Early Chapter 13 Payoff Allowed by Judge

In re Tibbs, Case No. 11-18943-EPK in the Southern District of Florida, West Palm Beach Division, addressed an important issue for chapter 13 bankruptcy attorneys.

The bankruptcy code provides that a debtor with over median income has “an applicable commitment period” of five years. Chapter 13 bankruptcies have a payment term of a minimum of a 3 year applicable commitment period for under median income debtors. The issue has been litigated whether this phrase in the statute means that a chapter 13 plan requires that an over median debtor must be in bankruptcy for 5 years. The Eleventh Circuit Court of Appeals, which is binding in Florida, has held that to confirm a chapter 13 plan for an above median debtor, the plan must be for 5 years.

The issue for debtor bankruptcy attorneys is can this time requirement be avoided with an early payoff? For example, if family makes a gift, or if the debtor can cash out an exempt asset, can the debtor have an early payoff?

Bankruptcy judges have differed on this issue. Two judges in Miami have held against an early payoff. At least one court in the Middle District approved an early payoff and at least one has ruled the other way.

On August 31, 2012, Judge Kimball in West Palm Beach approved an early payoff of a chapter 13 plan. Based on a technical analyses of the bankruptcy code, the court found that a motion to modify a previously confirmed chapter 13 plan with an early payoff was permissible. The key was that the statute as to modifications had different requirements than were necessary for the confirmation of the original plan. The court permitted family to make a gift to payoff the plan early in a modified plan.

No creditor objected to the motion. The Chapter 13 trustee objected based on the 11th Circuit Court requirement.

It is noteworthy that the judge did not determine whether or not any debtor could use this procedure. Robin Weiner, chapter 13 trustee, stresses the requirement of good faith. The trustee might well object if the debtors did not have a reduction of income. The court recognized there is a good faith requirement that the court should consider on a case by case basis but gave no indication of how it would analyze this issue. In this case, the spouse had lost her job. It is possible that the result would have been different if the debtor attempted an early payoff even though there had been no change in income.

I would argue there should not be an issue of good faith. A debtor could well prefer to use exempt assets or a family gift to shorten a five year plan and obtain a discharge. Creditors are given an opportunity to object to the early payoff and are likely to prefer to get paid now instead of waiting and risk not getting paid. The creditors would only be prejudiced if the debtor acquires a new asset or has an increase in income which could require higher payments. Of course, this is one reason a debtor would want an early payoff. But certainly any debtor would benefit if they could obtain their discharge and end the bankruptcy more quickly. This remains an important issue for any Fort Lauderdale bankruptcy.

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