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Consumer Bankruptcy Law and Practice: 12.4.4 Payments Directly to Creditors

Another type of provision that may be a classification is the designation of certain claims to be paid “outside the plan.” What this means is that the debtor will make payments on these claims directly to the creditor, instead of through the trustee. Such provisions may offer a number of advantages. They usually save the debtor from paying the trustee’s fees and costs of up to ten percent on such debts, a factor that may be important in cases in which the payments on one debt, such as a home mortgage, are particularly large.

Consumer Bankruptcy Law and Practice: 12.4.6 Practical Considerations

It is generally in the debtor’s interest to classify some claims. Large secured claims may be paid directly to the creditors to avoid considerable trustee expenses. Also it is usually advantageous to pay other secured claims, when liens cannot be avoided and the claims are not dischargeable in chapter 13 or chapter 7, especially those that are priority claims, before general unsecured claims.

Consumer Bankruptcy Law and Practice: 12.5 Feasibility of the Plan

In drafting a plan, a consumer debtor’s counsel must also be aware of section 1325(a)(6). This subsection requires that “the debtor will be able to make all payments under the plan and to comply with the plan.” If the plan does not meet this standard, sometimes called the “feasibility” test, confirmation may be denied.

Consumer Bankruptcy Law and Practice: 11.5.4 Secured Creditors Who Refuse to Agree to Continued Installment Payments

The secured creditor who refuses installment payments may also present a problem to the chapter 7 debtor who is current on payments for a secured debt such as an automobile loan or a mortgage. Secured creditors whom the debtor does not propose to affect in the bankruptcy will often simply continue to accept payments and not attempt to enforce their security interests as long as payments are current. Occasionally, however, a creditor will try to foreclose on the basis of a contract clause that makes the bankruptcy itself a default on the obligation (an “ipso facto clause”).

Consumer Bankruptcy Law and Practice: 11.5.5 Uses in Practice

The right to redeem is used most often to reduce the amount payable on purchase money or possessory security interests in high value226 household goods such as appliances, and on both purchase-money and non-purchase money (or possessory) security interests in motor vehicles.

Consumer Bankruptcy Law and Practice: 11.6.1.1 Generally

Perhaps the greatest powers to affect the rights of secured creditors are found in the provisions of chapter 13. Bankruptcy Code section 1322 provides that the debtor’s plan may modify the rights of holders of most secured claims, other than some claims secured only by a security interest in real property that is the debtor’s principal residence. In addition, section 1322(b)(3) and (b)(5) provide that as to any claim, including a claim secured only by the debtor’s principal residence, the plan may provide for the curing of a default over a reasonable period of time.

Consumer Bankruptcy Law and Practice: 11.6.1.2.2.1 Overview

The limitation in section 1322(b)(2), while important, is not as broad as it first appears. In addition to the general exception to the anti-modification provision for curing defaults on long-term debts discussed later in this chapter, there are a number of other exceptions based on the type of security interest involved, such as the following:

Consumer Bankruptcy Law and Practice: 12.6.1 Payment of Debtor’s Income Directly to Trustee

Section 1325(c) provides that, after confirmation,379 the court may order any entity from whom the debtor receives income to pay all or part of that income directly to the trustee. Such an order, known as a “wage order,” is often sought by attorneys representing debtors (with their clients’ concurrence) to ensure that they receive their own fees, which are priority administrative expenses, and to maximize the chance that payments will be made.

Consumer Bankruptcy Law and Practice: 12.6.3 Length of Plan

Although it contains provisions that set maximum limits on the length of plans, chapter 13 contains no minimum time period.402 A plan may not exceed three years in length, unless 1) the current monthly income of the debtor and the debtor’s spouse combined exceeds the applicable state median income or 2) the court specifically finds that there is good cause for a longer plan.

Consumer Bankruptcy Law and Practice: 12.6.4 Adjustments in Trustee’s Charges

A possible alternative to making large payments outside the plan is to request an adjustment in the percentage charged by the trustee for expenses and compensation. The justification for this would be that with respect to such large payments, the commission would be unduly large in proportion to the expense and work involved.

Consumer Bankruptcy Law and Practice: 12.6.5 Liquidation of Property in Chapter 13

Occasionally, nonbankruptcy law may prevent a debtor from selling property to realize exempt equity or to pay creditors. This may occur, for example, if only one of two cotenants by the entirety wishes to sell property that can be conveyed only by both spouses under state law. Or it may be that a sale of real estate is impossible to complete in time to prevent an imminent foreclosure.

Consumer Bankruptcy Law and Practice: 12.6.6 Refinancing a Property During a Chapter 13 Case

In times of low mortgage interest rates, even a bankruptcy debtor may be able to refinance their mortgage at a lower rate than the existing mortgage. In past years of loose credit, if a debtor could show a good payment history in a chapter 13 plan of at least a year’s duration, the debtor could qualify for a mortgage refinancing at relatively reasonable rates. Such a refinancing may be preferable to continuing to make payments under the chapter 13 plan, especially if the refinancing would lower the debtor’s monthly payments.

Consumer Bankruptcy Law and Practice: 12.8.2.1 Generally

As mentioned above, parties with interests in property have a right to adequate protection if the property is used, as provided under section 363(e). “On request,” the court may prohibit or condition the use of a home or a car, for example, by requiring fire or collision insurance to protect a secured party against damage resulting from use.

Consumer Bankruptcy Law and Practice: 12.8.2.2.1 When payments are required

With respect to allowed claims secured by purchase money security interests in personal property, as well as personal property leases, the Code sets forth special requirements for adequate protection. Section 1326(a)(1)(C) requires a chapter 13 debtor to make adequate protection payments directly to a creditor holding an allowed claim secured by personal property to the extent it is “attributable to the purchase of such property by the debtor for that portion of the obligation that becomes due after the order for relief.”

Consumer Bankruptcy Law and Practice: 11.6.1.2.2.4 Mortgages with additional security

The limitation on modification in section 1322(b)(2) also does not apply if the creditor has other security besides the mortgage.271 Many claims secured by real estate are also secured by household goods,272 or at least the possible refund of proceeds from credit insurance.273 Even in first mortgages, there are sometimes clauses giving creditors security interests in appliances or other property.274 I

Consumer Bankruptcy Law and Practice: 11.6.1.3.3.1 Lien retention and present value of payments—the chapter 13 cramdown

The most complicated provision is the second, which deals with retention of the property when the creditor does not consent to the plan. To meet this standard, the plan must specifically provide that the creditor retains a lien, that is, that the creditor will continue to have priority rights to the property subject to the lien.316 However, some of the rights usually associated with the lien are necessarily limited by chapter 13, such as the right to repossess.

Consumer Bankruptcy Law and Practice: 12.8.2.2.3 Remedy for failure to make payments

The remedy for failure to make adequate protection payments is likely to be relief from the automatic stay, the same remedy existing under prior law for failure to provide adequate protection. The main difference is that prior law in effect placed the burden on the creditor to demand adequate protection, usually by filing a motion. But a creditor will still have to file a motion for relief from the stay if adequate protection payments have not been provided, and the court may well allow a debtor to cure such a default in payments.