MEMORANDUM ON OBJECTIONS TO CONFIRMATION
J. VINCENT AUG, Jr., and JEFFERY P. HOPKINS, Bankruptcy Judges.
The four cases captioned above are before the Court on objections to confirmation filed by the Chapter 13 Trustee, Margaret A. Burks ("Trustee").
All four plans propose a monthly plan payment that is equal to the difference between Total Combined Monthly Income reflected on Schedule I and Total Monthly Expenses reflected on Schedule J. The Trustee does not challenge the necessity of the Debtors' expenses pursuant to § 1325(b)(2)(A). Moreover, the Trustee does not dispute that all projected disposable income will be applied to the plans if the assumptions used by the Debtors to draft the plans prove to be correct over
If a debtor chooses not to include a similar certification in the plan, the Trustee seeks a verbal certification of the same effect at the first meeting of creditors. The Debtors presently before the Court refused to make a similar certification, either written or oral. The instant objections followed.
The practical effect of the Trustee's objections is to raise two issues under § 1325(b)(1)(B). The first issue is whether a percentage plan of less than 100% violates § 1325(b)(1)(B). The second issue is whether § 1325(b)(1)(B) requires actual or projected disposable income.
PERCENTAGE PLANS VS. BASE PLANS
Traditionally, Chapter 13 debtors have filed percentage plans in this Court.
Because the proposed length of the plan is "estimated," nothing in the plan requires the Debtors to make the $1,000 payments for thirty-six months. To the contrary, the plan only requires monthly payments to the Trustee until she pays a 70% dividend on allowed unsecured claims. If enough creditors scheduled as holding unsecured claims fail to file a timely proof of claim, the 70% dividend will be paid prior to the thirty-sixth month. Moreover, if one or more of the Debtors' secured creditors obtains relief from the automatic stay, then the corresponding monthly plan payment on account of the secured claims (being $250 and $400) will be applied to the payment of allowed unsecured claims and the 70% dividend will be paid even earlier. Finally, there is the additional possibility that a timely filed claim will be disallowed or reduced as a result of a successful objection, thereby causing the plan to be completed earlier still. The Austens, along with the other subject Debtors, contend they should be able to benefit from these "windfall" situations.
The Seventh Circuit, in dicta, has recognized the inherent problem with percentage plans:
In re Witkowski, 16 F.3d 739, 746 n. 11 (7th Cir.1994) (affirming plan modification to increase percentage paid on allowed unsecured claims after certain scheduled unsecured creditors did not file timely proofs of claim). The foregoing language from Witkowski is particularly significant given that the Sixth Circuit, also by dicta, deemed it worth repeating:
In re Welch, No. 97-5080, 1998 WL 773999, at *3 n. 6 (6th Cir. Oct. 11, 1998) (affirming discharge of debtors where creditor appealed discharge order when debtors prepaid percentage plan through lump-sum payment).
Pursuant to the foregoing authority, particularly the Sixth Circuit's footnote in Welch, this Court concludes that a percentage plan cannot be confirmed over a timely objection pursuant to § 1325(b). In the event that a debtor cannot propose a percentage plan that pays a 100% dividend on allowed unsecured claims, a debtor must propose a "base" or "pot" payment to obtain confirmation over a § 1325(b) objection. See Arnold B. Cohen, Pot Plans Should Be Replacing Percentage Plans in Chapter 13, 4 J.Bankr.L. & Prac. 305 (1995); 2 Keith M. Lundin, Chapter 13 Bankruptcy § 166.1 (3rd ed.2000). Three out of four of the more commonly used plans incorporate such a "base" payment.
2 Keith M. Lundin, Chapter 13 Bankruptcy § 170.1 (3rd ed.2000). To obtain confirmation in the face of a § 1325(b) objection, the base amount cannot be less than the amount of the debtor's projected disposable income under § 1325(b)(1)(B). In the Austen case, for example, the Debtors must propose a base that is no less than $36,000 ($1,000 × 36).
Although the base plan takes care of disposable income objections, it creates a problem concerning the best interest test under 11 U.S.C. § 1325(a)(4) because the base plan does not bind the debtor to the
ACTUAL VS. PROJECTED INCOME
The Trustee's objections also raise the issue of whether § 1325(b)(1)(B) requires actual or projected disposable income. This issue was decided by the Ninth Circuit on substantially similar facts. In re Anderson, 21 F.3d 355 (9th Cir.1994) involved a Chapter 13 trustee who asked the debtors to sign a "Best Efforts Certification" that would require them to pay all of their actual disposable income over the first thirty-six months of the plan.
