UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

COVINGTON DIVISION

IN RE:

KAREN S. FIELD

DEBTOR CASE NO. 94-20953

Chapter 13

MEMORANDUM OPINION

This matter is before the Court on the Trustee's Objection to Paying Interest on Co-Signed Obligations and to Payment of Unsecured Debt Outside the Plan. The Court heard this matter on January 3, 1995, and allotted time for the submission of authority on the issues. Both the Trustee and the debtor have since filed memoranda in support of their respective positions, and the matter is ripe for decision.

The record in this case indicates that the debtor filed her Chapter 13 petition on August 29, 1994. Schedule F--Creditors Holding Unsecured Nonpriority Claims--lists a claim by Childrens Hospital Credit Union ("CHCU"), for $3500.00. Schedule H--Codebtors--lists Thomas Brueggen, the debtor's father, as codebtor on this debt. The debtor filed her Chapter 13 Pool Plan on August 29, 1994, proposing to pay CHCU as a "class 2 claim" outside the Plan. The Plan further proposed to pay two secured creditors, Provident Bank and Sears, to the extent of their allowed secured claims, and all other unsecured creditors "the highest percentage possible."

The Trustee's Report and Recommendation as to Confirmation, filed herein on November 7, 1994, did not recommend confirmation because of the proposal to pay CHCU outside the plan by payroll deduction. The debtor filed an Amended Chapter 13 Pool Plan on November 21, 1994, increasing the amount to be paid monthly to the Trustee, and providing that CHCU be paid "at 100% with contract interest due to its cosigned status." In his Second Amended Report and Recommendation filed on December 2, 1994, the Trustee recommended that the Amended Plan not be confirmed because it proposed to pay CHCU inside the Plan with contract rate of interest.

The Trustee's Objection states that he does not object to the separate classification for CHCU debt, as this is provided for in 11 U.S.C. '1322(b)(1). His objection is directed at the proposal to pay post-petition interest on the unsecured debt at the contract rate, and direct payment of the claim outside the plan by payroll deduction. He argues that, with three exceptions, none of which are applicable here, claims for post-petition interest have historically been denied. He cites several cases in support of his contention.

The cases cited involve Chapter 13 cases in which there were post-petition interest claims. However, only one of these cases, In re Saunders, 130 B.R. 208 (Bkrtcy.W.D.Va. 1991), involves a codebtor. In that case, the debtor proposed, as here, to pay a creditor in full. The creditor's claim consisted of the principal amount due plus attorney fees. As the Trustee points out, the Saunders court held that

....when a Chapter 13 plan proposes to pay an undersecured or unsecured creditor the full amount of such creditor's claim, the creditor is not entitled to recover the postpetition interest, attorneys' fees, cost or other charges from the codebtor, even if such items are provided for in the agreement under which the claim arises.

At page 213. In the Saunders case, the debtors did not propose to include the attorneys' fees in their plan, and the court did not rule on that question, but on whether the creditor could pursue the codebtor for the fees. Judge Anderson notes that the general rule is that no interest is paid on the undersecured portion of secured claims, at page 210, citing United Savings Association of Texas v. Timbers of Inwood Forest, Inc., 484 U.S. 365, 108 S.Ct. 626, 631, 98 L.Ed.2nd 740 (1988) and therefore it follows that this same general rule provides that no interest is paid on unsecured claims.

Apparently some courts have concluded that the specific provision allowing separate classification and treatment of comade claims provides an exception to the general rule. The Saunders court in fact points out that some courts have allowed postpetition interest where it was not provided for in the plan, thus prompting many debtors to include it in their plans:

11 U.S.C. '1301(c)(2) provides that a creditor may obtain relief from the codebtor stay once a Chapter 13 plan is filed if the plan does not propose to pay the creditor's claim in full. Based on section 1301(c)(2), some courts have allowed creditors to seek postpetition interest from codebtors to the extent that the plan does not allow for it, reasoning that a creditor is not being paid in full if it does not receive postpetition interest. As a result, in order to protect the cosigner, cosigned debts are often separately classified and paid in full with postpetition interest. (Emphasis added). See 11 U.S.C. '1322(b)(1).

At page 213.

In In re Austin, 110 B.R. 431 (Bkrtcy.E.D.Mo. 1990), the Chapter 13 Trustee objected to the claim of a creditor which included postpetition interest. The debtors' confirmed plan provided that cosigned loans or accounts would be paid "100% of claim filed and proven." As concerns this particular claim, the court stated:

The Claimant has argued, and the Debtors have agreed, that it was the Debtors' intention to pay the full amount of the allowed claim through the Chapter 13 plan so as to avoid any collection activity against the co-maker who is not a debtor in a bankruptcy case.

.......

It has been determined that pursuant to Section 1301(c)(2), the co-maker is liable to the claimant for the payment of post-petition interest which is not provided for in a debtor's plan. In re DeDominizio, 11 B.R. 357 (Bankr.D.Conn., 1981); In re Henson, 12 B.R. 82 (Bankr.S.D.Ohio, 1981). Therefore, a creditor's rights may be protected by a Chapter 13 plan which provides for the payment of the allowed claims including that portion for which the co-maker remains liable.

At page 431. This is exactly the situation in the case at bar.

Another issue to be addressed in resolving this matter, as set out by the court in Ledford v. McCormick, 27 B.R. 434 (Bkrtcy.S.D.Ohio 1983), is whether the

proposal to provide for distribution through Chapter 13 administration of post-petition interest to the separate 'class' of comade debts 'unfairly discriminates' against other general creditors 'only' paid '100 percent.' (quoting from its decision in Household Finance Corporation v. Hansberry, 20 B.R. 870).

At page 438. The Ledford court determined that such discrimination was not unfair, stating

The obvious purpose in assuming the added burden of postpetition interest accruing on Debtors' prepetition comade debt is to protect Comaker from Creditor's efforts to collect the postpetition interest by obviating the possibility of a grant of relief .... from the codebtor stay of 11 U.S.C. '1301. 11 U.S.C. '1301 (a) and (c)(2); Hansberry, supra. It is the determination of the Court that the Chapter 13 process may be used to permit payment of postpetition interest for the reasonable purpose of continuing the protection of 11 U.S.C. '1301 throughout the pendency of a debtor's Chapter 13 administration.

At page 439.

While it is true that a debtor may not be able to fully protect a comaker unless the plan provides for payment of interest due to the creditor claiming the comade debt, this Court concludes that the specific language of 11 U.S.C. '1322(b)(1) is not sufficient to provide an exception to the general rule and therefore interest may not be paid on an unsecured comade debt. Further, since this debt is an unsecured debt to be addressed by the debtor during the term of the plan, the debt must be paid inside the plan.

In consideration of all of the foregoing, it is therefore the opinion of this Court that the Trustee's Objection to Paying Interest on Co-Signed Obligations and Objection to Payment of Unsecured Debt Outside the Plan should be sustained. The parties shall prepare an order in conformity with this opinion.

Dated:

By the Court -

____________________________

Judge

Copies to:

Debtor

Jay T. Bosken, Esq.

Sidney N. White, Esq., Trustee

U.S. Trustee