In a Chapter 12 reorganization, dairy farmers filed a plan proposing the re-amortization of a Farm Service Agency (FSA) mortgage on their homestead with payments made directly to FSA. The trustee objected, claiming that the payments must be made through the trustee because FSA was an impaired creditor. If a debtor directly pays a creditor, the trustee does not collect fees on the payments.

The court noted that the plain language of the statute allows the debtor or the trustee to make payments to creditors under a Chapter 12 plan. The court recognized, however, that the courts have been split as to when and if a debtor can make direct payments to an impaired creditor. The court noted three approaches: (1) debtors cannot make direct payments to impaired creditors; (2) debtors can pay secured creditors directly regardless of impairment; or (3) whether direct payments should be allowed must be determined case-by-case.

The court opted to follow number three, the majority approach, and based its determination on the factors set forth in In re Pianowski, 92 B.R. 225 (Bankr. W.D. Mich. 1988). The court found that while the debtors had not supplied various financial reports, they still had time to provide the paperwork because the plan was not yet confirmed. Additionally, the following factors weighed in favor of the debtors: the debtors’ good faith to reorganize; FSA’s legal sophistication as a creditor to monitor payments and consent to the plan; the money saved on behalf of the debtors by making direct payments and avoiding trustee fees; and the small risk of abuse of the bankruptcy system. Based upon this analysis, the court affirmed that the debtors could make direct mortgage payments to FSA.

in_Re_Spindler, 2020 WL 7765808 (Bankr. W.D. Wis. Dec. 28, 2020)