them paying more to their creditors than necessary) and to creditors (by precluding them from exercising their legal rights while the automatic stay is in place).
Chapter 13 bankruptcy is complex and requires a thorough knowledge of the confirmation process and all of the required elements of the plan and discharge requirements. If you are thinking about bankruptcy, we hope you’ll schedule a free consultation (here) with an experienced Colorado bankruptcy attorney. We’ll let you know if we think bankruptcy is a good option, which chapter would be best for you, and how to take advantage of the process to eliminate as much debt as possible while also keeping your assets intact.