The Chapter 13 Trustee almost snarled from the counsel table at last week’s hearings.
Counsel’s “fix”, she told the court, put the debtor instantly in default.
Huh? The amended plan was supposed to correct the previous defect in the filed plan. What’s the problem? Counsel certainly was befuddled.
There were several such cases, and whatever dollars and cents problem in the plan the amendment was addressing, counsel in each case didn’t deal with the payments already made to the previous plan.
The problem
Most simply, assume that the plan provided payments of $200/month for 60 months. The trustee’s objection points out that the plan pot, at $200/month, is $3000 short of paying all the creditors provided for in the plan.
By the time the amended plan is filed, the debtor has made four payments to the plan. But counsel’s amended plan reads: $250/month for 60 months.
The math is correct: Sixty times $250 produces a plan pot of $15,000.
But the debtor’s first four payments were only $200, because that’s what the defective plan provided.
Bingo: instant default, unless the debtor ponies up an extra $200 ($50 a month times four payments already made). The payments already made did not match the terms of the amended plan.
The fix
To get the money right and avoid an instant default, the amended plan needed to read:
4 payments of $200 (validating what’s already happened)
56 payments of $253.57
I always round plan payments up to the nearest five dollars, since I’m never absolutely certain that claims will come in just as I expected, nor that the trustee’s percentage commission might not change during the life of the plan. Plus, I want a number my client won’t have trouble remembering (client memory is another story for another day).
So, the moral of this tale is: recognize that you can’t change the past when you amend a Chapter 13 plan to provide more money.
For those of you who followed the flap about my day in Chapter 13 confirmation hearings populated with professional bumblers, this piece emanates from a different court altogether. And these attorneys who didn’t get it right only had to go back and do it again. Egg on the face, but no lasting harm to the clients.
If you are within driving range of Mountain View, I’m presenting a bankruptcy basics class on Chapter 13 plans April 14. Details on Crafting Chapter 13 Plans.
Image courtesy of soldierant.
Cathy, it always surprises me when bankruptcy attorneys do this – seems sloppy, not thought through (or perhaps a non-attorney did it for them).
As I am sure you are aware, some districts are addressing this (as well as many other issues) by adopting Model Plans which have very specific language regarding amended plans so that this type of occurrence doesn’t happen as much. The Eastern District of PA where I practice has a Model Plan as such which I can voluntarily use (and I do-why not make the Chapter 13 Trustees happy!?!), and the Middle District of PA makes it mandatory to use the Model Plan.
Perhaps an attorney who cannot figure out what language to use in this type of situation (or is just having a brain freeze when it comes to drafting at that particular moment) can go to the Model Plan on the website for the Middle District of PA under local forms and look at how it deals with this issue.
Kim Coleman
Philadelphia Bankruptcy Attorney
http://www.colemankempinski.com
I’ll take a look. We have a model plan, a different one for each division or trustee as it turns out, but it provides no guidance on this issue.
Cathy
Here is the URL to the Model Plan for the Eastern District of PA: http://www.ramapo.com/ModelPlan121511.pdf
It is better delineated than the Middle District of PA’s Model Plan.
I have done what you think is so terrible a number times because the client tells me he or she wants to keep the payment as low as possible without extending plan and will pay the difference immediately. This is one of those few areas where I follow the client’s desires strictly. I do demand that the client bring the additional payment in a money order when he or she comes to sign the amended plan and it is put in an envelope and mailed from my office to the trustee. Of all the alternatives this is the simplest if the client wants to keep the payment down and as long as the additional payment is made when the amended plan is filed there no issue with being in technical default a few days. If you are concerned about bein in default briefly you can even mail the payment, wait a week and then file the amended plan.
I don’t for a moment think it is “so terrible” if you do it deliberately and the client is prepared to immediately pay the deficiency.
What I observed were attorneys who amended the payment schedule across the board without thought or awareness that, *absent that catch up payment*, the debtor was in default.
This
is something even I have witnessed. The attorney is so much focused on what
should be the next calculated payments that they completely miss out the past
payment differences.