objections to chapter 13 plan … final...objections to chapter 13 plan confirmation and...

OBJECTIONS TO CHAPTER 13 PLAN CONFIRMATION AND POST-CONFIRMATION

MODIFICATIONS

Frank J. Santoro, Esq. Kelly M. Barnhart, Esq.

Marcus, Santoro & Kozak, P.C. 1435 Crossways Blvd., Suite 300

Chesapeake, VA 23320 [email protected]

[email protected]

Disclaimer: The views expressed herein are the opinions only of the authors. This material is presented for education purposes, and to provoke discussion. Please make sure to conduct your own evaluation of the relevant Bankruptcy Code provisions, and as noted throughout the material, use common sense in the presentation of any financial information in connection with a bankruptcy case. Copyright 2008. These materials may not be reproduced without the permission of the authors. # 452486v1

TABLE OF CONTENTS

I. Arguing Means Test Used to Determine Reasonable and Necessary Expenses for

Above-Median Debtors ................................................................................................................. 1

A. Calculating Projected Disposable Income ...................................................................... 3

B. Expenses ............................................................................................................................. 8

II. Applicable Commitment Period: Multiplier or Temporal Requirement? ................. 9

III. 36-Month Plans Proposed by Above-Median Debtors: Can payment to unsecured

creditors be 0%? ......................................................................................................................... 11

IV. Reasons for Post-Confirmation Modification .............................................................. 14

A. Timing Issues ................................................................................................................... 15

B. Refinances and Sales Post-Confirmation ...................................................................... 15

C. Reduction in Income ....................................................................................................... 20

V. Post-Confirmation Modification of Applicable Commitment Period Based on Post-

Confirmation Income Reduction ............................................................................................... 21

VI. Reconsideration of Claims Post-Confirmation ............................................................ 22

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I. Arguing Means Test Used to Determine Reasonable and Necessary Expenses for Above-Median Debtors

11 U.S.C. §1325(b) requires that a chapter 13 plan must provide for “all of the debtor’s

projected disposable income received in the applicable commitment period beginning on the date

that the first payment is due under the plan will be applied to make payments to unsecured

creditors under the plan.”1 While “projected disposable income” is not defined, BAPCPA added

a definition for the term “disposable income” in 11 U.S.C. §1325(b)(2). Disposable income is

defined as “current monthly income received by the debtor . . . less amounts reasonably

necessary to be expended” for the debtor to provide for himself and any dependents.2 Current

monthly income:

(A) means the average monthly income from all sources that the debtor receives (or in a joint case the debtor and the debtor's spouse receive) without regard to whether such income is taxable income, derived during the 6-month period ending on-- (i) the last day of the calendar month immediately preceding the date of the commencement of the case if the debtor files the schedule of current income required by section 521(a)(1)(B)(ii); or (ii) the date on which current income is determined by the court for purposes of this title if the debtor does not file the schedule of current income required by section 521(a)(1)(B)(ii); and

(B) includes any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor's spouse), on a regular basis for the household expenses of the debtor or the debtor's dependents (and in a joint case the debtor's spouse if not otherwise a dependent), but excludes benefits received under the Social Security Act, payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes, and payments to victims of international terrorism (as defined in section 2331 of title 18) or

1 This subsection is only applicable if either the chapter 13 trustee or unsecured creditor has filed an objection to confirmation of the plan. 2 11 U.S.C. §1325(b)(2) (2006).


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domestic terrorism (as defined in section 2331 of title 18) on account of their status as victims of such terrorism.3

A. Calculating Projected Disposable Income

The seemingly precise definition of disposable income and the lack of a definition for

projected disposable income, has resulted in a split among the courts on what actually constitutes

“projected disposable income.” Courts have developed three approaches since the end of 2005

in determining what constitutes projected disposable income. The first approach places less

emphasis on the word “projected” and relies solely upon the debtor’s Form B22C to calculate

how much the debtor should be paying each month under the plan.4 The second approach

considers the figures of Schedules I and J, since these are forward looking projections, rather

