Five Chapter 13 Debtors’ Modification to Model Plan Violates the Law

by San Antonio Attorney

Modifications that 5 debtors from California have done to their Model Plans in Chapter 13 bankruptcy are against the Bankruptcy Code, the two California bankruptcy judges ruled in Sept.  26.

Judges Stephen L. Johnson and M. Elaine Hammond of the Northern District of California Bankruptcy Court held that the debtors are not allowed to “foreclose creditors’ and the rights of Trustee to oppose by not moving for changes when needed.

There were five debtors that made alterations to the Model Plans that allowed them to pay off their debts and get a bankruptcy discharge after confirmation while skipping the modification process and avoiding payments to unsecured claims that should have been paid in full.

Chapter 13 bankruptcy provides debt relief to individuals with regular income.  However, a debtor is required to submit a plan that utilizes future income to pay back some or all of his debts for three to five years.

In San Jose Division, there is a practice where bankruptcy cases can be confirmed without a specified term, making it impossible for general unsecured creditors to get paid.  Debtors can receive a discharge without completing the three or five-year term and a court order.

The argument of the debtors is their creditors and the trustee had no objection and there was no implemented minimum duration of the repayment plan.  Debtors are not contesting the Model Plan formulated by the court, but they contend that it is a rule that is incoherent and should be invalidated.

Particularly, the debtors have supplemented terms to the Model Plans that forbid the trustee from using outstanding funds.  Based on the form plan, whatever extra funds obtained above the agreed amount or percentage was given back to debtors except if the trustee sought an order to change the plan and distribute the money.  This is the practice that debtors want to keep doing.

But according to the court, the right way to deal with these issues is change the Chapter 13 plan through the Bankruptcy Code Section 1329.  Debtors need to get authorization to modify a plan and notify parties involved in the bankruptcy case.


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