Opinion
No. 00-82795.
November 29, 2000.
OPINION
This matter comes before the Court upon the objection of the Standing Chapter 13 Trustee, Richard Bowers, (TRUSTEE), to confirmation of the Chapter 13 plan filed by Shannon Kay Hart ("HART" or the "DEBTOR") on August 31, 2000. The proposed length of the plan is sixty months. The sole basis for the TRUSTEE'S objection is that cause does not exist to extend the plan for a period longer than three years pursuant to 11 U.S.C. § 1322(d). The DEBTOR filed a memorandum in support of confirmation of the Chapter 13 plan and the Court took the matter under advisement.
This plan challenges the long-standing policy of this Court's predecessor, of requiring, as a condition of confirmation, that Chapter 13 plans in excess of thirty-six months pay at least a 70% dividend to unsecured creditors. Based upon this Court's interpretation of § 1322(d) of the Bankruptcy Code, it believes that a valid purpose is served by the established procedure and that Chapter 13 Standing Trustees should continue to object to plans that provide for a term longer than three years with less than a 70% dividend to unsecured creditors. If the proponent of such a plan wishes to seek confirmation over the Trustee's objection, this Court will consider confirmation on a case-by-case basis.
This is a core proceeding, over which this Court has jurisdiction under 28 U.S.C. § 157 (b)(2)(L) and 1334. Upon consideration of the pleadings, the record, and the DEBTOR'S memorandum, the Court makes the following findings of fact and conclusions of law.
FINDINGS OF FACT
The DEBTOR is a single mother of two minor children, ages eight and two. She receives no child support. She is employed as a cashier and earns $1,802 per month in gross wages. Her net monthly take home pay is $1,554. The DEBTOR'S monthly living expenses are $1,314. Her monthly disposable income (net take home pay less expenses) is $240.
The DEBTOR rents an apartment and does not own a home. She scheduled secured claims of $12,453 and unsecured claims of $8,874. She scheduled no priority claims. She scheduled assets of $10,420 consisting primarily of household goods and clothing, several small account balances and a 1998 Chevy Cavalier valued at $8,850. Deere Harvester Credit Union (DEERE) holds a security interest in the Cavalier and filed a proof of claim on September 15, 2000, alleging a secured claim amount of $10,338. The DEBTOR has no nonexempt equity in her property and unsecured creditors would receive nothing if the estate of the DEBTOR were liquidated under Chapter 7 of Title 11 of the United States Code.
In her plan, the DEBTOR proposes to pay the TRUSTEE $240 per month. The plan directs the TRUSTEE to pay three small secured claims totaling $800 as well as the secured claim of DEERE in the amount of $8,850 (the scheduled value of the Cavalier) plus interest of $1,917.
The aggregate amount of the payments over the sixty-month term of the plan is $14,400. The Chapter 13 TRUSTEE will be paid $1,440 based upon his statutory 10% commission. The DEBTOR'S attorney's fees of $1,000 will also be paid out of the plan payments. After deducting the TRUSTEE'S fees and the attorney's fees, the sum of $11,960 is available for distribution to creditors. DEERE will receive $10,767 or 90% of the total plan payments. Of the remaining $1,193, the sum of $800 will be distributed to the other three secured creditors. The small remaining balance of $393 will then be paid to unsecured creditors resulting in a dividend of approximately 3.2% based on scheduled unsecured claims. Since unsecured creditors are paid last, they will not receive a distribution until the fifty-eighth month of the plan.
CONCLUSIONS OF LAW
The DEBTOR contends that an extension of the plan to sixty months is necessary to provide for full payment of DEERE'S secured claim, thereby allowing the DEBTOR to "save her car." Because her disposable income is small, she is unable to pay her secured creditors in full within thirty-six months. Section 1322(d) of the Bankruptcy Code provides as follows:
The plan may not provide for payments over a period that is longer than three years, unless the court, for cause, approves a longer period, but the court may not approve a period that is longer than five years.
The Bankruptcy Code does not define "cause." By leaving the "for cause" provision undefined and unillustrated, Congress intended that the parameters for cause to extend a plan beyond three years would be developed by the courts on a case-by-case basis. In re Poff, 7 B.R. 15, 17 (Bkrtcy. S.D. Ohio 1980). This statutory provision should be interpreted in light of the policies behind Chapter 13 relief and the limitation on the length of Chapter 13 plans.
Bankruptcy Judge Leif M. Clark analyzed these policies in In re Baker, 129 B.R. 127 (Bkrtcy. W.D. Tex. 1991). Judge Clark observed that the language and structure of the statute lead to the conclusion that Congress intended that a three-year plan would be the rule, and that extended plans should only be permitted in exceptional circumstances. The statutory limits on the length of plans are intended to benefit debtors by prohibiting exceedingly long periods in bankruptcy that effectively constitute "involuntary servitude." There is also an element of creditor protection in the time limit as well since longer term plans are more prejudicial to creditors by virtue of the delay in receiving payments.