3 11 U.S.C. §101(9) (2006). 4 See, e.g., In re Barr, 341 B.R. 181 (Bankr. M.D. N.C. 2006) (holding that an above-median debtor’s disposable income is calculated according to sections 1325(b)(2) and 1325(b)(3), not based on figures listed in debtor’s Schedules I and J); In re Winokur, 364 B.R. 204 (Bankr. E.D. Va. 2007). In Winokur, the Court explained, “[t]here are two approaches to setting plan payments: case-by-case determinations and standardized determinations. The Chandler Act of 1938 and the Bankruptcy Reform Act of 1978 both opted for individualized treatment of each chapter 13 case. In each bankruptcy case, the chapter 13 trustee examined the facts and circumstances of the debtor's financial affairs to determine on an individual basis what the debtor could afford to pay to his or her creditors. Creditors also had the opportunity to examine the debtor, the plan, and the schedules and to object to confirmation. Based on the chapter 13 trustee's recommendations, creditor objections (if any), the debtor's schedules, and any evidence taken at the confirmation hearing, the court determined if the debtor was devoting his or her actual projected net disposable income to the chapter 13 plan. The other approach is a formula applicable to all debtors. The debtor, the trustee and the court only need the input, mainly the debtor's income. The formula mechanically determines the result, the amount of the plan payment. Neither approach is perfect. One consequence of the individualized approach is the seeming lack of uniformity and the consequent suspicion-sometimes well justified-that some debtors are taking advantage of the bankruptcy system by not paying everything that they could. One consequence of the formula approach is that it prevents some debtors who want to pay their creditors from succeeding because the computed payment is too much for their particular circumstances. Another consequence is the windfall some debtors receive when the mathematical formula results in a chapter 13 plan payment that is less than the amount that they can afford to pay. Congress was undoubtedly aware of the tradeoffs between the two approaches. In 1938 and 1978, it chose the first; in 2005, the second. The statutory language is clear. The court has no discretion to substitute its judgment for that of Congress.” Winokur, 364 B.R. at 304-05. Query: if projected disposable income is to be determined using Form B22C and not Schedules I and J, why are those forms still being used, and what are they used for?


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than use of historical numbers, as listed in Form B22C.5 Finally, some courts first consider Form

B22C as a starting point in calculating the debtor’s projected disposable income, but deviations

may be considered when the income and/or expenses claimed have changed as of plan

confirmation.6

Those courts which rely solely upon Form B22C in calculating a debtor’s projected

disposable income, consider section 1325(b)(2) as explaining what is being “projected.” An

example of this line of reasoning is In re Miller7, out of the Northern District of Alabama. The

court in Miller reasoned:

Section 1325(b)(3) clearly states that the amounts reasonably necessary to be expended for purposes of determining disposable income ‘shall’ be determined under §707(b)(2)(A) and (B). The disposable income calculations made on Form B22C are drawn, not from the debtor’s Schedule J, but from the Internal Revenue Service standards and additional deductions allowed under §707(b)(2). Those courts that argue Congress intended something more when it referred to ‘projected disposable income’ in §1325(b)(1)(B) fail to address the fact that Congress defined ‘disposable income’ in §1325(b)(2). Section 1325(b)(1)(B) first makes reference to ‘disposable income,’ and then § 1325(b)(2) goes on to explain what is being ‘projected’.8

Recently, the Bankruptcy Court for the Western District of Missouri decided In re

Riding.9 In this case, the chapter 13 trustee objected to confirmation of an above-median income

debtor’s proposed chapter 13 plan, arguing that it failed to satisfy the projected disposable

5 See, e.g., In re Edmunds, 350 B.R. 636 (Bankr. D. S.C. 2006) (holding that projected disposable income is a forward-looking concept that is not limited to a debtor’s pre-petition income average under Form B22C but relates to debtor’s actual income expected over the life of the chapter 13 plan). 6 See, e.g., In re Kibbe, 361 B.R. 302 (1st Cir. BAP 2007) (affirming Bankruptcy Court’s conclusion that Congress must have intended, by adding the word “projected,” a forward looking examination of a debtor’s future anticipated income); In re Grady, 343 B.R. 747 (Bankr. N.D. Ga. 2006) (holding that the plain meaning of the statute, as well as policy goals of the Bankruptcy Code, calls for a determination of projected disposable income requiring consideration of future and past finances). 7 361 B.R. 224 (Bankr. N.D. Ala. 2007). 8 Id. at 234-35. 9 377 B.R. 239 (Bankr. W.D. Mo. 2007).


