The Failure To Pay The Promised Dividend To Unsecured Creditors Was Ruled Grounds For Dismissal Of A Chapter 13 Case, Even If The Debtor Makes All Monthly Plan Payments. 

 In the recent opinion issued in Schlegel v. Billingslea (In Re Schlegel), 14 C.D.O.S. 3166 (March 31, 2015), the United States Bankruptcy Appellate Panel of the Ninth Circuit addressed for the first time whether a Chapter 13 case with a confirmed plan may be dismissed for the debtors’ failure to pay the approved percentage dividend to unsecured nonpriority creditors during the applicable commitment period, even though the debtors otherwise made all monthly payments due under the confirmed plan. 

In Schlegel, the Debtors’ confirmed plan failed to account for a timely filed, judicially allowed unsecured claim in excess of $150,000.00 (“Allowed Claim”).  The Debtors’ confirmed Chapter 13 Plan provided for monthly payments to the Chapter 13 Trustee in the amount of $812.00 over a 60-month commitment period, with a 48% dividend to the nonpriority unsecured creditors.  However, with the inclusion of the Allowed Claim, the Debtors’ proposed monthly payments were grossly insufficient to pay the 48% dividend to the unsecured creditors during the commitment period.  Shortly after confirmation of the Debtors’ Chapter 13 Plan, the Chapter 13 Trustee filed and served a Notice of Claims Filed and Intent to Pay Claims, wherein the Debtors were notified of the Allowed Claim in addition to the amount to be paid and given thirty days to object to the payment of any claims.  The Debtors did not object to the Allowed Claim or otherwise move to modify their Chapter 13 Plan to adjust the percentage dividend to be paid to the unsecured creditors.  The Debtors paid all 60 monthly payments to the Chapter 13 Trustee as required by the Chapter 13 Plan.  In month 59 of the commitment period, the Chapter 13 Trustee filed a motion to dismiss the Chapter 13 case pursuant to 11 U.S.C. § 1307(c)(6) arguing that despite completing the monthly plan payments, the Debtors’ failure to pay unsecured creditors the approved percentage dividend constitutes a material default under the Chapter 13 Plan.

After reviewing several factually similar cases from other jurisdictions, the Court ultimately affirmed the Bankruptcy Court’s decision to grant the Chapter 13 Trustee’s Motion To Dismiss, reasoning that the Debtors’ failure to pay the approved percentage dividend to the unsecured creditors constituted a failure by the Debtors to comply with the other plan terms and was therefore a material default under § 1307(c)(6).  

With the dismissal of the Chapter 13 case, the unsecured creditors were now free to pursue collection of their claims against the Debtor.   

Attention to detail is a core legal best practice. The debtor’s lack of action in either objecting to the unsecured claim or adjusting the monthly payment led to the dismissal of the bankruptcy case and opened the doors for unsecured creditors to seek full payment of their debts. 

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