Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Diane Davis
May 31 — The Bankruptcy Code doesn't require a Chapter 13 debtor who isn't “engaged in business” to obtain court approval to obtain post-petition credit to purchase a vehicle after his car was wrecked, a bankruptcy court in Minnesota held May 27 ( In re Fields, 2016 BL 170873, Bankr. D. Minn., No. 4:14-bk-40969, 5/27/16 ).
Judge Michael E. Ridgway of the U.S. Bankruptcy Court for the District of Minnesota denied the debtors' motion to incur debt and obtain credit because court approval isn't necessary in these circumstances.
Congress provided a way to deal with changes in a debtor's post-confirmation circumstances in Bankruptcy Code Section 1329, the court said, and, thus, the debtors didn't need court approval to incur new debt. The debtors will need to seek modification of their original Chapter 13 plan, the court said.
Debtors Arthur and Kristen Fields filed a Chapter 13 bankruptcy petition, which allows individuals receiving regular income to obtain debt relief while retaining their property, but the debtor must propose a plan that uses future income to repay a portion of his debts over a three to five year period.
After their Chapter 13 plan was confirmed, the debtors' circumstances changed with a job loss, a move to Los Angeles to find work, and the loss of their car due to a wreck.
The debtors requested and received from Chapter 13 trustee Gregory A. Burrell a standard letter indicating that the trustee had no objection for them to obtain an auto loan as long as it wouldn't affect the liability of the debtors to make plan payments. The debtors informed the trustee of a car dealership who required in addition to the standard no objection letter, a “Letter to Incur Debt” detailing whether “specific loan terms on the purchase of a vehicle were agreeable to the trustee.”
The trustee, however, wouldn't deviate from his standard letter. The debtors then asked the bankruptcy court for authorization to incur debt and obtain credit.
The court first looked to the plain language of the Bankruptcy Code. Under Section 1304(a), debtors who are “engaged in business” may require court authorization, the court said. “A debtor that is self-employed and incurs trade credit in the production of income from such employment is engaged in business,” according to Section 1304(a).
Extending this provision to the debtors who aren't “engaged in business” would make Section 1304 “superfluous,” the court said. Thus, the court determined that there was a lack of congressional intent requiring court authorization to debtors not engaged in business.
A bankruptcy court in the Northern District of Texas found that court approval was required whenever a “significant post-petition debt is incurred by a debtor, ‘if for no other reason than because of the possible impact on the debtor's plan and the debtor's prospect for rehabilitation,'” the court said, citing In re Ward, 546 B.R. 667 (Bankr. N.D. Tex. 2016).
Although In re Ward detailed a “careful and comprehensive analysis,” the court chose to place more weight on Section 1305's “structural placement” in the Bankruptcy Code. Under Section 1305(c), a “claim for post-petition ‘necessary debt' shall be disallowed if the holder of such claim knew or should have known that prior approval by the trustee of the debtor's incurring the obligation was practicable and was not obtained,” the court said.
Section 1322(b)(6) allows a Chapter 13 plan to provide for the payment of a post-petition claim, the court said, and a debtor can seek the court's “blessing” through the interaction of Sections 1329 and 1325. Section 1329, the court said, contemplates a modification of the original plan, and is available to deal with any post-petition claims, the court concluded. This is the mechanism that Congress has provided to deal with a change in the debtors' circumstances post-confirmation, the court said.
Michael G. Davey of Davey Law PLLC, St. Paul, Minn., represented debtors Arthur Duane Fields and Kristen Lee Fields; Chapter 13 Trustee Gregory A. Burrell of Minneapolis, Minn., represented himself.
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