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income requirement since the proposed payments were based on her disposable income over the

next 60 months, rather than on her historically-based current monthly income as calculated by

Form B22C. The debtor argued that her current monthly income as calculated by Form B22C

was not indicative of what she could afford to pay, since she had worked an extremely large

amount of overtime over the six months prior to the filing date. The Bankruptcy Court, relying

on a recent Bankruptcy Appellate Panel decision from the Eighth Circuit, In re Frederickson10,

held that the debtor had to propose monthly payments in an amount equal to that which Form

B22C shows the debtor able to afford, even if in reality the debtor could not afford these

payments. The Court noted that “the result here is that the Debtor is in the difficult position of

having to propose a plan that will, most likely, not be confirmed because it is not feasible, since

it appears she will be unable to make the payments she is required to make under §1325(b).”11

Thus, at least in the Eighth Circuit, plan payment amounts are determined solely by Form B22C,

regardless of whether the debtor can actually afford such payments and what the debtor shows

she can actually afford.

Similarly, the Bankruptcy Court for the Eastern District of Virginia, Richmond Division,

held that a debtor’s current monthly income, as depicted in Form B22C, is the amount to be

proposed by debtors as payment to their creditors, rather than the amount reached by calculating

the difference between the income listed on Schedule I and the expenses listed on Schedule J.12

In reaching its decision, the Bankruptcy Court relied upon In re Barr, where the Bankruptcy

Court for the Middle District of North Carolina held:

10 375 B.R. 829 (8th Cir. BAP 2007). 11 Riding, 377 B.R. at 242. 12 In re Buck, 2007 WL 44149145 (Bankr. E.D. Va. Dec. 14, 2007) (slip copy).


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it appears that Congress intended to adopt a specific test to be rigidly applied rather than a standard to be applied according to the facts and circumstances of the case. Calculating ‘disposable income’ for above-median-income debtors under new section 1325(b) is now separated from a review of Schedules I and J and no longer turns on the court's determination of what expenses are reasonably necessary for the debtor's support.13

Courts relying solely upon Form B22C in determining the amount of plan payments of chapter

13 debtors have reasoned that Congress has removed any discretion courts have in applying

§1325(b), resulting in situations where “a debtor’s Official Form B22C will leave them with

either less than they actually need to make the plan payments, or more, depending on the

debtor’s income and expenses from Schedules I and J.”14 This may result in the debtor being

required to pay nothing to unsecured creditors even if the difference between the net income on

Schedule I and the expenses listed on Schedule J show that the debtor can in fact afford to pay

creditors some amount.

Other courts have held that a debtor’s projected disposable income is not to be rigidly

interpreted but instead is a

forward-looking term that is calculated based on a Debtor’s current projected income, not the historical average income for the six months prior to filing the petition. A Chapter 13 debtor’s ‘projected disposable income,’ as calculated by Form B22C, will be presumed accurate unless the debtor or trustee can show that the numbers contained in Form B22C do not reflect a fair projection of the debtor’s budget into the future because the debtor has experienced a substantial change in circumstances.15

This seems to be more in-line with the objective of a fresh start for those persons suffering from

financial problems. It also avoids the logical conundrum of requiring certain debtors to pay more

than they can actually afford and allowing certain debtors to pay less than they can afford. 13 Id. at * 3 (quoting In re Barr, 341 B.R. 181, 185 (Bankr. M.D.N.C. 2006)). 14 Id. See also, In re Musselman, __ B.R. __, 2007 WL 4357161, *4 (Bankr. E.D.N.C. Nov. 30, 2007) (holding that the term projected disposable income and the term disposable income have the same meaning to above-median debtors and thus Form B22C determines the monthly payment amount to be paid to unsecured creditors). 15 In re Purdy, 373 B.R. at 152.


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B. Expenses

Projected disposable income is based upon net income after expenses rather than gross.16

The issue is whether to use the expenses disclosed on Form B22C in calculating a debtor’s net

income or whether to use the expense figures disclosed on Schedule J.

