This Memorandum Opinion addresses the feasibility and good faith of a Chapter 13 Plan of Reorganization filed on the even of foreclosure by a homeowner. The Mortgagee bank wanted to shut down the case and the Plan. The Court said “not so fast” and prepared a carefully crafted analysis of each objection filed by the bank.
Richard Olson filed four Chapter 13 Bankruptcy Petitions and Plans in a five year period- the last one on the eve of the foreclosure of his home. Ventures Trust 2013-I-H-R (“Mortgagee”), assignee of the Debtor’s original mortgage lender Bank of America, objected to confirmation of the latest Plan on the basis that it failed to comply with the confirmation requirements in 11 USC §§1325(a)(1), (a)(3), (a)(6) and (a)(7). Specifically, the Mortgagee alleged that there were inaccuracies in the Debtor’s schedules, that the Debtor had failed to correctly value certain obligations while not disclosing others at all, that the Plan was not “feasible,” and that both the case and the Plan had been filed in “bad faith.” In response, the Debtor amended his Bankruptcy Schedules to address some of the inaccuracies.
It is worth noting that the Plan under review in this case proposed curing mortgage defaults per §1322(a)(5) and reinstating monthly mortgage payments to the Mortgagee; as well as committing all the Debtor’s disposable income for the maximum commitment period of 60 months. General Unsecured Creditors are scheduled to receive not less than 2% of the face value of their claims.
The Court entered a Memorandum Opinion on the balance of the Mortgagee’s Objection before ruling on confirmation of the Plan.
A Plan of Reorganization shall be confirmed if the 9 requirements of 11 U.S.C. §1325 are met. The Mortgagee asserted that 4 of those 9 had not been met in the proposed Plan:
§1325(a)(1): Plan doesn’t comply with “other Bankruptcy law”
§1325(a)(6): Plan not feasible (pays priority obligations)
§1325(a)(3): Plan not proposed in “good faith” (not to delay)
§1325(a)(7): Bankruptcy Petition was not filed in “good faith”
The Court analyzed compliance with each of the 4 disputed conditions individually.
§1325(a)(1): Compliance with “other Bankruptcy law”
The Mortgagee first claimed that the proposed Plan did not comply with 11 U.S.C. §521(a)(1) – hence, it did not comply with “other Bankruptcy law” as required by §1325(1). In turn, §521(a)(1) requires Debtors to file a list of creditors and case schedules. Here the Mortgagee pointed to the failure to list certain obligations and to undervalue others. But the Court noted that the creditors holding the disputed debts could file claims to set the record straight and take other action if indeed the Debtor were giving them short shrift. None of that was happening in this case and ultimately the Court found the Mortgee’s argument unpersuasive.
§1325(a)(6): Plan Feasibility
The Mortgagee next argued that the Plan did not comply with §1325(a)(6) – that is, it was not “feasible.” This essentially means that the Debtor will not be able to make all the proposed payments and otherwise comply with the Plan. That the Plan is speculative or over-optimistic. The Court noted that in order to be “feasible” a Plan of Reorganization only needed to have a “reasonable likelihood of success.” This is generally interpreted as the Debtor’s income being greater than his expenses by an amount sufficient to make the payments proposed in the Plan. That is what the Court found here; at least on paper the Debtor and his co-Debtor Spouse could make enough money to make the payments outlined in their Plan. Moreover, if neither the Trustee nor other Creditors could challenge this basic arithmetic (income-expenses=$$ available to invest in the Plan) then there was no basis to deny Plan confirmation.
§1325(a)(3): Plan Proposed in Good Faith
The Mortgagee objected that the Plan was merely meant to delay payment, not deliver reasonble value to all creditors – a determination known as “good faith.” But the Court pointed out that confirmation depends not on any single metric but rather on the “totality of the circumstances.” More to the point, the Court noted that the real question in good faith challenges was whether the Debtor was really trying to pay creditors to the extent of his ability or just trying to thwart them. Here the Mortgagee could only allege that the Debtor “manipulated” his income – but was unable to come up with proof to that effect. In the absence of compelling evidence, and in light of the Debtor’s full financial and termporal commitment to the Plan (60 months) the Court determined that there was no lack of good faith here. The Court also noted that allegations concerning the Debtor having been a “serial filer” of Bankruptcy cases had no place in its decision.
§1325(a)(7): Petition filed in Good Faith
Finally, the Mortgagee asserted that the timing of the Debtor’s filing and other factors such as serial filing, omission of certain creditor claims, etc. established a lack of the “good faith” called for by §1325(a)(7). Here the Court observed that factors relevant to such a determination included:
1. The nature of the debt, including whether it could be discharged in a Chapter 7;
2. The timing of the Petition;
3. How the debt arose;
4. The debtor’s motive in filing the Petition;
5. How the Debtor’s actions affected creditors;
6. The debtor’s treatment of creditors before and after filing; and
7. Whether the debtor had been forthcoming with the Court and Creditors.
The Court noted that since this was the Debtor’s fifth filing, it had to convince the Court of its good faith in order to keep the Automatic Stay in place (one of the changes in the 1995 BAPCPA was the eventual erosion of the Automatic Stay for serial filers). Since the Debtor had already established its good faith in this case and extended the Automatic Stay (again) the Court was satisfied with its good faith filing status. Moreover, the Debtor filed to save his home, a common and valid reason to file a Chapter 13 Bankruptcy and Plan of Reorganization. Finally, the Court noted again that the Debtor was committing all discretionary income for the maximum 60 months in order to repay creditors – a classic sign of “good faith.”
The Court concluded that, given these facts, as well as the Debtor’s motives and the circumstances leading up to the filing of the Petition, §1325(a) was indeed satisifed and the Plan was confirmed.