Before the Court is a Motion by Ideal Auto Sales for Immediate Pre Confirmation Adequate Protection Payments. Ideal Auto Sales (“Ideal”) asserts that the Chapter 13 Trustee (“Trustee”) is obligated to make adequate protection payments to it immediately and that the Trustee can neither require nor even request that a motion be filed or a hearing held before the payments must be made. Ideal also alleges that, because the Chapter 13 plan filed in the case does not specifically provide for pre-confirmation adequate protection payments to it, the plan violates §1326 of the Code.
Debtor filed her voluntary petition under Chapter 13 on December 8, 2017. On her Schedule A/B: Property, the Debtor listed ownership of a 2008 Chevrolet Equinox valued at $3625. On her Schedule D: Creditors Who Hold Claims Secured by Property, she disclosed that Ideal has a lien on the vehicle created through a purchase-money transaction in November 2016. According to the Debtor, Ideal is owed $12,400. The Debtor also filed a Chapter 13 plan (“Plan”) in which she proposes to pay Ideal $12,400 with interest at 6.25% per annum, in estimated monthly installments of $242 to be distributed by the Trustee.
Ideal promptly filed its claim asserting that, as of the petition date, it was owed $12,341.84 by the Debtor. On its claim form, Ideal did not fill in the requested information about the value of its collateral. Instead, it simply stated that the vehicle securing the indebtedness was acquired by the Debtor through a purchase-money transaction with Ideal within 910 days of the case filing.
On January 9, 2018, Ideal filed its motion requesting pre-confirmation adequate protection payments. In making its request, Ideal says that the failure of the Plan to specifically include such pre-confirmation payments violates §1326 of the Code. 11 U.S.C. §1326.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) made significant changes to §1326 of the Code. 11 U.S.C. §1326. The BAPCPA amendments changed the requirement that a debtor begin making plan payments within 30 days of the filing of a plan to a requirement that such payments begin within 30 days of the order for relief or the filing of a plan, which ever is earlier. 11 U.S.C. §1326(a)(1). The BAPCPA amendments also clarified that the payments required to be made by a debtor included not only the plan payments proposed to be made to a trustee but also ongoing payments for the lease of personal property and payments to provide pre-confirmation adequate protection to holders of certain types of claims secured by personal property. 11 U.S.C. §1326(a)(1)(A)-(C).
The pre-confirmation adequate protection payments provided for in §132604-(a)(1)(C) are limited to payments to holders of purchase-money secured claims and relate only to the portion of the indebtedness that becomes due after the case filing. 11 U.S.C. §1326(a)(1)(C). Debtors are to make the payments directly, and, to the extent that a debtor’s proposed plan designates the trustee as the disbursing agent for plan payments to the creditor, the debtor may deduct any such payments from the amounts otherwise due to the trustee. Id. The debtor must then also provide the trustee with proof of all pre-confirmation payments actually made. Id. To the extent that a party in interest questions the debtor’s compliance with the requirement to make adequate protection payments, after notice and hearing, a court may modify, increase, or decrease such payments. 11 U.S.C. §1326(a)(3).
The BAPCPA amendments to §1326 were met with some criticism, particularly for the provision directing debtors to make pre-confirmation payments directly to creditors who would be paid by the trustee post-confirmation. See In re Brown, 348 B.R. 583, 591-92 (Bankr. N.D. Ga. 2006) (collecting commentary). An obvious concern was the accounting issues that would arise from debtors making payments directly on claims that were ultimately to be paid by the trustee. Id. Because the provisions of §1326, as amended by BAPCPA, were qualified by the statement “[u]nless the court orders otherwise,” many bankruptcy courts— including the Central District of Illinois—chose to enter standing orders modifying the procedures set forth in §1326. 11 U.S.C. §1326(a)(1).