Courts are split about whether to use the expense figures disclosed on Schedule J in

determining the debtor’s projected disposable income, or those expenses listed on Form B22C.

In In re Guzman, the Bankruptcy Court concluded that there is no discretion in determining

which expenses to consider for above-median income debtors.17 Rather, the Court held that

expenses are limited to those listed in Form B22C.18 Why? First, section 1325(b)(3), provides

that, at least for above-median debtors, the expenses to be deducted in determining disposable

income must be determined under 11 U.S.C. §707(b)(2)(A) and (B).19 Section 707(b)(2)(A)(ii)

provides:

[t]he debtor’s monthly expenses shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor’s actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides, as in effect on the date of the order for relief, for the debtor…. In Miller, the Court agreed with the holding of Guzman, concluding that, with respect to

above-median income debtors,

16 In re Casey, 356 B.R. 529, 521 (Bankr. E.D. Wash. 2006). 17 345 B.R. 640 (Bankr. E.D. Wis. 2006). See also, Arsenault, 370 B.R. at 852. 18 Id. at 643. 19 Id. But see, In re Thicklin, 355 B.R. 856, 859 (Bankr. M.D. Ala. 2006). In Thicklin, the Bankruptcy Court for the Middle District of Alabama explained its reasoning in considering Schedule J expenses, “[t]he statute looks to the future, --to the time of confirmation and thereafter—to determine the debtor’s disposable income. It speaks of projected disposable income (§1325(b)(1)(B)) and of amounts to be expended (§1325(b)(2)). A court must consider the future finances of the debtor—not just the historical.”


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BAPCPA clearly limit[s] the court’s role in reviewing the expenses of above median income debtors . . . . By tying the phrase “amounts reasonably necessary to be expended” to the IRS standards, BAPCPA limit[s] the judicial discretion exercised prior to the amendments in determining whether the expenses of an above-median-income debtor are reasonably necessary and replaced judicial discretion with the means-test calculations under §707(b)(2).20

Other courts agree with this analysis. “There is no discretion woven into the statute to substitute

the debtors’ Schedule J expense for the section 707(b) standardized formula for the calculation of

applicable and actual expenses.”21 These courts rely on the statutory language used in reaching

their decisions, finding that the language employed in section 1325 is unambiguous and calls for

fixed formulas for identifying which debtors must repay their creditors and how much should be

repaid. As one court has explained, “Congress’ chosen method of determining the debtors’

disposable income must be respected. The statute must be applied according to its terms.”22

Needless to say, the issue remains open. The decided cases interpreting the

reasonableness of expenses on Schedule J should not be discarded.

II. Applicable Commitment Period: Multiplier or Temporal Requirement?

After determining what a debtor’s projected disposable income is, what is the appropriate

applicable commitment period of a plan, and is applicable commitment period, as provided in 11

U.S.C. §1325(b)(4) a temporal requirement or a multiplier, used only to calculate the dollar

amount a debtor should commit over the life of the plan?

20 361 B.R. at 228. See also, In re Buck, 2007 WL 4418145 at *2. 21 In re Brady, 361 B.R. 765, 772 (Bankr. D.N.J. 2007). 22 Id. at 773. Another court reasoned, “[a]lthough contrary to the stated purpose of BAPCPA and seemingly discriminatory against chapter 13 debtors with incomes below the median, the unambiguous language of the new statute compels but one answer: the above-median debtor’s expense deductions are governed by Form B22C, not by Schedule J. If the above-median debtor’s Form B22C contains enough deductions, the debtor will be entitled to obtain confirmation of a plan paying nothing to the unsecured creditors, even though the debtor’s budget shows that excess funds are available. Guzman, 345 B.R. at 642.


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11 U.S.C. §1325(b)(4), for purposes of §1325(b), provides the length of the applicable

commitment period, stating that:

(A) subject to subparagraph (B), shall be-

(i) 3 years; or

(ii) not less than 5 years, if the current monthly income of the debtor and the debtor's spouse's combined, when multiplied by 12, is not less than-

(I) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner;

(II) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals; or

(III) in the case of a debtor in a household exceeding 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals, plus $525 per month for each individual in excess of 4; and

(B) may be less then 3 or 5 years, whichever is applicable under subparagraph (A), but only if the plan provides for payment in full of all allowed unsecured claims over a shorter period.23

There has been some disagreement on the interpretation of the above quoted language.

