In re Page

658 B.R. 178

IN RE: Calvin Scott PAGE and Helen Villabane Page, Debtors.

Case No. 23-00590-WLH13

United States Bankruptcy Court, E.D. Washington

Signed March 25, 2024

Timothy M. Coleman, OlsenDaines, Salem, OR, for Debtors.

MEMORANDUM OPINION

Whitman L. Holt, Bankruptcy Judge

Repayment of a debt generally involves both a quantitative aspect (how much the debtor will pay) and a temporal aspect (when the payments will be made). For most debts, these key components can be reconfigured and framed as principal amortization, interest accrual, and maturity. With limited exceptions (such as so-called "perpetual bonds"), however, it is not possible to understand how a debt will be repaid without addressing both quantitative and temporal aspects.

The specific dispute here involves a disagreement between chapter 13 debtors and the chapter 13 trustee regarding the debtors' proposed repayment of certain vehicle loans. The parties agree about the quantitative aspect—the loans should be repaid in full—but disagree about what bankruptcy law requires or permits regarding the temporal aspect. For reasons explained below, the court agrees with the chapter 13 trustee's primary legal position, finds that the debtors' proposed plan is unconfirmable, and therefore dismisses this case.

BACKGROUND & PROCEDURAL POSTURE

The debtors are a married couple who owe, among other debts, amounts borrowed to facilitate their purchase of motor vehicles. Two of those loans arise from vehicles the debtors purchased a few months before filing a chapter 13 bankruptcy petition. The key details of the two loans are:

Vehicle

Lender

Petition Date

Debt Balance

Contractual

Interest Rate

Contractual

Maturity

Month

2021 Ram 1500

Spokane

Teachers Credit

Union

$47,323.71

5.49%

November 20291

2023 Hyundai

Santa Cruz

Global Federal

Credit Union

$49,390.75

6.84%

December 20292

[Editor's Note: The preceding images contains the reference for footnotes¹, ²]

The debtors filed chapter 13 bankruptcy in May 2023 and proposed a chapter 13 plan that would repay both vehicle loans in full within the 60-month term of their plan (i.e., by June 2028)³ and therefore earlier than each loan's contractual maturity date. The plan thus reamortizes these longer-term vehicle loans and, in doing so, contemplates a payment from the chapter 13 trustee to the vehicle lenders that would be materially larger than the contractually scheduled repayment amounts. Because the proposed plan is a "base plan" that does not repay all the debtors' creditors in full,⁴ the net economic effect of accelerated repayment of the vehicle loans is a reduction of the funds remaining for a dividend to the debtors' unsecured creditors.

The debtors' approach in their proposed plan regarding these two vehicle loans carried over to their responses on the required Official Form 122C-2 (Chapter 13 Calculation of Your Disposable Income). More specifically, the debtors listed as the "average monthly payment" for each vehicle the amount of the proposed monthly plan payment (i.e., the increased amount after reamortizing the total debt over 60 months).⁵ An end consequence of this listing is to increase the deductions the debtors claim from their current monthly income, which in turn decreases the debtors' monthly disposable income under Bankruptcy Code section 1325(b)(2) (a statutory provision that calibrates creditors' baseline entitlements regarding a chapter 13 plan).⁶

Additionally, the debtors have a third vehicle loan with Horizon Credit Union relating to a 2016 Thor Vegas Series Motorhome with a contractual maturity date in August 2037.⁷ The debtors' plan does not propose to reamortize this loan; instead, the debtors propose to cure an outstanding arrearage and otherwise repay the debt according to the obligation's original terms.⁸ Despite this plan treatment, the debtors reamortized the debt for purposes of calculating a deduction for debt payment on their Form 122C-2.⁹ Once again, an end consequence of the enhanced deduction is a reduction of the debtors' monthly disposable income.

The chapter 13 trustee¹⁰ objected to confirmation of the debtors' plan on several occasions and myriad grounds. One common theme among the trustee's objections is that the debtors' proposed reamortized vehicle deductions on their Form 122C-2 are improper and preclude confirmation of the plan.¹¹ The debtors' central response to this objection is that the vehicle loans are "910 claims" which must be repaid in full over the plan's term pursuant to the so-called "hanging paragraph" of Bankruptcy Code section 1325(a). The court requested additional briefing so the parties could detail their respective legal positions and authorities regarding this specific issue and then heard oral argument from counsel. The matter is now ready for decision.

