Summary of a Recent
Judicial Development in
Bankruptcy

Post-Discharge Secured Debt
Excepted from Discharge

Harrison M. Pittman
Staff Attorney

In an action involving a debtor who completed payments pursuant to his Chapter 12 bankruptcy plan and received a discharge but subsequently defaulted on two post-discharge payments it owed to one of its creditors, the United States Bankruptcy Court for the Western District of Oklahoma has ruled that, despite the creditor's attempt to collect both the secured and unsecured portions of the pre-petition bankruptcy claim, its claim was limited to the amount of the secured claim. In re Stidham, 292 B.R. 204, 205-07 (Bank. W.D.Okla. 2003).

The debtor was a farmer who filed a Chapter 12 bankruptcy petition. See id. at 205. Soon thereafter, one of the debtor's creditors, a bank, filed a proof of claim asserting that it held a secured claim against the debtor for $315,342.48 that resulted from a pre-bankruptcy state court foreclosure judgment. See id. In January, 1998, the bankruptcy court confirmed the debtor's Chapter 12 plan provided that the debtor

would surrender 6,624 bushels of wheat in satisfaction of that portion of . . . [the creditor's] claim secured by wheat, that the full amount of . . . [the creditor's] claims secured by cattle would be paid by a date certain, and that . . . [the creditor] would be given a secured claim in the amount of $75,000, to be secured by a second mortgage on ten tracts of land.

Id.

Under the debtor's plan, payment on the $75,000.00 claim "was to extend beyond the term of the plan with semi-annual payments of $4,188.38 until December 31, 2004, at which time . . . [debtor] was to make a balloon payment of the balance due (as authorized by 11 U.S.C. § 1222(b)(9))." Id. All remaining debt owed to the creditor was to be treated as unsecured. See id. The debtor made all payments due under the Chapter 12 plan, received a discharge from bankruptcy, and his bankruptcy case was closed. See id. However, the debtor subsequently defaulted on two of the post-default payments owed to the creditor. See id.

The creditor asserted that the debtor's default "authorized it to collect the full amount of its pre-bankruptcy claim, both the secured and unsecured portion" and brought an action "seeking to collect the entire amount of its claim as evidenced by its pre-bankruptcy judgment." Id. The debtor argued that the Chapter 12 plan "'permanently modified'" the creditor's pre-bankruptcy claim and the creditor's "claim [was] now limited to the $75,000 secured claim provided in the plan." Id. The parties filed motions for summary judgment, and the bankruptcy court ruled in favor of the debtor. See id.

The court explained that the issue was whether a creditor whose debtor "defaulted on an extended loan payment schedule after discharge of a Chapter 12 plan, should be allowed to execute on the entire (secured and unsecured) pre-bankruptcy loan amount, or only that portion of the loan that was treated as secured under the plan and upon which payment extended beyond the term of the plan." Id. (emphasis supplied). It noted that the Chapter 12 discharge provision provides that

[A]s soon as practicable after completion by the debtor of all payments under the plan, other than payments to holders of allowed claims provided for under section . . . 1222(b)(9) . . . the court shall grant the debtor a discharge of all debts provided for by the plan . . . except any debt . . . provided for under section . . . 1222(b)(9) of this title . . . .

Id. (quoting 11 U.S.C. § 1228).

The court also noted that Bankruptcy Code § 1228(a) "'lists two types of debts that are excepted from a full-compliance discharge. The first is secured claims that the plan provides will be paid over a period of time extending beyond the payment period for unsecured claims.'" Id. at 207 (quoting 8 Collier on Bankruptcy ¶ 1228.02[3][a] (15th ed. rev.)). It added,

[T]he reason for this exception is obvious. If the plan provides that a secured claim is to be paid over twenty years, the debtor's obligation to pay that claim cannot be discharged at the end of three years. Such a claim will be discharged only at such time as the claim is paid. It should be noted, however, that the exception extends only to the secured portion of the claim. If the creditor's claim was bifurcated into a secured and an unsecured portion under section 1506(a), the unsecured portion is subject to discharge along with other unsecured claims and the exception to the discharge applies only to the secured portion.

Id. (quoting 8 Collier on Bankruptcy ¶ 1228.02[3][a] (15th ed. rev.) (emphasis supplied)).

Based on this analysis, the court concluded that the $75,000.00 post-discharge secured claim was debt that was excepted from discharge under Bankruptcy Code § 1228 and that the unsecured portion was discharged when the debtor completed his Chapter 12 plan and was granted a discharge. See id.

The case was decided on March 27, 2003; this summary was posted May, 2003