The 2 Meanings of Feasibility in Chapter 13 Bankruptcy

Bankruptcy is unfortunately fully of terms and jargon. Worse, some terms don't even have one meaning. Among these are the terms "trustee" (usually the appointed case trustee, but sometimes the United States Trustee), "cramdown" (usually a forced chapter 11 plan treatment, sometimes a modification of creditor's claim down to value of collateral, and "feasibility," the topic of today's post.

The first meaning of feasibility is that of the "feasibility requirement" common to chapter 13 bankruptcy, chapter 11 bankruptcy, and chapter 12 bankruptcy. Simply put, the feasibility requirement is that debtor must demonstrate ability to do what is proposed in the plan, e.g. make the payments. The second meaning is disbursement feasibility: does the debtor propose to pay enough to the standing trustee that the standing trustee can then make all required disbursements to creditors.

The Feasibility Requirement

The feasibility requirement of chapter 13 bankruptcy is a requirement for plan confirmation. The bankruptcy code provides that "the court shall confirm a plan if ... the debtor will be able to make all payments under the plan and to comply with the plan" 11 USC 1325(a)(6). At the most basic level, this requirement poses a simple forward looking question: can the person who filed bankruptcy afford to make the payments proposed to be made over the life of the chapter 13 plan.

When plan payment is constant each month and employment is stable, the bankruptcy debtor's actual payment performance prior to confirmation is taken as a strong indicator of feasibility. Plan payments start within 30 days after a chapter 13 bankruptcy is filed, and often three to six payments would have been due before confirmation is considered by the court. If these first payments are made, such suggests any ability to make the later payments. If those initial payments don't get made, it is difficult for the debtor to explain how the rest are going to be paid.

The feasibility requirement comes up in more complex situations as well. Some examples where plan feasibility might be at issue:

1. The plan proposes a balloon payment at some point in the future. The debtor needs to be able to creditably explain how that balloon is going to be satisfied.
2. The debtor's post-bankruptcy income is known to be changing, raising question about affordability of future payments.
3. When a plan proposes to use the proceeds from sale of property, there may be questions about practicality of timing and whether the sale price is fairly estimated.

In short, the feasibility requirement considers whether the debtor can actually do and pay what the plan proposes.

Disbursement or Mathematical Feasibility

The second meaning of feasibility is commonly used by chapter 13 trustees and their staffs. Here, feasibility refers not the ability of the debtor to pay the trustee but of the ability of the trustee to pay the creditors. Any given chapter 13 plan consists of a collection of provisions on how each claim is treated (e.g. paid) under the plan. A plan might proposes to pay off the past due mortgage balance, reinstate mortgage payments, pay the value of a car, and pay the IRS in full. For a given set of plan provisions, it becomes a mathematical exercise to make sure what goes in is at least equal to what goes out.

This sounds simple at first. Why would anyone propose a plan that didn't add up? Many plans are formulated on imperfect information. A plan is proposed by a debtor with assistance of an attorney at the same time a chapter 13 case is filed. It's very common that a person does not have an exact balance on a mortgage note or does not know the balance the IRS might claim as owed. When the creditors file actual claims that are higher than the estimates, these claims "break" the plan, leaving it underfunded and unable to pay the claims. A trustee might call such an underfunded plan infeasible.

Occasionally, the term "not feasible" is used generically for "not confirmable". This use arises in the context where an alternative plan payment is suggested that would be confirmable. Once again, the issue with the plan is that there is not enough money going in to pay creditors.

Resolving Feasibility Concerns

Part of what makes the dual usage of "feasibility" confusing is they call for different resolutions. When a plan doesn't meet the feasibility requirement, the plan payment needs to be somehow adjusted downwards or evidence brought forward that the plan is otherwise realistic. When a plan is underfunded and mathematically infeasible, the plan payment needs to be adjusted upward or claims need to be disputed.

The end result can be a situation that any plan that is mathematical feasible will fail to meet the feasibility requirement--the plan is underfunded and the debtor cannot afford to fund it fully.

Bottom line: If there's something wrong with your chapter 13 bankruptcy plan, ask questions until you understand what is going on and what needs to be done.