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Court Allows Grace Period for Chapter 13 Debtors to Cure Remaining Debt

In a recent case, a federal appeals court determined that the Bankruptcy Code allows a bankruptcy court to grant a short grace period after the expiration of a Chapter 13 debtor’s payment plan to complete the payment of a debt. In the case, the debtors had filed a Chapter 13 bankruptcy petition, and the court approved their repayment plan. Their plan required payments of $2,485 every month for five years. Later, the monthly payment increased to $3,017 because of an increase in mortgage payments. They made all of the required payments, and at the end of the five-year period, they had paid $174,104, surpassing their original anticipated plan base of $174,059.24.

HourglassDespite this, the trustee alleged that they still owed another $1,123—but the trustee said that she would not object to the debtors paying off the remaining debt. The debtors paid the remaining debt within 16 days. However, after the payment, one creditor argued that the late payment was invalid because the Bankruptcy Code requires all payments to be made within five years.

The court held that bankruptcy courts can grant a reasonable grace period for debtors to cure an arrearage. The court identified a non-exhaustive list of factors to consider in deciding whether to grant a grace period. They were:  1) whether the debtor substantially complied with the payment plan; 2) the debtor’s ability to complete the plan; 3) whether an extension would prejudice any creditors; 4) whether the debtor was to blame; and 5) the availability of other remedies.

The court also found the lower court was reasonable in granting a grace period in this case. The debtors made all of their payments on time throughout the five-year period, the debt was small compared to the overall debt, the debtors were able to pay it quickly, the extension did not adversely affect any creditor, the debtors were not at fault because they were not told of the fee increase until after the plan’s term, and allowing an extension furthered the goals of the Bankruptcy Code and the plan. Therefore, the court’s extension was reasonable and permissible under the Code.

Payment Plans

Chapter 13 allows eligible individuals to pay all or a portion of their debts through payment plans over a period of time. The debtor must propose a payment plan to pay claims from future earnings. The total amount to be paid to complete the plan, including charges for escrow account fees and the trustee’s services, is generally known as the “plan base.”The payment plan’s term cannot be longer than five years. However, as the federal appeals court held, a bankruptcy court may grant a reasonable grace period in some circumstances.

Are You Considering Filing for Bankruptcy?

If you are considering bankruptcy, it is important to understand what a bankruptcy petition would mean and what a good option is for you. At Kruger & Schwartz, we understand the stress of being in debt and aim to find a resolution that is appropriate in your unique circumstances. We provide guidance on debt relief options as well as advocacy during a bankruptcy filing in order to get you the fresh start you need. We do this first by offering you a free initial consultation. To schedule yours, call us toll-free at 866-366-3328 or send us an email online.

More Blog Posts:

Ex-Girlfriend’s Claim Against Debtor Seeking to Exempt Loan from Bankruptcy Fails Because Court Finds Debtor Did Not Make False Statement, Kentucky Bankruptcy Lawyers Blog, published May 8, 2017.

Recent Case Determines Debtor’s Tax “Returns” Are Not Dischargeable Due to Late Filing, Kentucky Bankruptcy Lawyers Blog, published June 16, 2017.

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