Id. at 358; see also In re Killough, 900 F.2d 61 (5th Cir.1990) (potential for overtime was not definite enough to be characterized as projected income).
To the contrary, the Eighth Circuit has held that § 1225(b) (the same language as § 1325(b) incorporated under Chapter 12) requires debtors to contribute actual disposable income for thirty-six months. See Rowley v. Yarnall, 22 F.3d 190 (8th Cir. 1994). Although the Eight Circuit conceded that the plain language of § 1225(b) supports the interpretation that a debtor is required to commit only projected disposable income, the court concluded that such a construction "yields an absurd result" that "would reduce § 1225(b) to a nullity." Id. at 192. The Court feared that a projected income standard would enable debtors "to reject the debt without consulting the lender," id. at 193, "if they simply `predict' that disposable income will be zero." Id. at 192. This concern is allayed by a debtor's duty to complete and file accurate schedules and the potential consequences of a failure to do so. Moreover, even under circumstances like Rowley where it may be more difficult to project income (e.g. family farmers or salespeople on commission), the trustee or an unsecured creditor can always seek to capture actual,
This Court respectfully concludes that Anderson reflects the better statutory analysis. This conclusion is shared by Judge Lundin in his highly-respected treatise. See 2 Keith M. Lundin, Chapter 13 Bankruptcy § 164.1 (3rd ed.2000) (referring to Anderson as a "good model for other courts" and "the better-reasoned decision" in comparison to Rowley).
Judge Lundin notes the following problems if § 1325(b) is construed as requiring actual disposable income:
Id. By contrast, the Anderson standard "leaves the bankruptcy courts with discretion to assess the reality of each debtor's projections of income." Id. On a case-by-case basis, the party objecting under § 1325(b) must at least provide some evidentiary support for the contention that a
Although the Sixth Circuit has not addressed this issue in the context of a § 1325(b) confirmation objection, In re Freeman, 86 F.3d 478 (6th Cir.1996) suggests that § 1325(b) requires only projected disposable income. Freeman involved the issue of whether a debtor's motion to modify a confirmed plan violates § 1325(b) when the proposed modification seeks to retain a portion of a tax refund received postconfirmation. According to the court's analysis, the answer depends upon whether the refund in question was projected at the time of confirmation. This Court believes that the Sixth Circuit, if confronted with the issue of whether § 1325(b)(1)(B) precludes confirmation of a plan that does not commit all actual disposable income, would follow the projected disposable income standard set forth in Anderson.
For the foregoing reasons, this Court holds that § 1325(b)(1)(B) does not require a debtor to commit all actual disposable income to obtain confirmation over a timely objection. But see e.g., In re Riggleman, 76 B.R. 111 (Bankr.S.D.Ohio 1987) (Clark, J.) ("In this case debtor has not provided for increases in disposable earnings which are too uncertain to project as of the effective date of the plan. But an amendment providing for semi-annual earning and expense statements and appropriate increase in contributions will make the plan confirmable."); In re Krull, 54 B.R. 375 (Bankr.D.Colo.1985) (although future wage increases "are too speculative at this point as to be regarded as `projected' income," plan would not be confirmed unless debtor amended plan to commit 50% of any net increases); In re Akin, 54 B.R. 700 (Bankr.D.Neb.1985) (confirmation denied under § 1325(b) where "[t]here is no statement in the plan that as the debtor's disposable income increases it will automatically be applied to the plan.").
For the foregoing reasons, the Trustee's objections to confirmation will be sustained on the basis that, upon timely objection, § 1325(b)(1)(B) precludes confirmation of a percentage plan of less than 100%. The Trustee's objections to confirmation will be overruled to the extent that the Debtors need not incorporate the Trustee's certification language into their plan. Separate orders to this effect will be entered.
If the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan —
Peterson, 53 B.R. at 341. This procedure presents a problem, however, if the debtor defaults within the first thirty-six months. Under those circumstances, the debtor would complete the thirty-six month period without paying all projected disposable income. The base plan, on the other hand, requires the debtor to continue payments until the base amount is paid, regardless of the passage of time. See 2 Keith M. Lundin, Chapter 13 Bankruptcy § 166.1 (3rd ed.2000) ("It makes most sense to interpret the three-year period in § 1325(b)(1)(B) to require . . . a specified amount totaling a known (projected) amount of money. The `base plan' concept for drafting Chapter 13 plans implements this view of § 1325(b)(1)(B). Any other method of counting the three-year period threatens to reward the debtor for defaulting under the plan.").