Source: https://lundinonchapter13.com/Content/Section/127.5
Timestamp: 2019-12-12 10:41:59
Document Index: 51114195

Matched Legal Cases: ['§ 127', '§ 127', '§ 1329', '§ 1305', '§ 1329', '§ 13054', '§ 1305', '§ 1329', '§ 1305', '§ 1329', '§ 1329', '§ 1329', '§ 1329', '§ 1325', '§ 1325', 'art.\n1', '§ 92', '§ 69', '§ 137', '§ 137', '§ 158', '§ 261', '§ 127', '§ 1329', '§ 137', '§ 137', '§ 261', '§ 127', '§ 263', '§ 127', '§ 127', '§ 268', '§ 127', '§ 157', '§ 157', '§ 157', '§ 1329', '§ 1305', '§ 1304', '§ 1304', '§ 364', '§ 1305', '§ 1322', '§ 1329', '§ 1304', '§ 1305', '§ 1304', '§ 364', '§ 364', '§ 1329', '§ 1305', '§ 1304', '§ 1304', '§ 363', '§ 364', '§ 1305', '§ 1322', '§ 1329', '§ 1325', '§ 1329', '§ 1305', '§ 1329', '§ 1305']

§ 127.5 To Incur New Debt
Cite as: Keith M. Lundin, Lundin On Chapter 13, § 127.5, at ¶ ____, LundinOnChapter13.com (last visited __________).
A common postconfirmation modification is a motion from the debtor to incur new debt.1 Borrowing after confirmation requires a motion to modify under § 1329 because in most jurisdictions, the plan, the order of confirmation or local rule forbids debtors to incur new debt without court approval. Also, §§ 1305(c) and 1328(d) contemplate that the debtor and the postpetition lender will ask the permission of the trustee before the debtor borrows money.2 Filing a motion to modify to incur new debt is a sure way of either getting the trustee’s permission or determining before the leap that the trustee does not consent—in which case, the borrowing is a really bad idea.
Postpetition borrowing does not neatly fit into the permitted categories of postconfirmation modification in § 1329(a).3 If the new debt would be a postpetition claim under § 13054—for example, necessary medical expenses—then the debtor faces all the problems discussed above5 with respect to modifying the plan to manage a postpetition claim: If the postpetition claim is not allowable under § 1305, § 1329 is of little help in the debtor’s effort to pay the debt through a modified plan. If the new debt is not a § 1305 claim, then there is no obvious authority in the Code to incur the debt, nor would it fit any statutory category for modification of the plan.
Quite commonly, Chapter 13 debtors need to borrow money to replace personal property during the plan. When the debtor’s car expires after confirmation, the appropriate procedure to replace the car is a motion to modify the plan: to dispose of the old car by sale, trade or surrender;6 to incur a new debt for the replacement car; and to make payments on the new car through the modified plan.7 Incurring new debt necessary for performance of the plan typically meets little resistance from the Chapter 13 trustee or from creditors so long as distributions to prepetition claim holders are not affected.
Debtors sometimes purchase homes after confirmation, and this too is appropriately handled as a motion to modify the plan. It is true in some real estate markets that debtors can actually lower their monthly housing costs by buying a modest home rather than continuing to rent. If the debtor is eligible for a subsidized or government-guaranteed purchase, debtors can sometimes buy homes after confirmation and actually improve the family finances. Although a motion to buy a house hardly fits into § 1329(a), such motions are routinely granted without objection, especially when the effect is to reduce expenses. In In re Edwards,8 the court granted the debtor’s postconfirmation motion to incur credit to purchase a home and denied a creditor’s responsive motion to increase payments to unsecured claim holders when the creditor put on no evidence, the debtor’s modification did not change payments to creditors and the debtor proved that a divorce after confirmation justified a new place to live.
A particularly troublesome postconfirmation borrowing is refinancing or incurring new debt to pay off the Chapter 13 plan. Technically, § 1329(a)(2) authorizes modification to “reduce the time” for payments under the plan.9 But § 1329(a) says nothing specific about borrowing money to do so.
Philosophically, many bankruptcy courts and Chapter 13 trustees bridle at the proposition that debtors can park peacefully within the protective shell of a Chapter 13 case until they are financially able to buy a discharge by paying off the plan with a new loan. Sometimes after the claims bar date, because creditors fail to file proofs of claim, the amount necessary to complete the plan can be easily borrowed. The Chapter 13 case becomes a cleansing action to wash out the unfiled claims and restructure the debtor’s finances—not through payments under a plan, but through a “consolidation loan.”