JURISDICTION & POWER

The court has subject matter jurisdiction pursuant to 28 U.S.C. §§ 157(a) & 1334(b) and LCivR 83.5(a) (E.D. Wash.). The parties' dispute regarding confirmation of the debtors' proposed plan is statutorily "core"¹² and "the action at issue stems from the bankruptcy itself."¹³ Accordingly, the court may properly exercise the judicial power necessary to finally decide this dispute.

DISCUSSION

Chapter 13 Bankruptcy Generally

Chapter 13 is a legal structure permitting the adjustment of debts owed by individuals with regular income (including people who were previously called "wage earners").¹⁴ The basic bargain of chapter 13 is that in exchange for the debtors committing certain of their future income or property to repayment of their creditors over a 36- to 60-month plan period and otherwise satisfying the numerous requirements for plan confirmation, the debtors are permitted to retain their other property and receive a discharge of most unsecured debts remaining unpaid after completion of the plan.¹⁵

Treatment of Vehicle Loans in Chapter 13 Plans

Like many Americans, most chapter 13 debtors have one or more vehicle loans, which prompt several common issues about proper treatment of those loans in a chapter 13 plan.

I. The General Framework

Chapter 13 provides four main options for a debtor with a vehicle loan.

First, the debtor can propose whatever treatment the lender consensually accepts (i.e., a mutual reworking of the loan).¹⁶ For purposes of the court's Local Form 2083, which is a form chapter 13 plan, the agreed treatment might be specified in subpart 3.2.3, in subpart 3.2.4, or via a nonstandard provision in part 8.

Second, the debtor can retain the vehicle while making a stream of monthly payments over the plan term equal to the allowed amount of the lender's secured claim and with interest at a rate resulting in the lender receiving the present value of the secured claim.¹⁷ In a fractured decision, the Supreme Court held that the proper approach to determine the interest rate applicable to cramdown of a secured creditor under a chapter 13 plan is the "formula" approach, whereby courts start with a base rate and then add an upward adjustment.¹⁸ The most common approach to calculating the proper "Till rate" is to begin with the national prime rate and make a case-specific upward adjustment in the range of 1% to 3%.¹⁹ Depending on the interest rate environment when a debtor entered into a vehicle loan and when that debtor's chapter 13 plan will become effective, the Till rate could be substantially higher than the contractual rate. If the debtor chooses this option, the proposed treatment would be detailed in subpart 3.2.3 or subpart 3.2.4 of the court's form chapter 13 plan.

Third, the debtor can surrender the vehicle to the lender.²⁰ As the Collier treatise explains, "[s]urrender in this context means simply the relinquishment of any rights in the collateral. Therefore, if the debtor no longer has possession of the collateral, actual delivery by the debtor to the creditor should not be required."²¹ Moreover, there is "no requirement that the creditor consent to the surrender or actually accept possession of the collateral."²² A debtor may exercise this option in subpart 3.4 of the court's form chapter 13 plan.

Fourth, only in the case of loans for which the last payment is due after the end of the plan term, the debtor may "provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending."²³ Long-term debts subject to a "cure and maintain" plan treatment under section 1322(b)(5) are sometimes referred to as "continuing claims."²⁴ By exercising this option, "the debtor preserves the benefit of a longer payment schedule that extends beyond the due date of the last payment under the plan, and the creditor is protected by the exception to discharge for long-term debts on which defaults are cured."²⁵ Moreover, treatment under section 1322(b)(5) allows the debtor to keep the original contractual interest rate for the continuing claim, which may be a significant benefit if interest rates have risen such that the Till rate would be higher than the contract rate.²⁶ Section 1322(b)(5) is analogous to the chapter 11 concept of "unimpairment" or "reinstatement" and offers the debtor an ability to effectively leave the holder of a continuing claim with the same payment terms and rights that would apply outside of bankruptcy.²⁷ In this district, a debtor uses subparts 3.2.1 and 3.2.2 of the form chapter 13 plan to specify the treatment for a continuing claim arising from a vehicle loan.²⁸

II. Further Constraints Imposed by the "Hanging Paragraph"

In the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), Congress added an unenumerated paragraph to the end of Bankruptcy Code section 1325(a) that is frequently called the "hanging paragraph."²⁹ The hanging paragraph states in full that:

For purposes of [section 1325(a)(5)], section 506 shall not apply to a claim described in that paragraph if the creditor has a purchase money security interest securing the debt that is the subject of the claim, the debt was incurred

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