Ch. 13 Debtors’ Changes to Model Plan Violate Bankruptcy Code

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By Diane Davis

Oct. 3 — Changes that five California debtors made to their Chapter 13 bankruptcy Model Plans violate the Bankruptcy Code and are inconsistent with the rest of the Northern District of California, a bankruptcy court in California held Sept. 26 ( In re Escarcega , 2016 BL 316799, Bankr. N.D. Cal., No. 16-50368 SLJ, 9/26/16 ).

Judges M. Elaine Hammond and Stephen L. Johnson of the U.S. Bankruptcy Court for the Northern District of California concluded that the debtors can’t “foreclose creditors’ and the Trustee’s rights to object by failing to move for modification when necessary.”

Five different debtors made changes to the Model Plans that authorized debtors to pay off their plans and obtain a discharge at any time after confirmation without having to go through the modification process and without having to pay allowed unsecured claims in full.

Chapter 13 bankruptcy allows individuals receiving regular income to obtain debt relief while retaining their property, but to do so, the debtor must propose a plan that uses future income to repay all or a portion of his debts over a three to five year period.

There has been a long-standing practice in the San Jose Division, the court said, where bankruptcy cases have been confirmed without a defined term, that allows no possibility of distribution on allowed claims of general unsecured creditors, and that permits debtors to obtain a discharge before the end of the estimated term without a court order.

The debtors argued that because there was no objection by the trustee or creditors, no minimum plan length is required. Debtors doon’t challenge the court’s formulation of the Model Plan, but they argue that it is a de facto local rule that is inconsistent and must be invalidated.

Specifically, the debtors have added language to the Model Plans that prohibit the trustee from distributing excess funds. Under the San Jose form plan, any additional funds received above the stated percent or amount were returned to debtors unless the trustee obtained an order modifying the plan authorizing distribution of the funds. The debtors wanted to perpetuate this practice.

The Model Plan “substantively abridges the Debtor’s rights” by requiring a debtor “to make payments to general unsecured creditors in excess of the amounts required by the Bankruptcy Code” when the debtor is entitled to ""propose a zero dollar dividend plan,” the court said. According to the debtors, if a plan proposed a zero dollar dividend, there is no further reason for the creditor to be interested in the plan, unless the creditor has specific knowledge about the finances of the debtor that causes the creditor to question it, the court said.

The proper way to handle these issues, the court said, is modify the Chapter 13 plan using Bankruptcy Code Section 1329. “Debtors attempt to construct a plan that authorizes modifications without notice to parties in interest,” eliminates creditor’s rights to object to the modification and “flouts Section 1329,” the court said. The Bankruptcy Code anticipates that a plan may need to be modified, the court said.

Each and every Chapter 13 plan will have a “stated length and any substantive variation from that length wil require a motion to modify,” the court concluded.

Norma L. Hammes, Law Offices of Gold and Hammes, San Jose, Calif., represented debtor Dennis Michael Escarcega (No. 16-50368); debtor Nanette Marie Sisk (No. 16-50548); and debtor Mark Irvin Candalla (No. 16-50659). James S.K. Shulman, Law Offices of James Shulman, San Jose, Calif., represented Eugene Edward Vick, Debtor (No. 16-50401); and debtor Jeri Lyle Saldua Mercado (No. 16-50651).

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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