Some courts do not approve refinancings or new borrowings to pay off Chapter 13 plans. Other courts look at how long the debtor has been in Chapter 13, the terms of the new borrowing, changes in the debtor’s financial condition after confirmation and so forth. For example, in In re Martin,10 the confirmed plan required a 10 percent dividend. Two years after confirmation, the debtors proposed to cash out the 10 percent dividend by refinancing their home. The bankruptcy court found that § 1329(a)(2) “contemplates that a debtor can reduce the amount and time for payments under a plan.”11 The court found nothing in the Code that prohibited the proposed prepayment so long as the usual tests for a modified plan were satisfied. The court described the debtors’ cash-out as “simply an anticipatory satisfaction of the obligations under the plan.”12 However, from the evidence presented, the court was not able to determine whether the proposed modification satisfied the disposable income test in § 1325(b) and the best-interests-of-creditors test in § 1325(a)(4).
In In re Easley,13 the debtor proposed to borrow money from parents to accelerate and complete payments under the plan. The court described this modification as beneficial to creditors:
Using money that the Debtor’s parents have agreed to loan him, the Debtor hopes to pay the entire amount that creditors would receive pursuant to the Plan in one single lump sum payment. . . . The Trustee . . . argues that debtors are prohibited from borrowing funds from any third party, related or not, to prepay obligations under a confirmed Chapter 13 plan unless the borrowed funds are used to increase the debtor’s Chapter 13 plan payments. . . . Although the unsecured creditors are only receiving approximately 23% of their claims under the Plan, they would receive the funds quicker and in a single payment and without risking future defaults by the Debtor. Moreover, they would receive a greater return if the Debtor prepaid the amounts rather than merely completed his payments under the Plan due to the increased time value of money. The creditors receive a substantial benefit under the Debtor’s proposal to accelerate payments.14
Postconfirmation modification to incur debt to pay off a plan is more common in districts where real estate is rapidly appreciating, making refinancing and second mortgage money more available. Borrowing the debtor’s exempt equity in a homestead to pay off the Chapter 13 plan buys the debtor a full-payment discharge,15 but the debtor emerges from the Chapter 13 case with a substantial new debt that guarantees something less than a fresh start.
1 See also § 92.1 [ Incurring Debt prior to Confirmation ] § 69.1 Incurring Debt prior to Confirmation for discussion of incurring debt before confirmation.
2 See § 137.1 Postpetition Claims before BAPCPA, § 137.2 Postpetition Claims after BAPCPA and § 158.6 Postpetition Claims.
3 See § 261.1 [ To Provide for Postpetition Claims ] § 127.4 To Provide for Postpetition Claims for discussion of the similar question whether § 1329 permits modification to provide for payment of postpetition claims.
4 See § 137.1 Postpetition Claims before BAPCPA and § 137.2 Postpetition Claims after BAPCPA.
5 See § 261.1 [ To Provide for Postpetition Claims ] § 127.4 To Provide for Postpetition Claims.
6 See §§ 263.1 [ To Sell or Refinance Property of the Estate ] § 127.6 To Sell or Refinance Property of the Estate and 264.1 [ To Surrender Collateral, Account for Repossession or Change the Treatment of a Secured Claim ] § 127.7 To Surrender Collateral, Account for Repossession or Change the Treatment of a Secured Claim.
7 See In re Brown, 170 B.R. 362, 366 (Bankr. S.D. Ohio 1994) (Court grants debtor’s postconfirmation motion to replace nine-year-old car with newer used car and to incur $10,000 of postpetition credit at an interest rate of 25%. “In future cases before this Court, prior to filing postpetition credit motions, debtors’ counsel must know all of the terms and actively participate in aiding the debtor in obtaining the best arrangement possible. . . . It is hoped that debtors’ counsel will actively seek the assistance of the Trustee in locating alternative financing resources at reasonable rates. . . . [I]n the future, where the plan proposes a significant dividend of between seventy and one hundred percent, and there has been a favorable payment history for a significant period (one or two years), this Court will not approve financing arrangements with excessive interest rates.”).
8 190 B.R. 91 (Bankr. M.D. Tenn. 1995).
9 See § 268.1 [ To Extend or Reduce the Time for Payments ] § 127.11 To Extend or Reduce the Time for Payments.
10 232 B.R. 29 (Bankr. D. Mass. 1999).
11 232 B.R. at 34.
12 232 B.R. at 37.
13 205 B.R. 334 (Bankr. M.D. Fla. 1996).
14 205 B.R. at 335–36.
15 See § 157.1 Broadest Discharge Available, § 157.2 BAPCPA Shrank the Discharge and § 157.3 Completion of Payments after BAPCPA.