The provisions of the Code and Rules relating to adequate protection payments support the local practice. A creditor may be entitled to relief from the automatic stay if its interests in property are not adequately protected. 11 U.S.C. §362(d)(1). The debtor bears the burden of offering adequate protection payments and proving that a creditor’s interest is adequately protected if stay relief is sought. 11 U.S.C. §362(g)(2); In re Sauk Steel Co., 133 B.R. 431, 436 (Bankr. N.D. Ill. 1991). Nothing in §1326 or the Standing Order changes the controlling law that debtors bear both the ultimate responsibility for making sure that creditors are adequately protected and the consequences if adequate protection payments are not made. And nothing in the Standing Order changed the rights of creditors who do not receive the adequate protection payments they believe they are entitled to receive from seeking relief by filing a motion to compel or modify such payments. 11 U.S.C. §1326(a)(3). Ideal’s remedy for the Debtor not taking the appropriate action to make sure adequate protection payments were being made under §1326 and the Standing Order was to file its own motion—just as the Trustee requested.
Importantly, the Rules appear to require at least minimal notice and opportunity to be heard regarding the allowance of adequate protection payments, even when all parties are in agreement. Fed. R. Bankr. P. 4001(d). Simplified procedures—such as this Court follows—whereby agreed orders may be entered without the necessity of a hearing, are appropriate when sufficient notice and an opportunity for a hearing have been given. Fed. R. Bankr. P. 4001(d)(4). Notwithstanding Ideal’s position, these procedures are also appropriate when addressing pre-confirmation adequate protection issues. Further, it is questionable whether Ideal and its attorney have really thought through the issues associated with receiving adequate protection payments without the entry of an order clarifying how such payments are to be applied.
Adequate protection payments to a secured creditor are made to compensate for the decrease in value of the creditors’ collateral caused by the use of the collateral by a debtor or trustee. 11 U.S.C. §361(1); United Savings Ass’n of Texas v. Timbers of Inwood Forest Assocs., 484 U.S. 365, 370-71 (1988). When a creditor is undersecured, payments may be required to protect the creditor’s interest in its collateral, but such payments are not required to include interest. Timbers, 484 U.S. at 382. Thus, adequate protection payments made to undersecured creditors, including Chapter 13 pre-confirmation payments made pursuant to §1326, are generally applied to principal only. Brown, 348 B.R. at 594.
In its motion filed here, Ideal asks for $242 per month to be paid to it in adequate protection payments but makes no mention of applying any portion of the payments to interest. Although this Court makes no specific finding on the issue, Ideal is most likely substantially undersecured here; the Debtor says that her vehicle is worth only $3625, and Ideal’s secured claim is over $12,000. Nevertheless, in many similar Chapter 13 cases before this Court, Ideal has been able to negotiate agreed adequate protection orders that provide for the application of payments to both interest and principal. In the absence of such orders, Timbers would generally have controlled and required that all payments be applied to principal only. Because the Standing Order makes no mention of the application of payments to interest, it cannot be construed as intending to change the application otherwise compelled by Timbers. Because Ideal actually benefits from the process that promotes the entry of agreed orders that allow for interest payments, its resistance to the process seems counterintuitive.
Ideal’s motion should be granted but only because the Trustee and Debtor’s attorney have indicated a willingness to reach agreement on an order. Ideal’s position that the Trustee is obligated to respond to its demands without question is rejected.
Many complicated issues are involved in determining whether creditors are entitled to adequate protection payments and, if so, what amount is appropriate. With respect to Chapter 13 pre-confirmation adequate protection payments, the issues are somewhat narrowed by the provisions of §1326 and the Standing Order but still may involve contested issues of fact or law. Thus, the local practice, developed at the urging of the Trustee, which requires a motion to be filed and an order to be entered before the Trustee commences making such payments, is appropriate and serves to protect the interests of all parties. Ideal’s criticism of the practice is misguided.
This Court recognizes that it may be confusing, perhaps even frustrating, for local attorneys to see different practices followed in different divisions of the Central District. And this may be particularly true when the different practices arise pursuant to a common Standing Order. But this is not the only area where practices differ from judge to judge or division to division. Learning about, accepting, and following such different practices is part of practicing law. Nothing in this Opinion is meant to suggest that the practices followed by other judges or trustees are problematic. Rather, Ideal and Mr. Justice are admonished that the practices of this Court should be respected and followed in all cases pending before it.
An order will be entered giving the parties time to file an agreed order providing for pre-confirmation adequate protection payments to Ideal.
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.