Means Test in chapter 13 and interest to unsecured creditors
Summary: The 2005 Bankruptcy Abuse and Consumer Protection Act added a new budget test, called the means test, to determine whether debtors can file chapter 7, and if they file chapter 13, how much needs to be paid to unsecured creditors. One ancillary issue arising from this test is whether interest needs to be paid to unsecured creditors when debtors are paying unsecured creditors in full during the plan but not paying the full amount shown as available in the means test. Courts give conflicting answers on this. One recent decision ruled no interest is required.
A not uncommon issue in chapter 13 cases is what happens when debtors are paying 100% to unsecured creditors but are not committing all their disposable income to the plan in the process. The chapter 13 trustee's often object, requesting that interest be paid to the unsecured creditors when debtors do not commit all disposable income to the plan. A bankruptcy court in Indiana had the opportunity to rule on this issue in IN RE: GEORGE M. McKINNEY & EUGENIA L. McKINNEY, Debtors., No. 18-70417-BHL-13, 2018 WL 4378655 (Bankr. S.D. Ind. Sept. 13, 2018).
The means test showed debtors with a $1,369.31/month disposable income, which would require up to $82,158.60 over the 60 month plan. However, only $17,116.96 in unsecured claims filed timely. The plan proposed to pay $850/month over the life of the plan, sufficient to pay unsecured claims in full, but did not propose to pay interest on such claims. The trustee argued that §1325(b)(1) requires debtors to either pay all their projected disposable income into the plan, or to pay the present value of all unsecured claims, which would include the payment of interest. The debtors counter that they are only to pay unsecured claims in full as of the effective date of the plan, citing the same statute. Section 1325 reads
(b)(1) If the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan—
(A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or
(B) the plan 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.
The bankruptcy court notes that courts and treatises appear to be equally divided on the issue, noting numerous cases both requiring interest: In re Rhein, 73 B.R. 285 (Bankr. E.D. Mich. 1987); In re Parke, 369 B.R. 205 (Bankr. M.D. Pa. 2007); In re Hight-Goodspeed,486 B.R. 462 (Bankr. N.D. Ind. 2012); In re Deluna, 2012 WL 4679170 (Bankr. W.D. Tex.); In re Braswell, 2013 WL 3270752 (Bankr. D. Or.); In re McKenzie, 516 B.R. 661 (Bankr. M.D. Ga. 2014); In re Sampson-Pack, 2014 WL 1320371 (Bankr. D. Md); In re Barnes, 528 B.R. 501 (Bankr. S.D. Ga. 2015); In re Cheatham, 2017 WL 5614910 (Bankr.M.D. Fla.); and see, 3 Norton Bankruptcy Law and Practice, § 75.10 and not requiring interest ,In re Eaton, 130 B.R. 74 (Bankr. S.D. Iowa 1991); In re Ross, 375 B.R. 437 (Bankr. N.D. Ill. 2007); In re Stewart-Harrel, 443 B.R. 219 (Bankr. N.D. Ga. 2011); In re Richall, 470 B.R. 245 (Bankr. D.N.H. 2012); In re Coay, 2012 WL 2319100 (Bankr.D.C. Ill.); In re Edward, 560 B.R. 797 (Bankr. W.D.Wa. 2016); In re Gillen, 568 B.R. 74 (Bankr. C.D.Ill. 2017); In re Eubanks, 581 B.R. 583 (Bankr.S.D.Ill. 2018); and see, 5 Colliers on Bankruptcy, § 1325.06(3)(B).
The issue revolves around interpretation of the phrase 'as of the effective date of the plan.' Normally the code uses the phrase in the term 'the value, as of the effective date of the plan, of property to be distributed... (e.g. 11 U.S.C. §§1129(a)(7), 1225(a)(4), 1325(a)(4), etc). This language is uniformly interpreted to require a present value analysis of the proposed payments. However, when the phrase 'as of the effective date of the plan' is moved it arguably reflects an intentional legislative distinction, reflecting the different justifications for paying interest. Unlike secured creditors, or even unsecured creditors in a solvent chapter 7 estate, unsecured creditors in a chapter 13 have no right to immediate payment in full at the front end of the case. Given the lack of a forced deferral of a pre-existing payment right, there is no entitlement to interest.1 Indeed, placement of the phrase 'as of the effective date of the plan' outside of §1325(b)(1)(A) may have been to prevent courts from misconstruing such section as requiring a present value requirement. The only interpretation of such placement as applied to both subsections (A) and (B) is that the date as of which the court is to determine whether either (A) or (B) is applicable and satisfies the trustee's objection. The contrary interpretation would lead to the anomalous result of paying interest to general unsecured claims even though §1322(a)(2) allows for deferred payment of priority claims without interest.
Based on this analysis the court overruled the trustee's objection and allowed confirmation of the 100% plan without interest to unsecured creditors.
Per debtor's attorney, trustee plans to appeal.
Michael Barnett hillsboroughbankruptcy.com
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