Butala v. Logan, No. 5:18-CV-376-FL, 2019 WL 826468 (E.D.N.C. Feb. 21, 2019) (Flanagan) (Chapter 13 debtor lacks standing to challenge local rule that prohibits incurring postpetition debt in excess of $7,500 without court approval when debtor filed but withdrew application to incur debt to buy a house and now has no application pending that would be subject to the local rule.).
McDonald v. Wenzloff, No. 17-cv-13858, 2018 WL 1185283 (E.D. Mich. Mar. 7, 2018) (Ludington) (District court denies Chapter 13 trustee’s motion to withdraw reference of trustee’s adversary proceeding alleging debtor, attorneys and a creditor defamed the trustee during a disagreement over postpetition borrowing to replace a car.).
In re Jordan, No. 17-04280-5-DMW, 2018 WL 3530346, at *2–*4 (Bankr. E.D.N.C. July 20, 2018) (Warren) (Surprise: postconfirmation motion to purchase 2018 Hot Wheels Edition Camaro is denied. “Debtors are seeking court approval . . . to finance the purchase of a 2018 Chevrolet Camaro, Hot Wheels Edition . . . , manufactured to commemorate the miniature toy car company’s fiftieth anniversary. Ms. Jordan desires to purchase the 2018 Camaro because she has sentimental memories of playing with Hot Wheels toy cars with her brothers as a child. . . . As part of the proposed purchase transaction, the Debtors would ‘trade in’ the 2017 Camaro—which has negative equity—toward the purchase price of the 2018 Camaro. . . . The Debtors refinanced over $6,000.00 in negative equity when they purchased the 2017 Camaro, and they now want to add up to $10,000.00 in negative equity to a loan to purchase the 2018 Camaro . . . . It is difficult to imagine anyone being so out of touch with financial reality . . . . [C]reditors should not shoulder the burden of Ms. Jordan’s emotional rehabilitation through the unnecessary purchase of an adult version of a childhood toy[.]”).
In re Ripley, No. 14-01265-5-DMW, 2018 WL 735342, at *3–*4 (Bankr. E.D.N.C. Feb. 6, 2018) (Warren) (Although not analyzed under § 1329, debtors’ motion to borrow $269,000 to buy a house is denied when purchase will not benefit creditors, debtors would use retirement funds with adverse tax consequences and purchase is inconsistent with fresh start. Court rejects challenge to local rule that requires court approval of borrowings by Chapter 13 debtors greater than $7,500. Proposed borrowing is not subject to § 1305 because buying home is not necessary to the plan and debt would not be paid through the plan. “Debtors have not identified any Code provision which affirmatively gives the Debtors the ‘right’ to make unfettered credit purchases during the pendency of their Plan. . . . Chapter 13 comes with privileges and obligations. . . . Section 1305 . . . is not relevant to the Motion because the Debtors are not seeking to incur a consumer debt ‘for property or services necessary for the [Debtors’] performance under the plan,’ and the prospective lender is not seeking to be paid through the Plan. . . . If the court were to allow the Motion, the Debtors would emerge from their Chapter 13 case with over $200,000.00 in debt and related personal liability that would otherwise not exist. Further, allowing the Motion would require the court’s complicity for the withdrawal of money from Mr. Ripley’s 401(k) retirement account to comprise a portion of the down payment. The court cannot approve of transactions with such hazardous financial consequences. It appears the Debtors have learned little from their required pre-petition credit counseling. . . . [O]wnership of the Property would not convey any benefit to the Debtors’ creditors beyond the prospective minor increase in monthly disposable income . . . . The Debtors here simply want something to which they feel entitled.”).
In re Loden, 572 B.R. 211, 214-15 (Bankr. W.D. Ark. May 26, 2017) (Barry) (Chapter 13 debtors not engaged in business do not necessarily need a court order to incur debt after confirmation. When the Chapter 13 trustee does not object, debtors not engaged in business can borrow money but must modify the plan if the new loan is to be paid by the debtors or through the trustee. “It is customary in this state for debtors to bring before the Court their motions to incur debt after a chapter 13 plan has been confirmed. With the prior approval of the chapter 13 trustee, the Court typically will enter its order granting the debtor’s motion, recognizing that the order is more of a ‘comfort order’ than a dictate of the Court. In actuality, an order from the Court is not required unless the debtor is a debtor . . . ‘engaged in business’ under § 1304–then an order would be appropriate. . . . Under § 1304, a chapter 13 debtor engaged in business has the rights and powers of a trustee to . . . (2) incur debt or obtain credit under § 364. . . . There is no comparable requirement for a debtor not engaged in business . . . . In a case in which the debtor is not a debtor engaged in business, if a creditor holds a post-petition ‘consumer debt . . . ,’ that creditor can seek allowance of the claim under § 1305. . . . With the trustee’s prior approval of the claim, the debtor could then amend his plan if he wanted to and provide for the payment of the post-petition claim under § 1322(b)(6). . . . Through this statutory framework, a debtor has the ability to obtain post-petition debt without court authorization. . . . However, approval by the trustee would be required if the debtor intended to make payments to the post-petition creditor under his plan. Regardless, if the debtor opted to modify his confirmed plan—either to reflect payments being made ‘outside the plan,’ or to bring the new creditor into the plan—the provisions of § 1329 would apply.”).
