542 B.R. 522
Bankr. D. Kan.2015Background
- A series of below-median‑income debtors filed Chapter 13 “fee‑only” plans that primarily pay attorney fees (presumptively reasonable fees of about $3,100) and trustee/admin fees, often providing little or no distribution to unsecured creditors.
- The U.S. Trustee objected across these cases, arguing debtors eligible for Chapter 7 may not elect Chapter 13 absent "special circumstances," and moved to convert many cases to Chapter 7 based on lack of good faith (§ 1325(a)(3)/(a)(7)) and infeasibility (§ 1325(a)(6)).
- The Chapter 13 Standing Trustee also objected in some matters, and evidence included debtor testimony, local credit‑counseling expert opinions, and Standing Trustee statistics showing above‑average Chapter 13 completion rates in the Division.
- The court applied the Tenth Circuit’s totality‑of‑the‑circumstances good‑faith test (considering Flygare factors) rather than adopting a per se rule that fee‑only plans are bad faith or requiring a heightened ‘‘special circumstances’’ showing.
- For each debtor the court assessed (good faith and feasibility): it overruled U.S. Trustee objections and denied conversion in most cases where debtors showed sincere motives, inability to afford up‑front Chapter 7 counsel, imminent garnishment risk, or other tactical reasons; but sustained feasibility objections (and ordered dismissal/conversion) in several cases where budgets could not support plan payments.
Issues
| Issue | Plaintiff's Argument (U.S. Trustee) | Defendant's Argument (Debtors) | Held |
|---|---|---|---|
| Whether eligible (below‑median) debtors may choose Chapter 13 when Chapter 7 is available | Debtors should not be permitted to elect Chapter 13 merely to pay attorney fees over time; a high threshold or a showing of "special circumstances" should be required | Debtors may elect Chapter 13; good faith assessed under totality of circumstances; inability to pay Chapter 7 fees up front, garnishments, medical needs, and tactical reasons are legitimate circumstances | Court rejected per se special‑circumstances rule; held debtors may choose Chapter 13 and court must evaluate good faith under totality of circumstances (Flygare factors) |
| What standard determines whether a fee‑only Chapter 13 is filed in good faith (§ 1325(a)(3)/(a)(7)) | Urged a demanding standard that treats fee‑only filings skeptically and requires a heavy burden to justify Chapter 13 election | Good faith is fact‑specific; apply Flygare/totality test; fee‑only plans are not per se bad faith though may be scrutinized closely | Applied totality‑of‑circumstances (considering Flygare factors); declined to impose a rigid ‘‘special circumstances’’ rule; most fee‑only plans here met good‑faith requirement |
| Whether paying counsel’s fees through the plan (rather than upfront in Chapter 7) constitutes improper manipulation | Counsel payment via Chapter 13 is an improper end‑run to obtain fees and is not a sufficient justification for Chapter 13 | Paying counsel via plan can be necessary for indigent debtors facing garnishment and lacking ability to save/borrow; counsel protects debtors and benefits the system | Court recognized Lamie limits on fee payment in Chapter 7 but upheld Chapter 13 fee‑payment practice when part of a good‑faith plan and not abusive; counsel availability and practical consequences (garnishment, health, pro se risks) are relevant |
| Feasibility (§ 1325(a)(6)) — can debtors make plan payments and maintain living expenses? | Many plans are unrealistic; some purportedly fee‑only plans mask inability to fund commitments | Debtors testified to stable income, employer withholding, budgeting, and realistic prospects; some had demonstrated ability to pay | Court sustained feasibility objections in several cases where budgets could not support plan payments; other debtors with stable income, withholding orders, and credible budgets satisfied feasibility |
Key Cases Cited
- Flygare v. Boulden, 709 F.2d 1344 (10th Cir. 1983) (announces non‑exclusive factors and totality‑of‑circumstances approach for good‑faith inquiry in Chapter 13)
- Cranmer (In re Cranmer), 697 F.3d 1314 (10th Cir. 2012) (clarifies good‑faith inquiry post‑§1325(b) and narrows focus while preserving totality analysis)
- Brown (In re Brown), 742 F.3d 1309 (11th Cir. 2014) (upholds denial of fee‑only plan where record showed filing primarily to pay attorney and not in debtor’s best interest)
- Crager (In re Crager), 691 F.3d 671 (5th Cir. 2012) (upholds fee‑only Chapter 13 where bankruptcy court credited debtor’s need and credibility under totality test)
- Puffer (In re Puffer), 674 F.3d 78 (1st Cir. 2012) (rejects per se rule; emphasizes heavy burden to show ‘‘special circumstances’’ but remands to apply totality test)
- Lamie v. United States Trustee, 540 U.S. 526 (2004) (controls that debtor’s counsel cannot be paid from Chapter 7 estate post‑petition, influencing the practical differences between Chapters 7 and 13)
- Lanning (In re Lanning), 545 F.3d 1269 (10th Cir. 2008) (addresses commitment period and below/above‑median debtor treatment)
- Harris v. Viegelahn, 135 S. Ct. 1829 (2015) (Supreme Court decision referenced for distinctions between Chapters and treatment of postpetition wages)