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Hobson's Choice

posted by Tara Twomey

In my last post this week I wanted to thank everyone at Credit Slips for giving me the opportunity to “speak my mind.” It has been a full week when it comes to bankruptcy and foreclosure. The Senate Banking Committee held its hearing to examine the crisis in the subprime mortgage market, Judge Steen in Texas heard hours of testimony in the hearing to determine the appropriate sanctions for Countrywide’s counsel Barrett Burke, and the Bankruptcy Appellate Panel for the Eighth Circuit decided the case of In re Zahn, 2007 WL 817510 (B.A.P 8th Cir. Mar. 20, 2007). The Zahn case, while little noticed, shines a spotlight on the way chapter 13 debtors fighting to save their homes, must often battle the “system” first.

You see when creditors or trustees object to confirmation of a chapter 13 plan and lose, they may appeal immediately as of right. By contrast, when debtors lose and a plan is rejected, the order in most circuits is considered interlocutory. Debtors must request leave to appeal the interlocutory order and, at least in the Eighth Circuit, leave is rarely if ever granted. As a result debtors are left with two choices: 1) file an amended plan that contains provisions the debtor does not believe are required by the Code, or 2) elect not to file an amended plan and have the case dismissed. The dismissal results in a final appealable order, but also terminates the automatic stay. In addition, under BAPCPA dismissal now has significant consequences if the debtor must later refile.

Not wanting to suffer the consequences of dismissal, the debtor in Zahn tried a different approach—she filed an amended plan and objected to it. This procedure was referred to favorably in dicta from other Eighth Circuit cases. Unfortunately for the debtor, the BAP held that she had no standing to appeal confirmation of her own plan. According to the court, the debtor was not an “aggrieved party.” Despite the court's conclusion, the debtor was effectively left without a way to challenge the original denial of confirmation. With so many chapter 13 issues under BAPCPA unresolved many more debtors are likely to find themselves in this same situation.

Until the Courts of Appeals reconsider their position on this issue (as suggested by Judge Mahoney in concurrence) debtors will have to choose between submitting less favorable plans or having their cases dismissed. Sometimes a choice is no choice at all.

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