The Bankruptcy Protector

On the surface, Chapter 13 appears to provide creditors the same general remedies as other chapters of the Bankruptcy Code — the right to seek dismissal of the case (11 U.S.C. § 1307), the right to seek relief from the automatic stay (11 U.S.C. § 362(d)), and the right to object to and contest confirmation of the debtor’s chapter 13 plan. However, the better option may be a settlement that provides certain relief to the creditor if the debtor fails in her chapter 13, since the majority of chapter 13 debtors do not successfully complete their plan (which typically lasts 5 years).

Specifically, creditors’ attorneys in chapter 13 cases may quickly realize that, as a practical matter, it may extremely difficult to derail a chapter 13 case by using statutory remedies. Judges will typically give chapter 13 debtors — especially first-time filers — the benefit of the doubt. For example, a creditor may object to a plan based on feasibility if the debtor’s scheduled income and expense figures are insufficient to make the proposed chapter 13 plan payment. But, a debtor’s attorney may simply amend the bankruptcy schedules to reflect additional income (or lower expenses) to overcome this hurdle. It may seem as if the debtor just invented these figures, but if the debtor is current on her plan payments on the date of the confirmation hearing, the Judge is likely to confirm the plan and give the debtor a chance. Indeed, even if the creditor is very aggressive, the debtor has the absolute right to dismiss the case under § 1307(b) and then re-file a chapter 13 petition, which puts the creditor back at square one (there may be more stringent requirements in a re-filed case depending on when it was filed in relation to the prior dismissal, but creditors are still generally at a disadvantage). Finally, although a chapter 13 case may be dismissed if the debtor fails to complete required credit counseling (§§ 109(h) and 521(b)(1)) or if the debtor’s debts exceed the limits imposed by §109(e)(generally less than $419,275 for unsecured debts and less than $1,257,850 for secured debts), a dismissal under these grounds is rare and should not be relied upon.

These results may be especially frustrating when the client sees the debtor as someone trying to game the system (which may or may not be true). So, with the deck stacked against you as a creditor’s attorney in chapter 13, what can you do? While it may seem counterintuitive, I believe two types of “settlements” with the debtor may be a good outcome:

  1. File for relief from the automatic stay, and as a settlement of that motion, negotiate a “drop dead” settlement that if the debtor defaults on any future plan payment, the creditor may immediately obtain relief from the stay without further hearing. However, not every Judge will approve this type of self-effectuating provision.
  2. File an objection to confirmation, and as a resolution, negotiate a consent order that if the case is dismissed for any reason, the dismissal is with prejudice for a period of one year. While this may require the creditor to “wait out” the debtor until she defaults, upon default the creditor could have one year to obtain the appropriate relief in state court without having to address a second bankruptcy filing.

These resolutions may not be available in every jurisdiction — as with any legal matter, the outcome of a particular case will depend on the facts, circumstances, judges, parties and counsel involved. But, with the deck stacked against the creditor in a chapter 13, a settlement that provides the creditor some level of finality if the debtor fails may be the best-case outcome. As a creditor’s attorney, you should consider steering the case towards one of these types of settlements.