Courts Split over Interest on Unsecured Claims in 100% Chapter 13 Plans
On an issue where the lower courts are about evenly divided, Bankruptcy Judge Basil H. Lorch, III of Evansville, Ind., ruled that a chapter 13 debtor who is not devoting all disposable income to the plan can confirm the plan by paying unsecured creditors in full, without interest.
The debtor would have disposable income of more than $80,000 over the course of the proposed five-year plan. Timely filed proofs of unsecured claims amounted to some $17,000, and payments under the plan would total about $51,000. Although the chapter 13 plan would pay unsecured claims in full, the debtor was not proposing to pay interest on unsecured claims.
The chapter 13 trustee objected to confirmation, contending that Section 1325(b)(1) requires interest on unsecured claims. The trustee argued that the statutory language in subsection (b)(1), “as of the effective date of the plan,” modifies the word “value” in subsection (b)(1)(A) to mean that the plan must pay the present value of the claims and therefore includes interest.
Also relying on Section 1325(b)(1), the debtor contended that unsecured creditors are not entitled to interest. The debtor interpreted the quoted language as modifying both subsections (A) and (B) by specifying the date when the court must make the calculation.
Listing decisions coming down on both sides, Judge Lorch said in his September 13 opinion that the courts are “equally divided.” The Norton and Collier treatises take opposite positions on the outcome, with Collier on the debtor’s side.
Judge Lorch adopted the approach of Bankruptcy Judge Thomas L. Perkins of Peoria, Ill., in In re Gillen, 568 B.R. 74 (Bankr. C.D. Ill. 2017).
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