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U.S. District court reverses ruling on Chapter 13 plan

In many instances, appeals of an order entered in a U.S. Bankruptcy Court here in New Jersey or elsewhere are heard by the U.S. District Court in the same geographic area. Recently, a ruling that approved a Chapter 13 bankruptcy plan was reversed by an out-of-state court. The issue was whether the filer was allowed to pay his attorneys' fees before his mortgage under the plan.

The Bankruptcy Court judge approved the plan, which allowed the debtor to pay the attorney prior to resuming mortgage payments. One section of the U.S. Bankruptcy Code does allow for the priority payment of "administrative fees," which includes fees paid to an attorney. However, another section does not allow the interference with the rights of a mortgage lender when the property securing it is the filer's primary residence. 

In this case, the plan required that monies be diverted to pay attorneys' fees, which were a priority administrative expense, before resuming payments on the mortgage. The lender argued that this created a post-petition default, which modified its rights in violation of the U.S. Bankruptcy Code. In this particular instance, the U.S. District Court for the Eastern District of Michigan agreed that a filer's right to cure a post-petition default does not apply when the plan is causing the default.

Putting together a Chapter 13 plan that satisfies creditors, the court and the filer can be a challenge. There are times when certain sections of the code appear to be at odds, and it could lead to an appeal of a ruling made by the judge overseeing the case by either a creditor or the trustee/filer. In order for a New Jersey resident to receive the most benefit from a bankruptcy filing, it is sometimes necessary to take the matter to a higher court.

Source: Bloomberg BNA, "Ch. 13 Debtor Can't Pay His Attorney Before Mortgage", Diane Davis, April 13, 2016

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