Lucky Number 13: Why Courts have Discretion to Allow Debtors to Cure Chapter 13 Arrearages after Five Years

By: Richard Weber, Comment Editor

I. Intro

“I, declare…bankruptcy!”[1]  In the television show The Office, paper supplies manager Michael Scott believes all that is necessary to declare bankruptcy is to verbally “declare” bankruptcy.[2]  Fortunately, one of his co-workers explains that nothing actually happens by simply “declaring” bankruptcy.[3]  Of course, this understanding of bankruptcy is a made-for-tv exaggeration, but for many people, filing for bankruptcy is a confusing and complex process.[4]  Bankruptcy plans are further complicated when courts interpret bankruptcy statutes differently, leading to varying outcomes for debtors.[5] 

The Third and Tenth Circuits interpret § 1328(a) of the Bankruptcy Code differently.[6]  The Third Circuit correctly rules that § 1328(a) grants bankruptcy courts discretion to provide a brief grace period to debtors to cure arrearages[7] in their Chapter 13 bankruptcy plan after the plan’s five-year period has expired.[8]  The Tenth Circuit holds that debtors cannot cure such arrearages.[9]  This Post argues that the Third Circuit is correct because properly applying statutory construction to interpret § 1328(a) unambiguously reveals that § 1328(a) allows a debtor to cure arrearages in a bankruptcy plan after the five-year period. 

II. Background

One of the most important decisions for a bankruptcy court is whether to grant a discharge or dismissal of a debtor’s debts.  A Chapter 13 bankruptcy plan is a set of organized payments from a debtor to a trustee over a set amount of time, with a maximum length of five years.[10] The trustee distributes the payments to the debtor’s creditors.[11]  A bankruptcy plan typically ends in either a discharge or dismissal.[12]  The goal for a debtor is to receive a discharge from a bankruptcy court of her debts.[13]  If a debt is discharged, a creditor can no longer pursue it.[14]  In contrast, if a bankruptcy court does not grant a discharge the court commonly issues a dismissal.[15]  Under a dismissal, a debtor’s debts are no longer protected by her bankruptcy plan and may be pursued by creditors.[16]

Section 1328 of the Bankruptcy Code governs discharges in Chapter 13 bankruptcy plans.[17]  Bankruptcy plans may receive a discharge after the completion of the payment plan.[18]  Bankruptcy courts may grant a discharge only if (1) the debtor has completed all the payments and (2) those payments were under the plan.  Section 1328(a) allows a court to discharge a debtor’s debts once a debtor completes all the payments under her Chapter 13 bankruptcy plan.[19]  Section 1328(a) requires a court to discharge a debtor’s debts “as soon as practicable after completion by the debtor of all payments under the plan.”[20]  The interpretation of “under the plan” determines whether courts have discretion to allow a debtor to cure arrearages in the debtor’s bankruptcy plan after five years.[21]  Different courts give different meanings to § 1328(a) and the phrase “under the plan.”[22]  The Third Circuit interprets the phrase to allow payments after the five-year time limit of the plan has expired.[23]  The Tenth Circuit does not allow payments after the five-year time limit has expired.[24] 

III. Analysis          

Section 1328(a) does not contain a plain or obvious meaning but is unambiguous in the broader context of the Bankruptcy Code.  Section 1328(a) allows courts discretion to permit debtors to cure arrearages after a plan’s five-year limit expires.

Section 1328(a) has No Plain Meaning

The phrase “under the plan” in § 1328(a) contains no plain or obvious meaning.  Merriam-Webster defines “under” as “subject to the authority, control, guidance or instruction of.”[25]  Britannica defines “under” as “controlled or affected by” or “guided or managed by”[26]  while Black’s Law Dictionary contains no definition for “under.”[27]  The phrase “under the plan” cannot be defined using dictionary definitions because there are too many varying definitions for the word “under.”  “[U]nder the plan” could range in meaning from “controlled by the plan,” “guided by the plan,” or “affected by” the plan.  “Controlled”[28] has a different definition than “guided,”[29] and different still from “affected.”[30]  If there are different interpretations, then “under the plan” in § 1328(a) cannot be defined by any dictionary definition. 

