Can you pay your bankruptcy case early and get a discharge?

For the first time since 2005 the Northern District of Texas Bankruptcy Court had to use their en banc procedure in order to resolve a question that resulted at the enactment of BAPCA. When the law changed in 2005 under Section 1324 (b)(2) of the Bankruptcy Code the legislature replaced the words three years (36 months) when determining the unsecured creditor pool with “applicable commitment period”. This applicable commitment period is further defined in this section as either 36 months if the person is below the median income or 60 months if they’re above the median income. The case of first impression before the Court today was whether or not a person who is above the median income uses proceeds from the sale of non-exempt property to pay off the balance of his plan and receive a discharge prior to the expiration of the applicable commitment period.

The Chapter 13 Trustee argued the law was not merely a mathematical formula but it actually imposed a time restraint on the debtor in which they had to be in Bankruptcy for their applicable commitment period of time no matter whether or not they had fully funded the plan. In essence his argument is it’s not just a mathematical component but in fact a temporal requirement of Bankruptcy law. He further argued if a person is able to fully fund their plan and pay off early they would have to first petition the Court for a Motion to Modify in order to change the time requirement as noted in Section 1329 (b). This section states the person may file a Motion to Modify to reduce the period of time that is in their previously confirmed plan. Unfortunately the trustee’s argument is essentially the time requirement is mandatory and cannot be changed. That is, if you’re above median income you are required to remain in Bankruptcy for 5 years-no matter when you’re able to fund your plan. He additionally argued if the Debtors want to shorten the time according to section 1329 (a)(2), which states a person may move to modify the plan to either lengthen or shorten the plan duration.

Debtors attorneys argue the temporal requirement alleged by the trustee was not in fact temporal at all but was merely a mathematical formula used to determine the entire amount needed to pay the unsecured creditors, the plan was a contract, and once that contract was fully performed on behalf of the debtor then he is then to receive a discharge. The debtor’s attorney argued that because section 1325 (b)( 4) specifically states the applicable commitment period is for the purposes of that section only and does not have the power or the purpose of modifying any other section of the Bankruptcy Code.

The trustee was essentially arguing because the time requirement is mandatory and cannot be changed, the only way a debtor may be successful in reducing the length of their time to pay is if the trustee and creditors do not object. This of course would violate the adversarial process that is the heart of our American jurisprudence. Essentially you’d be filing a Motion with the Court in which you had absolutely no chance of winning despite the laws and facts if the opposing parties simply objected. This would require everybody to have an Agreed Order in order to succeed in that Motion. The real implications is if a person funds their plan based on the 60 month disposable income projection, they’re given the amount and that’s how much is needed to pay their unsecured creditors, and at a later date they elect to sell non-exempt property they had at the time the plan was created and was accounted for in the UCP. If they receive enough money which allows them to fully fund the plan, under the trustee’s argument the debtor would still be required to be in Bankruptcy for the remaining years and expose themselves to the potential liability of increased income. If their income increased, a Motion to modify could be filed to increase the amount of funds needed above and beyond the agreed amount.

Of course this would have a chilling effect on all debtors essentially preventing anyone from paying off their plan early. Instead they may sell their non-exempt property and simply keep it as cash on hand or use it to buy other property. With the 35% completion rate on Chapter 13 case, this would be detrimental to future success.

The Court was concerned mainly with two issues: whether the person could simply pay off with as little as one payment and which would be in essence buying a “super discharge” of Chapter 13 or would they have to file a Motion under 1329. Their main concern seemed to be reconciling section 1329(b) with Section 1325(a)(2). However, it remains unclear as to how to resolve this issue. The judges may not reach a unanimous decision. If they don’t, under their own procedural rules, the decision will return to the Court of the judge originally hearing the case and he alone will make the ruling.

Below are the briefs that pertain to this matter:

1. Amicus Brief
2. Appendix for Brief in Opposition
3. Brief in Opposition of Debtor
4. Brief in Support of Debtor
5. Nacba Amicus Brief