Third Circuit Court of Appeals: Chapter 13 debtors may have a grace period to complete their plan after 60 months

The Bankruptcy Code specifies that Chapter 13 plans must provide for payments over no more than 5 years or 60 months. Yet it is not unusual even where the debtor has made all payments to end up with a shortfall at the end of the case due to increased fees or other expenses or other reasons. In Klaas v Shovlin, the Third Circuit Court of Appeals, in a ground-breaking ruling at the circuit court level, held that a bankruptcy court can give debtors in this situation a short but reasonable grace period to pay what is needed.

At the end of their 60 month plan, the Klaases owed another $1123 due to an increase in the trustee’s fee while the plan was underway. The Trustee moved to dismiss the case for that reason. Had that occurred, the Klaases would not have received the discharge they had paid for. Within 16 days after the motion was filed, they paid the difference and the Trustee withdrew the motion. However, a creditor who had joined in the motion objected that the late payment was invalid. The Bankruptcy Court disagreed.  The Creditor then filed a separate lawsuit in the bankruptcy court to deny the Klaases their discharge.  A year later the Bankruptcy Court ruled that as a matter of law the discharge was properly issued.

Both rulings ended up before the Third Circuit Court of Appeals, which ruled that a bankruptcy court has discretion, even after 60 months, to give debtors a grace period to complete plan payments and get a discharge. It found support for this in both the statutory language which limited the length of plans without a specific cutoff for completing payments, and in the purpose of Chapter 13 to afford debtors more flexibility in achieving a fresh start. It rejected the argument that a bankruptcy plan is akin to a contract, and strictly governed by its terms.

The Court cautioned that debtors do not have an absolute right to cure an arrearage after 60 months. Instead, a bankruptcy court can grant a grace period in its discretion applying various factors including how diligent the debtors have been in paying, the time needed to complete payments, what prejudice to creditors would be in allowing the late payment,  how late in the plan term did the issue come up, and whether the shortfall was caused by something the debtors did or failed to do.

Because the Klaases had been diligent and were not at fault, the Third Circuit held that the Bankruptcy Court got it right.

Chapter 13, in the right circumstances, can provide welcome and much-needed relief. However, it requires knowledgeable guidance, and care in fashioning a payment plan, diligence in payment, and attention to detail. We handle these cases regularly and are available to help those who need this special form of relief.

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