Section 1328(a) is Unambiguous in the Broader Context of the Bankruptcy Code

The phrase “under the plan” is unambiguous in the broader context of the Bankruptcy Code, which defines the phrase “under the plan” in § 1328(a) as “payments under the authority of a confirmed plan.”  If a court cannot find a plain or obvious meaning for a word or phrase, it turns to the broader context of the statute, act, or code where the phrase is found.[31]  A tool for examining a phrase in the broader context of a code is searching for identical words or phrases used in other parts of the code.[32]  Identical words or phrases used in one part of a code are generally meant to have the same meaning in other parts of the code.[33]  Another tool for examining a phrase in the broader context of a code states statutes are not written to contain superfluous or inoperative phrases.[34]  Words or phrases combined by conjunctions, such as “and,” are intended to have separate meanings.[35] 

11 U.S.C. § 1146(a) in the Bankruptcy Code renders § 1328(a) unambiguous because § 1146(a) contains the phrase “under a plan.”[36]  Section 1146(a) reads, “delivery of an instrument of transfer under a plan confirmed.”[37]  In Florida Department of Revenue v. Piccadilly Cafeterias, Inc.,the Supreme Court debated the meaning of § 1146(a), particularly the phrase “under a plan.”[38]  The Supreme Court interpreted the phrase “under a plan” to mean “with the authorization of”[39] or “under the authority of a confirmed plan.”[40]  The phrase “under a plan” in § 1146(a) means “under the authority of a confirmed plan.”[41] 

The phrase “under the plan” in § 1328(a) means “under the authority of a confirmed plan.”  Phrases found in one part of the Bankruptcy Code have the same meaning in other parts of the code.[42]  Sections 1146(a) and 1328(a) are both found in the Bankruptcy Code.[43]  Section 1146(a) reads “under a plan confirmed,”[44] and § 1328(a) reads “under the plan.”[45]  The two sections contain nearly identical phrases but in different parts of the Bankruptcy Code.  The phrase “under the plan” in § 1328(a) means “under the authority of a plan confirmed.” 

The phrase “under the plan” in § 1328(a) should be defined to have the same meaning as “under a plan” in § 1146(a).  Bankruptcy courts contemplating a discharge consider only the payments scheduled under a confirmed plan;[46] they do not consider payments outside a confirmed plan.  The “plan” in § 1328(a) is a “plan confirmed.”  The phrase “under a plan” in § 1146(a) means “under the authority of a plan confirmed,” and the phrase “under the plan” in § 1328(a) means “under the authority of a plan confirmed.” 

§ 1328(a) Allows for Cures to Arrearages

The phrase “under the plan” in § 1328(a) means “under the authority of a plan confirmed,” which allows debtors to cure arrearages after the five-year limit.  Section 1328(a) grants a discharge to a debtor who completes all her payments “under the plan.”  Therefore, § 1328(a) grants a discharge to a debtor who completes all her payments “under the authority of a confirmed plan.”  A bankruptcy judge approves a bankruptcy plan, making it a confirmed plan.[47]  The judge’s involvement gives the confirmed plan authority.  The plan lists the payments the debtor must complete.  If payments were originally subject to the authority of a Chapter 13 plan, those are “payments under the plan” as referred to in § 1328(a).  These payments are created under the authority of a plan confirmed.  A debtor attempting to cure late payments “under the plan” of Chapter 13 is still attempting to cure payments created under the authority of a confirmed Chapter 13 plan.  The payments are not new payments created by a court or trustee.  Section 1328(a) allows a bankruptcy court to grant a discharge if all payments have been completed by a debtor.[48]  If a debtor completes all payments created under the authority of a confirmed plan, a bankruptcy court may grant the debtor a discharge.  A discharge could be granted after the five-year period if all the payments have been completed.  A bankruptcy court has discretion to allow debtor to cure arrearages after the five-year time-period.