“Although apparently straightforward, as with much of BAPCPA, the text Congress used

plausibly lends itself to at least two different interpretations of what exactly ‘applicable

commitment period’ means.”24 A minority of courts have interpreted this language to “require a

multiplication of the debtor’s disposable income projected over a specified period of time to

determine the amount of payment required to unsecured creditors in the plan.”25

23 11 U.S.C. §1325(b)(4)(A) & (B) (2006). 24 In re Slusher, 359 B.R. 290, 300 (Bankr. D. Nev. 2007). 25 In re Brady, 361 B.R. 765, 776 (Bankr. D.N.J. 2007).


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Some courts that hold Form B22C is the only determiner of a debtor’s projected

disposable income, also hold that the applicable commitment period is a multiplier, so that if the

form results in a negative number, the debtor does not have to comply with the language of

§1325(b) to propose a plan of at least 60 months, even if the debtor is an above the median

income earner.26

Most courts, however, have held that the applicable commitment period is a temporal

requirement.27 “These courts find support in the plain language of the statute, having determined

that ‘[t]he use of the term ‘period’ implies time period rather than amount.’”28 As the

Bankruptcy Court in the Western District of Arkansas explained, “[t]he reasoning of the majority

view [that the applicable commitment period is a temporal concept, not a multiplier], in my

judgment, is the most logical interpretation to give effect to Congressional intent, although a

narrow reading of the text of the statute certainly does support the minority view, as various

commentators have concluded.”29

III. 36-Month Plans Proposed by Above-Median Debtors: Can payment to unsecured creditors be 0%?

For debtors whose income is above the median family income, the applicable

commitment period should not be less than sixty months as required by the Bankruptcy Code

and discussed above. This language seems to require that an above-median income debtor must

26 See In re Swan, 2007 WL 1146485 (Bankr. N.D. Cal., April 18, 2007); Brady, 361 B.R. 765; In re Fuger, 347 B.R. 94 (Bankr. D. Utah 2006). 27 In re Luton, 363 B.R. 96 (Bankr. W.D. Ark. 2007); In re Schanuth, 342 B.R. 601 (Bankr. W.D. Mo. 2006); In re Cushman, 350 B.R. 207 (Bankr. D. S.C. 2006); In re Davis, 348 B.R. 449 (Bankr. E.D. Mich. 2006); Slusher, 359 B.R. 290; In re Girodes, 350 B.R. 31, 35 (Bankr. M.D.N.C. 2006); In re Hylton, 374 B.R. 579, 587 (Bankr. W.D. Va. 2007). 28 Hylton, 374 B.R. at 587 (citing Girodes, 350 B.R. at 35). 29 Luton, 363 B.R. at 101 (citations omitted).


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propose payments for a term of not less than sixty months, unless of course, the plan provides

for payment in full of all allowed unsecured claims over a shorter period of time (as provided

for in 11 U.S.C. §1325(b)(4)(B)).

Some courts have held that an above-median income debtor may in fact propose a plan

for less than sixty months and propose less than full repayment, as long as the debtor’s

projected disposable income is a negative amount.30 The rationale behind this is that there is no

minimal amount which must be paid to unsecured creditors since the debtor has no projected

disposable income according to Form B22C.

An example of this line of reasoning is the bankruptcy case of In re Brady, decided by the

Bankruptcy Court for the District of New Jersey. In this case, the Bankruptcy Court stated that

the applicable commitment period is a multiplier to determine the amount of projected

disposable income that must be paid to unsecured creditors and is a requirement only for those

debtors who have projected disposable income to pay unsecured creditors.31

In re Alexander32 is another example of where a bankruptcy court allowed a plan to end

prior to the expiration of five years since the projected disposable income was negative, despite

the debtor proposing a 0% payout to unsecured creditors. The Bankruptcy Court for the

Northern District of New York explained, “if there is no projected disposable income to be

received, the statute [1325(b)(4)(A) and (B)] has no more meaning than if there were no

