Chapter 13 Can Shield Preferences from Recovery
So long as the debtor is paying unsecured creditors what chapter 13 requires, the debtor is not obliged to pursue preferences.
Chapter 13 can sometimes protect recipients of preferences, as shown in an opinion by Bankruptcy Judge William A. Altenberger of Peoria, Ill.
The debtor had made $8,000 in payments to family members less than one year before his chapter 13 filing. The payments were presumptively preferential.
The chapter 13 trustee agreed that the debtor’s monthly disposable income was $42.50, or about $2,500 over the course of a five-year plan. The debtor was nonetheless proposing to pay about $6,500 to unsecured creditors under his plan.
The debtor’s unsecured claims of $150,000 were not his only worry. He owed domestic support and $33,000 in priority tax claims. The debtor would not pursue the $8,000 in preferences, nor did the plan propose for the chapter 13 trustee to litigate preferences.
The chapter 13 trustee objected to confirmation, arguing that $8,000 should be added to the pot for creditors. The debtor responded by contending that his plan met all the tests in Section 1325. The trustee also argued that the plan was not filed in good faith because the family members were to retain their preferences.
Judge Altenberger overruled the trustee’s objections and confirmed the plan in his December 29 opinion.
First, Judge Altenberger addressed the confirmation requisites in Section 1325, starting with the best interests test in Section 1325(a)(4). It requires that general unsecured creditors receive at least as much as they would in chapter 7.
In a chapter 7 case, the preferences would be the only estate property for distribution to unsecured creditors, but the priority tax claim would sop up the entire $8,000, Judge Altenberger said. Even before chapter 7 administrative claims, unsecured creditors stood to gain nothing.
The plan therefore satisfied the best interests test.
Section 1325(b)(1)(B) requires the devotion of all of the debtor’s “projected disposable income” to the plan. Although “projected disposable income” is not defined in the statute, “disposable income” means “current monthly income” less amounts “reasonably necessary” for “maintenance or support.”
In turn, “current monthly income” is defined in Section 101(10A)(A)(i) to mean the debtor’s average monthly income in the six months before filing.
The parties agreed that the debtor’s disposable income was $42.50 a month, but the trustee contended that the $8,000 was “additional” disposable income.
Judge Altenberger said that a preference claim only arises on filing and is pursued “on behalf of the bankruptcy estate.” The preference recoveries, he said, should not be included in “additional” disposable income.
The plan therefore satisfied Section 1325(b)(1)(B).
The chapter 13 trustee also failed to persuade the judge with his good faith argument under Section 1325(a)(3).
The only element of bad faith alleged by the trustee was the amount of the pool for unsecured creditors. Because the plan was paying creditors more than they would have been given under chapter 7, Judge Altenberger said that the debtor “cannot be faulted for proposing what the Bankruptcy Code permits him to do.”
Moreover, recovery of the preferences would not benefit unsecured creditors, because proceeds from judgments or settlements would go toward priority tax claims.
In terms of good faith, Judge Altenberger said that the debtor “has proposed to pay general unsecured creditors more than is required.”
Finding no lack of good faith and compliance with the requisites of Section 1325, Judge Altenberger confirmed the plan. There was no appeal.