Fee-Only Plan Has Purpose beyond Payment of Fee

Posted by NCBRC - February 29, 2016

Although the debtor’s chapter 13 plan effectively paid nothing to the debtor’s single creditor, it was filed in good faith. In re Banks, No. 15-9819 (Bankr. N.D. Ill. Feb. 8, 2016).

Mr. Banks had no assets and only one debt: $5,080 in city parking tickets. His chapter 13 plan contemplated paying his entire $120 disposable income for 36 months for a total of $4,320, $4,000 of which would go to his bankruptcy attorney, and $285.12 to the bankruptcy trustee. The trustee challenged the plan as not having been filed in good faith under section 1325(a)(7).

The Seventh Circuit applies a fact-intensive, case-by-case, analysis when addressing the issue of good faith filing. Ravenot v. Rimgale (In re Rimgale), 669 F.2d 426 (7th Cir. 1982). The court noted that fee-only plans, while not per se bad faith, are subject to a heavier burden to demonstrate a “special circumstance” justifying the plan. The decision rests on whether the debtor is abusing the provisions, purpose or spirit of the Bankruptcy Code, or whether he has proposed the plan in an honest effort to repay creditors to the best of his ability. An important consideration is whether the debtor would be better off in chapter 7 but appears to have filed chapter 13 solely for the purpose of paying off his attorney.

As an initial matter, the court found that Mr. Banks appeared to be an ideal candidate for chapter 7 as he had no non-exempt assets that would be vulnerable to liquidation and was below median. Furthermore, in chapter 7 the attorney fees would be smaller and he would likely obtain his discharge more quickly. The court weighed those considerations against the single factor that parking tickets, as debts owed to the government under section 523(a)(7), are not dischargeable in chapter 7 but may be discharged under section 1328(a). As the debt to the City of Chicago was the only debt Mr. Banks sought to discharge, this established an independent reason for his filing under chapter 13. The fact that Mr. Banks pledged to commit all of his disposable income for the applicable commitment period distinguished his case from others in which courts have found bad faith. Moreover, the court found the creditor would receive as much in chapter 13 as it would in chapter 7 as Mr. Banks had no non-exempt assets to liquidate.

The court rejected the trustee’s argument that the plan was not filed in good faith because it did not propose an “adjustment of debts.” The court found no such requirement in the Code and, in any case, Mr. Banks did in fact propose to “adjust” the only debt plaguing him.

With respect to the reasonableness of the flat fee of $4,000, the court found that Mr. Banks’ attorney’s fee was reasonable in part because the fee agreement obligated the attorney to represent Mr. Banks through all phases of the case. Though not dispositive, the fact that counsel represented Mr. Banks against the trustee’s challenge to the plan further vindicated the fee.

Banks Bankr ND Ill Feb 2016 opinion


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