The Tenth Circuit’s Incorrect Interpretation

The Tenth Circuit’s “natural reading”[49] suggesting that payments only remained authorized within a five-year window is incorrect.  Authorized payments create a debtor’s confirmed bankruptcy plan.  The point of authorization occurs when a judge approves and confirms a plan, which is independent of the expiration period of the plan.  There is no such authorization for a payment that has not been approved by a judge.  These authorized payments remain part of the plan until a judge issues a discharge or dismissal and do not become immediately unauthorized if the bankruptcy plan expires.  Authorized payments remain part of the confirmed plan past the five-year period.

IV. Conclusion

The Third Circuit correctly recognizes that § 1328(a) unambiguously grants bankruptcy courts discretion to allow debtors to cure arrearages in debtors’ Chapter 13 bankruptcy plans.  The Third Circuit’s holding is supported by different rules of statutory construction.  The Supreme Court denied granting cert over this matter, closing the door on the issue for the time being.[50]  Chapter 13 is one of the most common forms of bankruptcy,[51] and uncertainty around discharges creates unpredictability around the most important stage of the bankruptcy plan.  Until the Supreme Court resolves the issue, courts should continue to resolve this issue using the Third Circuit’s reasoning. 

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[1]  The Office: Money (NBC television broadcast Oct. 18, 2007).

[2]  Id.

[3]  Id.

[4]  E.g., Mehran Ebadolahi, What is Bankruptcy Law, BARMAX, https://testmaxprep.com/blog/bar-exam/what-is-bankruptcy-law?v=3 (last visited Apr. 3, 2024).

[5]  See Anne Zoltani & Katharine S. Sender, Circuits Split on Whether Debtors can Cure Chapter 13 Plan Arrearages after Five Years, 40, (Iss. 11), Am. Bankr. Inst.  J. 58, 58–60 (Nov. 2021).

[6]  Id.

[7]  An arrearage “broadly refers to . . . owing a debt.”  The term “arrearage” commonly describes payments that are owed on a debt, “that are meant to occur after they are owed.”  Cornell Law School, Arrearages, Legal Info. Inst., https://www.law.cornell.edu/wex/arrearages#:~:text=Arrearage%20also%20can%20mean%20a,signaling%20a%20warning%20of%20insolvency (last visited Apr. 3, 2024).

[8]  In re Kinney, 5 F.4th 1136, 1147 (10th Cir. 2021), cert. denied, Kinney v. HSBC Bank USA, N.A. No. 21-599, (U.S. Oct. 11, 2022).

[9]  In re Klaas, 858 F.3d 820, 833 (3d Cir. 2017).

[10]  Zoltani & Sender supra note 5.

[11]  11 U.S.C. § 1322(a).

[12]  See id. §§ 1328, 1307; Process – Bankruptcy Basics, U. S. Cts, https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy- basics/process-bankruptcy-basics (last visited Apr. 3, 2024).  

[13]  Cathy Moran, Discharge, Bankr. in Brief, https://www.bankruptcyinbrief.com/discharge/ (last visited Apr. 3, 2024); Discharge in Bankruptcy – Bankruptcy Basics, U.S. Cts, https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/discharge-bankruptcy-bankruptcy-basics (last visited Apr. 3, 2024).

[14]  11 U.S.C. § 1328(c).

[15]  Katie Lincoln-Goldfinch, Major Reasons for Bankruptcy Dismissal, Lincoln Goldfinch (June 13, 2022), https://www.lincolngoldfinch.com/blog/reasons-for-bankruptcy-dismissal/.

[16]  Jonathan Petts, What Happens When a Chapter 13 Bankruptcy Case is Dismissed?, Upsolve, (Oct. 27, 2021), https://upsolve.org/learn/what-happens-when-a-Chapter-13-case-is-dismissed/.

[17]  11 U.S.C. §§ 1307 & 1328; Zoltani & Sender supra note 5; Process – Bankruptcy Basics, supra note 12.

[18]  See Process – Bankruptcy Basics, supra note 12; 11 U.S.C. § 523(a).

[19]  Id. § 1328(a).

[20]  Id. (emphasis added).

