“Step Plan” Puts Additional Responsibilites on Debtors

In the Northern District of Georgia, our Chapter 13 plans are often filed as “step” plans. Basically a step plan is one in which the debtor’s trustee payment changes (steps up or steps down) when a known event happens. For example, in this district, vehicle leases are paid directly to the lender. If the lease payment is $325 per month and it terminates in month 27 of the plan, presumably the debtor will have an extra $325 available starting in month 28. The trustee wants this “extra” money. Therefore, the plan filed at the initiation of the case provides that the plan payment increases by $325 per month beginning in month 28. If the debtor has different plans at the time of the step up, the debtor has to affirmatively file appropriate paperwork prior to month 28.

In reality, the debtor will continue to have a need for transportation, so the $325 is not likely to be free. However, because the debtor is in bankruptcy, he can’t just visit his local car dealership and buy or lease another vehicle. Instead, he has to arrange a deal, file an application for approval of and outside loan, and get permission from the trustee. Next, the debtor has to file an amended budget and plan that documents this change. If income or expenses have also changed, those changes also have to be reflected in the new budget and plan.

If the step up in plan payments is going to result in phantom disposable income, the debtor (my client) has to let me know what he wants to do. In my office, I advise my clients to contact me two to four months prior to the “step up” deadline to discuss what the debtor wants to do. In the example discussed above, I would have my client arrange for a replacement vehicle loan and file the necessary paperwork to get that loan approved.

As you might imagine, it can be difficult to arrange the timing so that the new loan is approved at the exact time as the prior lease expires. It can be difficult to find a reasonable vehicle loan when you are in the middle of a Chapter 13. In the Northern District of Georgia, the Chapter 13 trustee will generally not approve an outside loan in excess of $325 per month, and if the debtor’s financial fortunes have improved, the plan may go up any way. To put this another way, step plans often add a layer of complication to Chapter 13 cases.

If your plan is in the form of a step plan you cannot be reactive. I recently received a trustee motion to dismiss on a case in which the debtor did not contact me and had a friend buy a car for her. My client has been using her “disposable” money to pay the car note but the trustee’s office is showing a growing delinquency. This case will likely need to be heard by the judge - and it may end up being dismissed - all because my client did not keep me informed about her activities.