30 See, e.g., In re Frederickson, 368 B.R. 825 (Bankr. E.D. Ark. 2007); In re Barr, 341 B.R. at 185. 31 Brady, 361 B.R. at 776-77. See also In re Lawson, 361 B.R. 215, 219-21 (concluding that the applicable commitment period requirement is immaterial in situations involving above-median debtors with negative disposable income); 5 Keith M. Lundin, Chapter 13 Bankruptcy, §500.1 at 500-2 (3d Ed. 2006). 32 344 B.R. 742 (Bankr. E.D.N.C. 2006) (holding that above-median debtors whose projected disposable income was negative did not have to have a five year plan)


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creditors to be paid.”33 If there is no projected disposable income, then a debtor does not have

to commit any income for any time period, be it 36 months or 50 months, regardless if the

debtor is characterized as an above-median debtor.34 This logic seems to absolve above-median

income debtors, who have negative disposable income according to Form B22C, but who may

have actual disposable income, from paying anything to unsecured creditors.

Other courts have held that a debtor has no projected disposable income based on Form

B22C must remain in a chapter 13 for five years, unless the debtor proposes to repay unsecured

creditors in full, since the time period is a temporal requirement and not a multiplier.35 These

courts reason that the applicable commitment period dictates the length of the plan and is tied to

whether the debtor is above- median or below-median, not to whether there is negative or

positive projected disposable income.36

The Bankruptcy Court for the Eastern District of Michigan noted, “[s]imply put, the

applicable commitment period under §1325(b)(4) for a below median income debtor is three

years, and for an above median income debtor is five years, but may be shorter for either if the

plan provides for payment in full of unsecured claims over a shorter period.”37 For these courts,

the term period indicates a measurement of time. “If Congress had intended plans to end when

33 In re Green, 378 B.R. 30, 35 (Bankr. N.D.N.Y. 2007). 34 Id. at 39. 35 See, e.g., In re Musselman, ___ B.R. ____ , 2007 WL 4357161 (Bankr. E.D.N.C. Nov. 30, 2007); In re Casey, 356 B.R. 519, 527 (Bankr. E.D. Wash. 2006). 36 See, e.g., In re Nance, 371 B.R. 358 (Bankr. S.D. Ill. 2007). 37 In re Davis, 348 B.R. 449, 453 (Bankr. E.D. Mich. 2006).


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zero or negative projected disposable income was present, Congress could have easily said

so.”38

IV. Reasons for Post-Confirmation Modification

11 U.S.C. §1329 allows modification of a plan, following confirmation, upon either the

request of the debtor, the chapter 13 trustee or an unsecured creditor.39 Note that a secured

creditor may not request such a modification.40 What about the undersecured creditor?

Modification may be to increase or decrease the amount of plan payments, or to increase

or decrease the life of the plan (although no plan may be extended beyond sixty (60) months).41

Modification may also be permitted to change the amount of a distribution to a particular

creditor to reflect payments received by that creditor outside the plan.42

Pursuant to 11 U.S.C. §1329(b)(1), post-confirmation modifications must comply with

§§1322(a) and (b), §1323(c) and §1325(a). For certain circuits, including the Fourth Circuit,

modification of a confirmed plan may not occur unless the party seeking the modification

shows that the debtor experienced a “substantial” and “unanticipated” change in financial

condition following confirmation.43 However, outside of the Fourth Circuit, most courts are

38 Musselman, ___ B.R. at ____, 2007 WL 4357161 at *10. 39 See In re Simmons, __ B.R. ___, 2007 WL 4442745 (Bankr. N.D. Ill. E. Div. Aug. 30, 2007) (holding that residential mortgagee was not an entity authorized to seek modification of debtor’s confirmed chapter 13 plan; only the debtor, the trustee, or an unsecured creditor may request modification of plan following confirmation); In re Sanchez, 372 B.R. 289 (Bankr. S.D. Tex. 2007) (mortgagee, as secured creditor, had no standing to file a modified chapter 13 plan). 40 See Simmons, __ B.R. ___, 2007 WL 4442745. 41 But see, In re Hill, 374 B.R. 745 (Bankr. S.D. Cal. 2007) (two separate chapter 13 debtors, both of whom had materially breached terms of confirmed plans by failing to complete within 60 months, were allowed to continue to perform under their plans). 42 See, e.g., In re Lane, 374 B.R. 830 (Bankr. D. Kan. 2007). 43 In re Arnold, 869 F.2d 240, 243 (4th Cir. 1989).


