Debtors Were Entitled to Discharge after Completing Plan Payments, Even Though they Violated Terms of the Plan and the Confirmation Order

Debtors Were Entitled to Discharge after Completing Plan Payments, Even Though they Violated Terms of the Plan and the Confirmation Order

The Court “may” dismiss a chapter 13 case for “cause,” including unreasonable delay, material default under a confirmed plan, and bad faith. But once the debtor completes all payments under the plan, the Court “shall” grant the debtor a discharge. In this case, the debtors violated both their plan and confirmation order. They flouted their duties to the Trustee, the Government, and the Court throughout the case. Even after the Trustee’s and the United States’ motions to dismiss were pending, the debtors continued to run afoul of the confirmation order. Yet the debtors completed their payments before the trial on these motions. 

Husband and Wife (“Debtors”) filed a Chapter 13 petition in late 2011. They proposed a chapter 13 plan that provided for them to make 60 monthly payments of $707. Under the plan, they would surrender their late model Mercedes Benz and their boat, strip off a $212,494 second mortgage on their homestead, and retain their 2009 Volkswagen.4 On June 28, 2012, the Court entered an agreed order confirming their plan as modified (“Confirmation Order”), increasing their monthly payments to $1,517 for 57 months.

The evidence shows that the Debtors flouted the duties required of them in the the standard confirmation order throughout the case. The Debtors were ordered to immediately notify the Trustee of any change in employment. They were directed to timely file all tax returns coming due during the case and to provide copies of those returns to the Trustee upon request. They were prohibited from incurring any new debt during the plan without the Trustee’s or the Court’s approval. And, they were prohibited from selling, encumbering, or otherwise disposing of their assets without a prior court order.

Debtors completed their plan payments in December 2016 by making their final payment while awaiting the hearing on various motions to dismiss the case for alleged violations of the Confirmation Order. The United States requests that the case be dismissed for cause, asserting that debtors are funding their plan by incurring and not paying post-petition income tax liability without approval of the Court or Trustee. The Trustee asks for the same relief and asserts debtors’ bad faith as an additional basis for cause, plus a conditioned dismissal under § 349 that would not only bar the Holmans from filing another case for 180 days under § 109(g)(1), but would also bar the future discharge of any of the debts scheduled in this case. Both parties request that I dismiss this case without entering a discharge order. Given the amount of money they have paid, that would be a draconian remedy—the bankruptcy equivalent of the death penalty.

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