Bankruptcy Laws: Page 8

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• 17.  Trustee compensation

Section 330 (a)(3) is amended to exclude Chapter 7 trustees from the professionals whose compensation is to be based, among other things, on the time spent providing their services. Rather, a new § 330(a)(7) is added, providing that the reasonable compensation of “a trustee” shall be treated “as a commission, based on §326.” Although new paragraph (a)(7) is not limited by its terms to Chapter 7 trustees, Chapter 11 trustees are expressly included in the list of professional subject to & 330 (a)(3), and so it is doubtful the new paragraph applies to Chapter 11 trustees.

Section 1326 is amended to add a new paragraph (b)(3), providing for payment of compensation awarded to a Chapter 7 trustee in connection with the conversion or dismissal of a debtor’s case pursuant to § 707(b). Any such compensation remaining unpaid during the Chapter 13 case is to be paid over the remaining term of the Chapter 13 plan, according to a limiting formula: no more that $25 per month or 5 percent of the average monthly payment made to general unsecured creditors under the plan, whichever is greater. Since most chapter 13 plan do not provide more than $500 per month in payments to general unsecured creditors, it is likely that trustees would be paid no more than $25 per month under this formula – a maximum of $1,500 over a five-year plan.

• 18.  Non-subordination of property tax liens to family support claims

Section 724(b) is amended to limit the authorization of a Chapter 7 trustee to pay priority claims from funds that would otherwise be used to satisfy a property tax lien (and subordinate the tax lien to other liens on the affected property). Except for wage and employee benefit priority claims, this subordination is made inapplicable to perfected ad valorem property taxes, the situation in which it most commonly arises. Moreover, even for wage and benefit priorities, and even as to liens arising from property tax assessed other than on the value of the property, subordination would be allowed under new § 724(e) only after the trustee had exhausted the unencumbered assets of the estate – including § 506(c) recoveries from holders of secured claims. Thus, in contrast to the prior law, if a debtor owes both ad valorem property taxes secured by a lien on the debtor’s property and support obligations, the proceeds property taxes secured by a lien on the debtor’s property and support obligations, the proceeds of any sale of the property will now be used to pay the taxes before the support obligations.

Changes to consumer cases under Chapter 13

• 19.  Secured Claims

Elimination of “cram down” for certain secured loans

Section 1325(a) is amended to limit the power of Chapter 13 plans to cram down secured claims to the value of the collateral under § 506(a). No cram down would be allowed for (1) purchase money security interests in motor vehicles purchased within 910 days of the bankruptcy filing (two days less than 2-1/2 years) or (2) as to all other secured debts (whether or not involving purchase money security interests) incurred within one year of bankruptcy. Under the old law, if a debtor's car was worth $6,000 and the outstanding loan was $10,000, the lender would be assured $6,000 in payment but would have to stand in line with other creditors to try to recover the $4,000 balance. Under the new law, the borrower in many cases will be required to repay the entire $10,000 if the vehicle was purchased within 30 months of the bankruptcy filing.

Valuation of certain secured claims

New § 506(a)(2), discussed above in connection with redemption, applies in Chapter 13 as well as Chapter 7, and, in Chapter 13, has the effect of requiring that the crammed down value of a secured claim be based on the cost to the debtor of replacing the collateral without deduction for costs of sale or marketing. And, that if the collateral was acquired for personal, family, or household purposes, this replacement cost is the retail price for property of similar age and condition.

Payments before and after plan confirmation

S.256 makes two changes requiring adequate protection payments on secured claims in Chapter 13. First, § 1325(a)(5)(B) is amended by the addition of a new subparagraph (iii) requiring that Chapter 13 plans provide for payment of secured claims in equal installments, at least sufficient to provide adequate protection. Second, § 1326(a)(1) is amended by the addition of new subparagraphs (B) and (C), which require that, prior to plan confirmation, and unless otherwise ordered by the court, the debtor must make adequate protection payments directly to the secured creditor, deduct the adequate protection payments from the pre-confirmation plan payments made to the trustee, and give proof of the adequate protection payments to the trustee. The amount required to be paid for pre-confirmation adequate protection is not clearly defined, but it appears that the debtor might have the choice of paying either the amount called for by the plan or the amount due under the loan. Pre-confirmation payments on personal property leases (primarily auto leases) would have to be paid directly to the lessor, with proof of the same provided to the trustee.

Conclusion: The new bankruptcy law imposes many restrictions that will make it much more difficult to discharge unsecured debt, which will allow lenders to enforce and foreclose secured claims such as mortgages over a shorter timeframe. The amount of non-dischargeable debt will tremendously increase, affecting the ability of many households to qualify for future mortgages.

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