Missing Plan Deadline Doesn't Doom Bankruptcy Case

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By Stephanie Cumings

Sept. 2 — If your Chapter 13 bankruptcy plan takes longer than the standard 60 months to complete, some judges will be more forgiving than others.

Judge Arthur J. Schwab took the more lenient stance, finding that if a debtor takes a little longer than 60 months to complete her plan due to unforeseen circumstances, her case doesn't have to be dismissed outright. But Schwab acknowledged that some bankruptcy courts have adopted a tougher approach, holding that the Bankruptcy Code clearly states a Chapter 13 plan can't run for longer than 60 months.

$1,000 Shortfall

The debtors in this case were about $1,000 short of completing their Chapter 13 plan when the 60-month plan period elapsed. Chapter 13 bankruptcy allows individuals receiving regular income to obtain debt relief while retaining their property. To do so, the debtor must propose a plan that uses future income to repay a portion of his debts over a three to five year period.

Due to the shortfall, the bankruptcy trustee moved to dismiss the case, but indicated she would withdraw the motion as long as the debtors paid the delinquent funds. The debtors did eventually turn over the money and the motion to dismiss was withdrawn.

Dismissal Required?

But one of the creditors still wanted the case dismissed. Elizabeth Shovlin argued that Section 1322 of the Bankruptcy Code specifically limits a plan to no more than 60 months. Shovlin claimed that because the missing money had been paid after the 60-month mark, the case must be dismissed.

The bankruptcy court disagreed and declined to dismiss the case.

‘May' Not ‘Must' Dismiss

On appeal, the district court said that Sections 1322 and 1325 of the Bankruptcy Code both make it clear that a bankruptcy court can't confirm a plan that calls for more than a 60-month payment period. In this case, the court said, the debtors' plan did call for a 60-month repayment period, and so it was properly confirmed under both sections.

The court said that the appellant was “confus[ing] the plain meaning of Section 1322 and 1325 with the statute governing dismissal of a bankruptcy case — Section 1307.” Section 1307 says that a court “may” dismiss a case “for cause,” which includes “material default by the debtor with respect to a term of a confirmed plan.”

Although the shortfall in this case was considered a “material default,” the trustee said it is her “standard practice ... to move for dismissal when a material default arises, and to withdraw motions to dismiss when debtors have cured the precipitating default.”

Inconsistency Among Courts

“Notably, Section 1307, the Section of the Bankruptcy Code governing the criteria for dismissal, indicates that the [b]ankruptcy [c]ourt may dismiss a bankruptcy case for cause (such as a material default) when the [c]ourt deems it appropriate to so,” the court said. The court cited Marshall v. Henry (In re Henry), 2007 BL 182683, 368 B.R. 696 (N.D. Ill. 2007), in which the Illinois court held that “dismissal under § 1307 is a discretionary matter for the bankruptcy court,” and the bankruptcy court “was not required to dismiss [the debtor's] case simply because [the debtor's] plan would not complete until after 60 months had elapsed”.

But as the Henry court noted, “[b]ankruptcy courts have not come to a consistent conclusion as to whether § 1322(d) or § 1329(c) require dismissal of a Chapter 13 case for cause when a confirmed plan, due to circumstances unknown to the debtor prior to the plan's confirmation, requires more than 60 months to complete.”

For example, in In re Jackson, 189 B.R. 213 (Bankr. M.D. Ala. 1995), an Alabama bankruptcy court held that “[t]he language of the United States Bankruptcy Code is clear, no Chapter 13 Plan can run for more than five years.” However, the Jackson court did not discuss the criteria for dismissal under Section 1307.

No circuit courts have weighed in on this issue, according to research conducted by Bloomberg BNA.

Legislative History

The court in this case sided with Henry, and held that “[a]lthough Sections 1322 and 1325 prohibit a debtor and a [b]ankruptcy [c]ourt from knowingly proposing and confirming a plan that extends beyond five years (i.e., sixty months), these Sections of the Bankruptcy Code do not mandate dismissal of a bankruptcy case if a debtor needs a reasonable period of time to cure an unanticipated arrearage incurred during the sixty-month plan period.” The court agreed with Henry that the decision to dismiss under Section 1307 was a “matter of discretion” for the bankruptcy court.

“Moreover, the legislative history, as referenced by many of the parties to this case, indicates that Section 1322(d) which governs the [p]lan's duration, was created to protect the debtor” from becoming “a ‘wage slave,'” the court added. “Thus, it would be inconsistent to utilize Section 1322(d) in such as way so as to dismiss [d]ebtors' plan for relief after they made five years' worth of payments on their plan and cured their arrearage (an amount which was less than one-half of one of the sixty monthly payments) in a reasonable period of time which did not adversely affect any creditor.”

The appellant was represented by Aurelius P. Robleto of Robleto Law, PLLC, Pittsburgh.

The debtors were represented by Gary W. Short and Phillip S. Simon, both of Pittsburgh.

To contact the reporter on this story: Stephanie Cumings in Washington at sacree@bna.com

To contact the editor responsible for this story: Jay Horowitz at mailto:%20jhorowitz@bna.com

Full text at: http://www.bloomberglaw.com/public/document/Shovlin_v_Klaas_No_15cv0802_2015_BL_279606_WD_Pa_Aug_28_2015_Cour