STEP UP IN CHAPTER 13 PLAN PAYMENTS AFTER PLAN CONFIRMATION

Once the Chapter 13 plan payment is confirmed, the amount is fixed in stone, right? For example, if the court confirms your chapter 13 plan payment at $300 monthly for 60 months, then the payment amount stays at $300 for five years. Is this a correct statement? Yes and No. Normally, the plan payment remains the same once the plan is confirmed. But there are actually situations where the plan payment may go up despite a confirmed plan. Chapter 13 trustees like to “step up” plan payments once car payments are done by “interlineating” the step up payment into the plan with the consent of debtor at the confirmation hearing. Debtors are caught between a rock and a hard place when this happens. The trustee tells the court that debtor’s car payment of $280 ends after 24 months into the plan. So, trustee proposes that plan payment of $300 will “step up” to $580 on the 25th month. Further, trustee tells the court that debtor’s second car payment of $500 ends after 36 months into the plan, so trustee proposes that the plan payment which started at $300 which became $580 on the 25th month will become $1,080 from month 37 to month 60. The judge then turns to debtor counsel to ask whether counsel agrees to what the trustee has proposed.

As debtor counsel, you cannot really disagree with trustee’s proposal because the fact is once a car payment ends, disposable income will be created. The same kind of problem arises when a loan modification becomes permanent resulting in reduced mortgage payments after the plan is confirmed. Prior to plan confirmation, a debtor going through the loan modification process may face an objection from trustee who may refuse to recommend plan confirmation because the plan is “speculative” because the loan modification is not yet permanent. This is a valid argument because if the loan modification does not become permanent, then in most cases, there may be a large amount of default that needs to be cured through the plan. Thus, secured creditor may file a proof of claim for a substantial amount of default after the plan is confirmed which will derail debtor’s bankruptcy. On the other hand, a permanent loan modification that reduces the mortgage will create disposable income just like the ending of a car payment. Once there is disposable income, the trustee is responsible to creditors to get that disposable income. Hence, the “step up” problem presents itself anew.

But what about the ending of repayments of loans from debtor’s 401(k) retirement accounts? Trustee will naturally argue for “step up” payments on the plan because a 401(k) loan repayment is actually debtor paying himself back for a loan from himself. Did debtor not just pay himself back at the expense of his creditors? These are valid arguments because instead of paying his creditors, debtor actually gave himself priority and paid himself back. Money that could have been paid to his creditor went to pay back the debtor himself. This seems to be unfair on its face.

In Re Egan, a recent Pennsylvania case, the Chapter 13 debtors had current monthly income of $8,455.76 and disposable income of $514.07. The debtors’ proposed plan called for monthly payments of $514.07 for 60 months. Debtors had total unsecured claims of $83,135. Thus, debtors proposed to pay about $30,000 out of $83,000 unsecured debt or about 37%. Debtors attempted to avoid filing for bankruptcy by taking out three loans from their 401(k). All three loans were to be repaid during the life of the plan. But they intended to increase their 401(k) contributions when the loan repayments ended. So, the trustee said “Whoa, you can’t do that, not in my part of the woods!” Naturally, trustee asked for “step up” payments on the plan instead of allowing debtors to resume 401(k) contributions after loan repayments ended.

Surprise! The court sided with debtors and allowed debtors to resume 401(k) contributions instead of increasing plan payments.