Judge Clark also recognized Congress' belief that the primary benefit of Chapter 13 relative to Chapter 7 is the expected improved return for unsecured creditors. Low percentage plans are not favored since if virtually all of a debtor's disposable income is being devoted to the payment of secured debts, Chapter 13 becomes little more than a court supervised system of reaffirmation of secured debt, with little attendant benefit to the intended beneficiaries of the Chapter, the unsecured creditors. Id. at 132.
Consistent with the foregoing policies, bankruptcy courts have naturally been reluctant to allow extended plans in the absence of exceptional circumstances. One such exception developed by the courts is to permit extended term plans where necessary to pay unsecured creditors a substantial dividend, usually at least 70%. In re Frank, 69 B.R. 129 (Bkrtcy. C.D. Ill. 1986); In re Canda, 33 B.R. 75 (Bkrtcy. D. Ore. 1983); In re Poff, 7 B.R. 15 (Bkrtcy. S.D. Ohio 1980); In re Levine, 10 B.R. 168 (Bkrtcy. D. Mass. 1981); In re Price, 20 B.R. 253 (Bkrtcy. W.D. Ky. 1981). Other courts have also confirmed extended plans where necessary to pay priority claims in full. In re Norris, 165 B.R. 515 (Bkrtcy. M.D. Fla. 1994).
As pointed out by the DEBTOR in her memorandum, a "save the home" exception to the three-year rule has been developed in this division of the Central District by Judge William V. Altenberger in two prior cases. In In re McMeekan, Case No. 96-82757 (Unpublished, January 30, 1997), the debtors' home was encumbered with two mortgages containing abnormal terms. Because the mortgages were extremely short-term, the debtors were required to pay both mortgages in full through the plan. The debtors did not have the option of curing the arrearage through the plan and paying the balance of the mortgages over an extended number of years. The court held that these unusual circumstances constituted cause for extending the plan to sixty months.
In In re Serres, Case No. 98-83386 (Unpublished, January 4, 1999), the debtor owned her residence free and clear and proposed a five-year plan in order to pay unsecured creditors an amount equal to the home's nonexempt value. The plan also proposed to pay in full a claim secured by the debtor's vehicle and would pay unsecured claims a dividend of approximately 35%. The court held that these circumstances constituted cause for extending the plan term to five years.
Judge Altenberger later narrowed the "save the home" exception in In re Smith, Case No. 99-82073 (Unpublished, October 5, 1999). The court found that the debtors' equity in their residential real estate, on a percentage of value basis, was no more than 8%. The court held that in order to confirm an extended plan designed to save their home, the debtors must have an equity interest equal to or greater than 10% of the value of the property. Since the debtors had less than 10% equity, the court denied confirmation of their proposed sixty-month plan.
The DEBTOR suggests that since shelter and transportation are both basic needs, this Court should view a five-year plan necessary to pay for an automobile the same as a five-year plan that is necessary to save the home. The Bankruptcy Code, however, does not support the DEBTOR'S analogy. The Code contains special provisions that are intended to facilitate the ability of Chapter 13 debtors to save their homes. Section 1322(c)(1) permits a debtor to cure a default on a loan secured by a mortgage on his principal residence until the residence is sold at a foreclosure sale. Section 1322(c)(2) permits a debtor to pay a mortgage balance over the life of the Chapter 13 plan even where the mortgage comes due within the term of the plan. There are no comparable special Code provisions designed to facilitate the debtor's retention of an automobile.
In this case, the DEBTOR is proposing to use virtually all of her disposable income for sixty months to pay for her vehicle, three small claims secured by household goods, plus a minimal distribution to unsecured creditors. The DEBTOR is not paying any priority claims. The plan will not pay a substantial dividend to unsecured creditors. Nor is the extended plan necessary to save her home.
The DEBTOR has not cited any example of a court approving a sixty-month plan where the sole or predominant reason for the extended term is to pay for a vehicle. This Court is not aware of any such opinions. Unlike the "save the home" cases that are reflective of a Congressional policy to facilitate home retention, this Court is not inclined to carve out a new, blanket exception for "save the car" cases.
Under these circumstances, where the DEBTOR is proposing to use virtually all of her disposable income for five years to pay off her car loan, with a de minimus distribution to unsecured creditors, this Court concludes that the DEBTOR has not established cause under § 1322(d) for an extended term plan. Confirmation of the proposed plan will be denied and the DEBTOR will be given 14 days in which to convert to Chapter 7, dismiss her Chapter 13 case, or alternatively, file an amended Chapter 13 plan that is not inconsistent with this Opinion.
ORDER
For the reasons set forth in an Opinion entered this day, IT IS HEREBY ORDERED that the objection of the TRUSTEE to confirmation is hereby sustained and confirmation of the DEBTOR'S Chapter 13 plan is DENIED. It is further ordered that the DEBTOR shall have fourteen (14) days from the date of this Order to file an amended plan or a motion to convert to Chapter 7. If the DEBTOR fails to file an amended plan or a motion to convert within that time, this case will be DISMISSED.