Fee-Only (almost) Plan Not Bad Faith

Posted by NCBRC - July 17, 2018

“In this Court’s view, attorney fees, which are governed by 11 U.S.C. § 328, should not be intertwined with § 1325(b)(1)’s requirement that debtors pay either 100% of general unsecured claims or all of their disposable income.” In re Jones, No. 17-40497, 2018 Bankr. LEXIS 1244 (Bankr. S.D. Ill. April 26, 2018).

Chapter 13 debtor, Gary Jones, proposed to pay secured creditors directly, and pay into the plan $100.00 per month with that amount going first to pay his attorney’s and the trustee’s fees in full, and then to pay 7.4% to his general unsecured creditors. Despite the fact that the attorney’s fees were below the court-approved no-look fee and that Mr. Jones could not afford to pay more into the plan, the trustee objected to confirmation on the basis that the plan was not filed in good faith.

Applying a totality of the circumstances inquiry into the issue of good faith, the court overruled the trustee’s objection.

The court disagreed with those cases finding that plans paying attorney fees with little or no payment to unsecured creditors are necessarily proposed in bad faith. Such a blanket rule would force a debtor to propose a plan in which either his attorney agrees to a lesser fee, thereby effectively subsidizing the plan, or the debtor pledges to pay more than his disposable income requires. The Code does not require either of these actions. The court also distinguished those cases where the fee-only plan was found to have been proposed in bad faith as involving 0% payments to unsecured creditors, as opposed to the 7.4% proposed in this case.

The court was not persuaded by the trustee’s argument that because Mr. Jones was judgment proof, he did not need to discharge his debts in chapter 13. It found chapter 13 a preferable alternative to subjecting Mr. Jones to the time and expense of protecting his exempt assets in numerous potential state court cases.

Nor did the court find Mr. Jones’s two previous chapter 7 bankruptcies suggestive of bad faith. His most recent chapter 7 was filed seven years before the current chapter 13, and the first chapter 7 was filed twenty one years before that. This did not stand as evidence that Mr. Jones was a serial filer seeking only to delay collection by his creditors.

The court declined to engage in speculation as to whether Mr. Jones would simply convert to chapter 7 once his attorney was paid in full.

The court added that good faith should be determined based on benefit to unsecured creditors. In this case, those creditors stood to gain 7.4% through Mr. Jones’s plan, where in any other circumstance they stood to gain nothing. Finally, the court found generally that it would be difficult to show bad faith when a plan is consistent with the Code and prior holdings of the court.

Jones Bankr SD Ill April 2018

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