“Stealth” Plan Provisions: Confirmation of Chapter 13 Plan Did Not Alter Domestic Support Obligation

02 Jun “Stealth” Plan Provisions: Confirmation of Chapter 13 Plan Did Not Alter Domestic Support Obligation

A Tennessee bankruptcy court recently ruled that confirmation by the court of a chapter 13 plan did not affect the debtor’s obligation to continue paying his ex-wife’s house payment. The chapter 13 plan did not specifically say that the ex-wife’s rights were being altered by the proposed plan, although the plan implicitly treated the ex-wife as a typical unsecured creditor without any priority claim for payment.

In re Owen, 2009 WL 693161 (Bky.E.D.Tenn. March 13, 2009), involved a debtor who had been divorced for eleven years prior to his chapter 13 filing. The divorce decree obligated the debtor pay his ex-wife’s house payment until she either died or remarried, but this obligation was not identified as being in the nature of alimony or child support. The divorce decree required that the debtor make the payments directly to the mortgage holder, and that he relinquish his interest in the house.

The debtor’s chapter 13 plan provided that he would surrender the house to the mortgage holder in full satisfaction of its claim. Furthermore, the debtor’s bankruptcy schedules identified his ex-wife as a creditor without any claims in the nature of alimony or child support. The chapter 13 plan was confirmed without objections. Shortly thereafter, the ex-wife refinanced her house and filed a priority claim for the remaining balance on the mortgage, $45,270.84. She asked for treatment of her claim as spousal maintenance, meaning it would be a priority claim which the debtor would have to pay in full.

The debtor objected to the claim, arguing that confirmation of his plan was binding on his wife regarding treatment of her claim as not being entitled to priority.

The court observed that it is common for chapter 13 plans to contain provisions addressing the rights of certain creditors, and normally such provisions are binding on the creditors after the plan is confirmed. However, the court held that in this case, the chapter 13 plan did not specifically address the claim of the ex-wife; it did not expressly deal with her claim at all; it only stated that the property would be surrendered to the mortgage holder in full satisfaction of its claim. Therefore, the chapter 13 plan failed to give the ex-wife sufficient notice of the debtor’s intention to treat her as a non-priority creditor.

Because the plan did not specifically raise the issue of the nature of the ex-wife’s claim, as a matter of due process she should not have been required to litigate that issue during the plan confirmation proceedings. The court therefore allowed her to file a priority claim, despite any language in the plan dealing with the surrender of the house to the mortgage holder.

The court also held that the wife’s claim was in the nature of alimony, and thus was entitled to full payment as a priority debt. This was due to the authority of the bankruptcy court to determine the true nature of divorce decree obligations, despite the presence or absence of such labels contained in divorce decrees.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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