In re King, No. 16-24784-GMH, 2016 WL 11459824, at *1–*2 (Bankr. E.D. Wis. July 29, 2016) (Halfenger) (Chapter 13 debtor’s motion to incur debt to replace a broken car is denied based on lack of authority under § 1304 but without prejudice to consultation with and approval by the Chapter 13 trustee consistent with § 1305. “§ 1304 applies only to chapter 13 debtors engaged in business. . . . [O]nly chapter 13 debtors engaged in business may obtain new financing through court authorization under § 364. Ms. King is not engaged in business. She thus has no rights or duties under § 364. . . . Section 1305 provides structural support for an inference that chapter 13 debtors (even those who are not engaged in business) can obtain post-petition credit. . . . The Code conditions allowance of post-petition consumer debt claims on pre-approval by the chapter 13 trustee, rather than the court . . . . The Code’s text and structure suggest that the chapter 13 trustee, rather than the court, is the appropriate source of that approval.”).
In re Fields, 551 B.R. 424, 426-28 (Bankr. D. Minn. June 3, 2016) (Ridgway) (Debtor not engaged in business can incur postpetition debt to buy a car without court authorization; § 1329 modification procedures apply if a § 1305 postpetition claim is filed. Debtor asked trustee's permission to replace a wrecked car. Trustee offered a "standard letter" that was insufficient to satisfy lender. Debtor then moved for court authority to incur debt. "By qualifying as a 'debtor engaged in business' under § 1304, the Bankruptcy Code, through § 1304(b), allows the debtor to use, sell, or lease property of the estate in the ordinary course of business under 11 U.S.C. § 363(c), and to obtain credit or to incur debt under 11 U.S.C. § 364. . . . [C]ontrasting the clear route accorded to those chapter 13 debtors who are 'engaged in business' to the statutory silence with respect to those debtors who are not 'engaged in business' tends to indicate something short of clear congressional intent to require court authorization to those debtors situated in the latter category. . . . A holder of a post-petition claim . . . under § 1305(a)(2) can seek allowance of that claim. . . . In turn, 11 U.S.C. § 1322(b)(6) allows a chapter 13 plan to provide for the payment of such a post-petition claim. The debtor can seek, in effect, a court's 'blessing' through the interaction of 11 U.S.C. § 1329 and 11 U.S.C. § 1325. Congress, through this statutory framework, provided a route for a debtor who is not 'engaged in business' to incur post-petition debt, and notably, such route is devoid of any language requiring court authorization. . . . The design of § 1329 contemplates a modification of the original plan. That procedure would be available to deal with the allowance, or not, of a post-petition claim under § 1305. . . . [T]he absence of an expression in the Bankruptcy Code is not the same as the presence of an expression requiring court authorization . . . . Court approval is simply unnecessary under these circumstances.").
In re Ward, 546 B.R. 667, 678-79 (Bankr. N.D. Tex. Mar. 14, 2016) (Jernigan) (On dreadful facts, there is no authority in § 1329 for debtor to modify confirmed plan to incur debt to replace a repossessed car. Section 364 only applies to debtors engaged in business. Debtor had obligation under § 1305 to get trustee's permission before borrowing money but signed contract and took possession of car without permission. Car dealer sold exclusively through advertising to debtors in bankruptcy cases. Interest rate was 20.25%. Car dealer paid debtor's $500 attorney fee. Debtor drove car for three months before filing motion to borrow funds to pay for the car. Debtor's attorney ordered to regurgitate the $500 fee paid by car dealer. Debtor ordered to return car to dealer. Dealer ordered to return debtor's $500 down payment. "[S]ections 363 and 364 of the Bankruptcy Code likely only apply in chapter 13 cases if the debtor is engaged in business somehow; . . . chapter 13 debtors who are not engaged in business . . . still should not borrow postpetition, unless it is for 'property or services necessary for the debtor's performance under the plan,' consistent with the language and spirit of section 1305 . . . ; . . . postpetition debt will not be dealt with under a plan or discharged unless section 1305 of the Bankruptcy Code is complied with, and . . . only trustee approval is necessary—not court approval—notice and court approval are nevertheless necessary whenever significant postpetition debt is incurred by a debtor . . . . [A]rguably, there is nothing in chapter 13 that either authorizes or prohibits the incurrence of postpetition debt per se. And arguably, there is nothing that requires court approval. However, incurrence of significant postpetition debt is an action that absolutely could bear on the performance of the plan. It could absolutely impact the debtor's rehabilitation efforts. Thus, this court will require court approval. . . . [T]he Chapter 13 trustee and court are required to be gatekeepers on post-confirmation activities, to some extent, such as a chapter 13 debtor's desire to purchase a car during her case. . . . [I]t makes sense to use the same type of legal standard that one applies when evaluating borrowing under section 364 . . . .").