[21]  Zoltani & Sender, supra note 5.

[22]  Id.

[23]  In re Klaas, 858 F.3d 820, 826 (3d Cir. 2017).

[24]  In re Kinney, 5 F.4th 1136, 1147 (10th Cir. 2021), cert. denied, Kinney v. HSBC Bank USA, N.A., No. 21-599, (U.S. Oct. 11, 2022).

[25]  Under, Merriam-Webster, https://www.merriam-webster.com/dictionary/under (last visited Feb. 22, 2024).

[26]  Under, The Britannica Dictionary, https://www.britannica.com/dictionary/under (last visited Feb. 22, 2024).

[27]  Black’s Law Dictionary (11th ed. 2019).

[28]  Control, Merriam-Webster, https://www.merriam-webster.com/dictionary/control (“[T]o exercise restraining or directing influence over . . . .”) (last visited Apr. 3, 2024).

[29]  Guided, Merriam-Webster, https://www.merriam-webster.com/dictionary/guided (“[T]o direct, supervise or influence usually to a particular end . . . .”) (last visited Apr. 3, 2024). 

[30]  Affect, Merriam-Webster, https://www.merriam-webster.com/dictionary/affect (“[T]o produce an effect upon . . . to influence”) (last visited Apr. 3, 2024). 

[31]  Norman Singer & Shambie Singer, “Whole Statute” Interpretation, 2A Sutherland Statutes and Statutory Constr. § 46:5 (7th ed. 2021); United States v. Bonanno Organized Crime Family of La Cosa Nostra, 879 F.2d 20, 24 (2d Cir. 1989) (“In ascertaining the proper construction of a specific statutory provision, it is also appropriate and helpful to view the disputed language in context; that is, to interpret the specific provision in a way that renders it consistent with the tenor and structure of the whole act or statutory scheme of which it is a part.”).

[32]  See Norman Singer & Shambie Singer, Each Word Given Effect, 2A Sutherland Statutes and Statutory Constr. § 46:6 (7th ed. 2021); United States v. Menasche, 348 U.S. 528, 538–39 (1955).

[33]  Singer & Singer, supra note 31.

[34]  Singer & Singer, supra note 32; United States v. Menasche, 348 U.S. at 538–539; Yselta Del Sur Pueble v. Texas, 142 S. Ct 1929, 1939–41(2022).

[35]  See generally Yselta Del Sur Pueble v. Texas, 142 S. Ct at 1939–41; Corley v. United States, 556 U.S. 303, 314 (2009).

[36]  11 U.S.C. § 1146(a) (“[U]nder a plan confirmed . . . .”).

[37]  Id. (emphasis added).

[38]  Fla. Dep’t of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. 33, 35 (2008).

[39]  Id. at 39–41.

[40]  Id. at 44.

[41]  Id.

[42]  Caminetti v. United States, 242 U.S. 470, 485 (1917).

[43]  11 U.S.C. §§ 1146(a), 1328(a).

[44]  Id. § 1146(a).

[45]  Id. § 1328(a).

[46]  Henry J. Sommer & Richard Levin, 8 Collier on Bankr. P. 1328.02 (16th ed. 2022) (“1328(a) directs the court, subject to 1328(d), to grant the debtor a discharge as soon as practicable after the completion of all payments under the Chapter 13 plan . . . ‘completion by the debtor of all payments’ in section 1328(a) clearly refers to payments made by the debtor to the trustee . . . .”).

[47]  11 U.S.C. § 1325(a).

[48]  Id. § 1328(a).

[49]  In re Kinney, 5 F.4th 1136, 1143 (10th Cir. 2021), Kinney v. HSBC Bank USA, N.A. No. 21-599, (U.S. Oct. 11, 2022).

[50]  Id.

[51]  Geoff Williams, Chapter 7 vs. Chapter 13 Bankruptcy: Which Is Best for You?, US News (Oct 26, 2022 1:07 PM), https://money.usnews.com/money/personal-finance/debt/articles/bankruptcy-Chapter-7-vs-Chapter-13.