Trustee’s objection overruled

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Chapter 13 debtors have a new means of holding on to their homes, under a recent decision by Bankruptcy Judge Margaret Dee McGarity. But only if the creditor agrees to it.

Darrin J. Schultz filed a Chapter 13 petition, after foreclosure was commenced on his home, but before confirmation of the sheriff’s sale. More than $78,000 was required to pay off the mortgage.

Schultz’ plan provided for monthly payments of $533 of principal and interest on the loan, with the unpaid balance to be paid with a balloon payment at the end of 60 months by refinancing — roughly $71,000.

The creditor did not object, but the trustee did, arguing that the plan did not comply with the equal payment requirement of 11 U.S.C. 1325(a)(5)(B)(iii)(I), recently enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

The statute provides that the holder of a secured claim may retain the lien, if for each secured claim, the holder receives full value, and the property to be distributed to it is in the form of periodic payments in “equal monthly amounts.”

The court agreed with the trustee that equal monthly payments, followed by a balloon payment, are not “equal,” and thus, the plan does not comply with the requirement.

A number of bankruptcy courts have considered the issue since the bankruptcy act was passed, with most concluding that monthly payments, followed by a balloon payment, are not “equal monthly payments.”

Schultz argued that the statute is inapplicable, if the entire debt is paid in full.

But Judge McGarity disagreed and joined the majority approach, stating, “This court holds that periodic payments must be equal, period,” regardless of whether the default is cured and only current payments and the arrearage are paid off pursuant to the plan, or whether a long-term debt is paid in full.

Other Options

The court noted that Schultz had another option available, specifically that approved in In re Westcott, 309 B.R. 308 (Bankr. E.D. Wis. 2004) — reinstating payments under the original debt, paying off the arrearage, curing the default, and then refinancing in month 61, after completion of the plan.

The court acknowledged that the plan actually proposed by Schultz is more favorable to the creditor than the one approved in Westcott, speculating, “The merits of the proposal may indeed be the reason the creditor did not object to its treatment under this plan.”

Nevertheless, because the plan did not provide for equal payments during its duration, the court held that it does not fit within the requirements of subsec. 1325(a)(5)(B).

No Creditor Objection

However, the court sua sponte considered another issue — whether the plan can be confirmed, nevertheless, because the creditor made no objection, and concluded that it could.

Subsection 1325(a)(5) is written in the disjunctive, so that its requirements are met in one of three possible ways. Subsec. 1325(a)(5)(B) is only one of those ways.

Subsec. 1325(a)(5)(A) provides for approval of a plan if “the holder of such claim has accepted the plan.”

Interpreting the creditor’s failure to object to the plan as acceptance, the court held that subsec. (a)(5) was satisfied, even if subsec. (a)(5)(B) was not, overruled the trustee’s objection, and confirmed the plan as proposed.

As a result, debtors in future cases can provide for monthly payments, with a balloon payment in the final month, provided that the lender does not object. Otherwise, the debtor will have to establish a plan in accord with Westcott, with refinancing and final payment after the plan is completed.

David Ziemer can be reached by email.