PBCBA BAR BULLETINS pbcba_bulletin_november 2018 | Page 9

BANKRUPTCY C o r n e r
Is a Chapter 13 Debtor Required to Pay Interest to
Unsecured Creditors?
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JASON S. RIGOLI
In a recent opinion out of the United States
Bankruptcy Court for the Southern District
of Indiana, the Court decided the issue of
whether, “11 U.S.C. § 1325(b)(1)(A) requires
payment of interest on general unsecured
claims where the Chapter 13 plan commits
less than all of the Debtors’ projected
disposable income to the plan.” In re
McKinney, 2018 WL 4378655 at *1 (Bankr.
S.D.Ind. Sept. 13, 2018).
Section 1325(a)(4) requires that “the value,
as of the effective date of the plan, of the
property to be distributed under the plan”
equal the amount that would be paid on the
claim in a Chapter 7 case.
Generally, Chapter 13 cases are filed so
the debtor can keep non-exempt assets,
essentially buying those assets by making
the payments through the plan. Let us
set up a hypothetical situation, where in
The McKinney court recognized a split addition to the facts in McKinney, supra, the
of opinions throughout the country on debtor also had non-exempt assets and the
this issue. Id. at *1-2. The focus of the liquidation test equaled $100,000.
courts coming down to a grammatical
interpretation as to whether the phrase “as In this scenario if the debtor is proposing a
of the effective date of the plan” modifies plan that pays the unsecured creditors 100%
or defines the word “value” in subsection of their claim without interest, it would not
(A) of the Section 1325(b)(1) or if that was appear to be in the best interest of creditors,
simply when the court was to make its who, in a Chapter 7 liquidation, would be
determination as to whether subsection (A) entitled to full payment of their claims plus
or (B) applies to the case. Id. at *2.
“payment of interest at the legal rate from
the date of the filing of the petition,” before
This issue arises where the debtor proposed any distribution could be made back to the
to pay unsecured creditors 100% under the debtor. See 11 U.S.C. § 726(a)(5), (6).
plan, however, there were only $17,116.96
of timely claims filed, the debtor proposed It remains unsettled whether a Chapter
a 60-month plan of $850.00 for a total of 13 debtor must pay interest to unsecured
$51,000.00 over the life of the plan, but the creditors under § 1325(b)(1)(B), but it is
debtor had disposable income of $82,158.60 certainly something for debtor’s lawyers to
over the same period. Id. at 1. Essentially, be aware of when the creditors or trustee
the Debtor is keeping a surplus.
involved are active.
The McKinney court considered both views
of construction of § 1325(b)(1). Ultimately,
the court came down on the side of the
courts that the phrase “as of the effective
date of the plan” is when the court makes
its decision about whether subsection (A)
or (B) applies. Id. at *2.
This article is submitted by Jason S.
Rigoli, Esq., Furr Cohen, 2255 Glades Road,
Suite 301E, Boca Raton, FL 33431, jrigoli@
furrcohen.com
One thing not considered in McKinney, and
potentially not raised, is whether such a
plan that pays unsecured creditors 100% of
their claims without interest, but not 100%
of the disposable income is in the best
interest of creditors. See 11 U.S.C. 1325(a)(4).
PBCBA BAR BULLETIN 9
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