2013 saw several major judicial shifts affecting Bankruptcy law, and one decision by the Ninth Circuit Court of Appeals affects how Chapter 13 bankruptcy plans are proposed and confirmed in profound ways. In August of this year, the Ninth Circuit published the decision In re Flores, taking away significant flexibility from debtors in Chapter 13 when proposing the length of their Chapter 13 payment plans. The issue before the court was pretty technical and wonky, so bear with me because its effects on debtors and creditors are profound, and I believe, profoundly negative.

It all hinges on the requirements contained in the Bankruptcy Code for a Chapter 13 plan proposed by the debtor to be confirmed by the bankruptcy court. Section 1325(b)(4) defines the “applicable commitment period” for a Chapter 13 plan, which is either (a) three years if the debtor’s annual income is less than the median annual family income for the debtor’s state, or (b) “not less than” five years if the debtor’s income is greater than his or her state’s median, or (c) less than three or five, but only if the plan proposed would pay 100% of the debtor’s unsecured debts.

That’s all fine and good. The “commitment period,” for a Chapter 13 payment plan is either three or five years depending on whether the Chapter 13 debtor’s annual income is below or above the median income for a family of the same size for his or her state. That’s what the Bankruptcy Code says, and that wasn’t in dispute in the case.  The issue was whether this code section should be interpreted to strictly mean a “temporal” requirement for the actual length of the payment plan, or whether it wouldn’t make more sense for everyone—debtors and creditors alike—to interpret “applicable commitment period” as the measure for how much the debtor in a Chapter 13 must pay. In other words, if the above-median debtor must commit all her “projected disposable income” to pay to her unsecured creditors calculated over a five year, or sixty month period, then why couldn’t that debtor pay the same amount over a shorter time period? As long as the creditors are getting the same amount, who is harmed, exactly, by the debtor proposing to pay that amount in four years? Or four? Or two and a half, for that matter?

Prior to the In re Flores case, the Ninth Circuit had previously held in In re Kagenveama, that if the Chapter 13 debtor had no projected disposable income under the Means Test, then the bankruptcy code does not impose any minimum plan duration for a Chapter 13 bankruptcy. In discussing the differing approaches by the different appeals court circuits, the Ninth Circuit noted that some of the circuits have interpreted the applicable commitment period for a Chapter 13 to be merely a “monetary multiplier” meaning that essentially as long as an above-median debtor pays as much as he would pay over sixty months, then he should be allowed to pay that amount over a shorter period.  And, further, even if the above-median debtor has projected disposable income, it is the amount paid, not the temporal length of the Chapter 13 payment plan that should matter. This approach makes sense for both debtors and creditors alike.

After all, doesn’t it stand to reason that a creditor in Chapter 13 would prefer to be paid sooner rather than later provided that she is going to be paid the same total amount? As time stretches on in a Chapter 13 plan, the likelihood that some intervening factor like job loss increases that can result in the debtor’s failure to complete the plan.  That puts general unsecured creditors back in the position of having to try to collect on the debt outside of bankruptcy, and in many cases, if the reason for the plan failure is a decrease in income, then the likelihood that the debtor could simply move to convert the case to a Chapter 7 bankruptcy and discharge all the remaining unsecured debt is likewise increased.

The reasoning applied by the Ninth Circuit to impose a rigid temporal requirement for the length of a Chapter 13 rather than the more sensible approach of allowing the plan to be of any length provided that the above-median debtor with disposable income to pay the same amount over a shorter period violates the principle that “a bird in the hand is better than two in the bush.” It doesn’t advance the interests of creditors, and it is certainly bad for debtors.