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January 9, 2008

9th Cir BAP Rules on Chapter 13 "Early Discharge" Issue

Fridley v. Forsythe (In re Fridley),  ---- B.R. ----  (9th Cir. BAP  December, 2007)

Issue:  Can a debtor, at a given point into the chapter 13 plan, simply pay all of the forthcoming payments under the plan at once and receive a discharge immediately?                  

Holding:  Not without seeking a modification of the plan through a noticed motion and establishing good faith.      

Judge Paul Snyder, Washington
Klein, Montali, Jury
Opinion by Klein

These are under-median chapter 13 debtors.  “The plan confirmed in June 2006 provided for payments of $125 per month and, in paragraph 3.E.2, that the debtors would pay their projected disposable income of $0 for no less than the applicable commitment period of thirty-six months.”  The debtors’ income increased 45% that year but they did not report that to the trustee.  “In May 2007, during plan month fourteen, the debtors paid the trustee $2,900.  This prepayment brought the total paid to slightly more than the $4,500 required by the 36-month plan.”  “The debtors filed a motion for entry of discharge pursuant to § 1328(a),” which the trustee opposed.  The Bankruptcy Court denied the motion saying that the payments required under the plan were not “complete” and that a Sunahara type modification was required.  Furthermore, the “proposed early payoff” was not in good faith because of the increased income.   

The BAP affirmed.  “The narrow statutory question is whether the phrases ‘completion by the debtor of all payments under the plan’ and ‘completion of payments under [the] plan’ in §§ 1328(a) and 1329(a) include an implied temporal requirement that the chapter 13 plan remain in effect for the ‘applicable commitment period,’ as specified in the plan.”  Klein wrote, “The interplay of §§ 1328(a) and 1329(a) invites a race whenever a debtor’s income increases during the performance of a plan.  The debtor tries to reach § 1328(a) payment completion before a trustee or creditor forces a § 1329(a)(1) increase in plan payments by way of motion made between plan confirmation and completion of payments.”  Rule 3015(g) requires a noticed motion before a modification can be entered.  A modification requires “good faith.”  “[G]ood faith is to be assessed through the matrix of whether the plan proponent ‘acted equitably’ taking into account ‘all militating factors’ in a manner that equates with the ‘totality’ of circumstances.”  BAPCPA did not change any of this.  “After BAPCPA, the § 1325(b)(1) ‘applicable commitment period’ continues to operate as a temporal requirement.”  “Thus, part of the statutory bargain inherent in chapter 13 is that the debtors must, for the prescribed life of the plan, run the gauntlet of exposure to trustee or creditor requests to increase payments.”  “A debtor desiring to prepay a chapter 13 plan and obtain an early discharge without paying allowed unsecured claims in full must follow the § 1329 modification procedure prescribed by Rule 3015(g).”  “Since the debtors’ plan [here] would not pay all allowed unsecured claims in full and since they committed themselves to thirty-six months, their prepayment does not ‘complete’ their plan for purposes of §§ 1328(a) or 1329.”

January 9, 2008 in 9th Circuit Briefs | Permalink

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