In re Wills, No. 10-72120, 2014 WL 2442275, at *5 (May 30, 2014) (Gorman) (Postconfirmation debt to repair well that supplied water to home was legitimate expense at modification. "Debtor did not take out the loan to buy luxury goods or to take a vacation. The Trustee has a duty to review proposed plan modifications and to appear and be heard on the issues. . . . But the Trustee is not required to be strident or unreasonable, and his suggestion that the Debtor acted improperly by borrowing money to make necessary well repairs required for his health and safety must be rejected.").
In re Key, 465 B.R. 709 (Bankr. S.D. Ga. Feb. 2, 2012) (Barrett) (Motion to incur new debt to renovate rental properties inherited postpetition is denied when payments would extend beyond five-year term of plan and debt was not necessary to completion of current plan.).
In re Berkich, 457 B.R. 252 (Bankr. W.D.N.Y. Oct. 7, 2011) (Bucki) (Motion to mortgage property requires modification of confirmed plan. Modification must comply with best-interests-of-creditors test which will be a problem because debtor's remainder interest matured postpetition into fee simple interest, as result of mother's death, and fee became property of estate.).
In re Connelly, No. 08-32156, 2011 WL 1515413 (Bankr. W.D. Ky. Apr. 19, 2011) (Stosberg) (Postconfirmation motion to borrow money to buy house was denied when home loan would be $500 per month less than current rent but debtors borrowed down payment from 401(k) without authorization and it was not clear how debtors could afford closing costs, repayment of 401(k) loan, and monthly payment.).
In re Kipling, Nos. 09-20142, 09-22919, 2010 WL 2584191, at *3 (Bankr. E.D. Ky. June 23, 2010) (unpublished) (Wise) (Debtor cannot use modification to incur debt as strategy in dispute with former spouse. Former spouses filed separate Chapter 13 cases. In dispute concerning mortgage on former marital residence, Lillian Kipling's motion to incur additional debt to refinance or modify home mortgage was denied when motion sought to compel Randy Kipling to execute loan modification. Under marital separation agreement, parties had agreed to sell home, and it appeared that Lillian Kipling's application was intended to delay sale rather than comply with confirmed plan. "The court will decline to adjudicate the tug of war between these dueling Debtors.").
In re Gonzales, No. 08-00719, 2009 WL 1939850 (Bankr. N.D. Iowa July 6, 2009) (Kilburg) (Motion to incur debt to purchase replacement vehicles was denied when motion did not include copy of proposed credit agreement, did not disclose interest rate and did not address whether better financing or more reasonably priced vehicles were available.).
In re Clemons, 358 B.R. 714, 716 (Bankr. W.D. Ky. Jan. 18, 2007) (Postconfirmation motion to incur debt to buy replacement car for $6,100 at 24.9% interest denied without prejudice when motion did not include enough information for bankruptcy court to assess prudence of credit. "This Court will not grant motions to incur post-confirmation credit when the motion does not address, e.g., (1) the terms of the credit agreement; (2) what alternatives to the proposed credit agreement were considered; (3) a description of the automobile that the debtor seeks to purchase, detailing the make, model, mileage, condition, and value—taking into account its reasonable market value . . . (4) a copy of a current budget that includes the proposed credit payments. . . . Furthermore, when the interest rate for the proposed credit agreement is 20% per annum or more, this Court will require the debtors to appear in court at the hearing on a motion to incur credit so that the Court is sure that the debtors understand what they are getting themselves into.").
In re Hammett, No. 05-30733, 2007 WL 92815, at *1 (Bankr. M.D. Ala. Jan. 11, 2007) (unpublished) (Motion to incur debt for purchase of new vehicle to drive to work denied because purchase was not shown to be "essential for the debtor to complete the plan"; motion failed to disclose disposition of present vehicle being paid for in plan.).