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moving away from requiring an unanticipated, substantial change to occur before modification

of a confirmed plan may be permitted.44

A. Timing Issues

In In re Meza45, the chapter 13 trustee filed a Motion to Modify the Debtors’ Chapter 13

Plan, because the debtors’ were getting a federal tax refund. This motion was filed near the end

of the debtor’s chapter 13 plan. The Trustee requested an increase in the proposed distribution

to unsecured creditors. After receiving notice of the Motion, but prior to the hearing being held

on the Motion, the debtors paid off the confirmed chapter 13 plan and argued that modification

could not be allowed because all payments required under the plan had been paid and thus the

motion for modification was untimely. The Fifth Circuit Court of Appeals disagreed, finding

that the motion was not rendered untimely by the debtors’ completion of payments required

under the plan. The Court, reading 11 U.S.C. §1329(a) and (b)(2) together, held that a

modification filed prior to the completion of plan payments becomes the plan unless later

disapproved by a court after notice and a hearing. Accordingly, the Court ruled that the debtors

were not entitled to a discharge, pursuant to 11 U.S.C. §1328, until either they paid the refund

into their plan or until the request for modification had been denied.

B. Refinances and Sales Post-Confirmation

In In re Murphy46, the chapter 13 trustee moved to modify the confirmed plans of two

different debtors to increase the amount to be paid to unsecured creditors so as to pay them in

full. On appeal, the cases were consolidated. In the first case (Goralski), the Chapter 13

44 In re Meza, 467 F.3d 874, 877 (5th Cir. 2006); Barbosa v. Soloman, 235 F.3d 31, 41 (1st Cir. 2000); In re Witkowski, 16 F.3d 739, 742 (7th Cir. 1994); In re Sutton, 303 B.R. 510, 516 (Bankr. S.D. Ala. 2003). 45 Meza, 467 F.3d 874. 46 474 F.3d 143 (4th Cir. 2006).


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Trustee sought to modify the confirmed plan following the Bankruptcy Court’s granting the

debtors permission to refinance the mortgage on their residence. From the refinance, the

debtors received some of the equity in their residence in cash in exchange for debt, and the

Trustee sought a portion of this money as additional payment to the unsecured creditors. The

primary reason for the refinance, according to the debtors, was because the debtor husband’s

income had been cut in half, making it hard for them to meet their expenses, including the plan

payments. The debtors intended to use the proceeds to pay their expenses going forward. The

confirmed plan in this case provided that upon confirmation the real property of the debtors

revested in the debtors. The Trustee had objected to the refinance, but the objection was

overruled. At the hearing on the Motion to Modify filed by the Trustee, the Bankruptcy Court

refused to grant the motion and the Trustee appealed. The District Court affirmed and the

Trustee appealed to the Fourth Circuit Court of Appeals.

In the second case (Murphy), the Trustee sought to modify the confirmed plan after the

debtor received permission from the Bankruptcy Court to sell his house. The Trustee sought a

portion of the proceeds for the benefit of the unsecured creditors. Without a modification, the

debtor stood to keep over $80,000, based on a large increase in value of the home following

confirmation. At the time the case was filed, the debtor listed a value of the house at $155,000,

subject to a lien in the amount of $121,000. According to the debtor’s motion to sell the house,

the house was to be sold for $235,000. The Trustee did not file an objection to the motion to

the sale, but did state at the hearing that he needed approximately $30,000 from the sale to pay

the unsecured creditors in full. The debtor objected, arguing that the Trustee was only entitled

to $12,000, the amount still owed under the confirmed plan. First, the Bankruptcy Court ruled

that the sale proceeds constituted income that had to be applied to the plan and directed that


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$30,000 be turned over to the Trustee. Based on debtor’s counsel indicating that he intended to

appeal the ruling, and so that there could be a final order to allow the contract to go to closing,

the order entered by the Bankruptcy Court approved the sale and stated that the disposition of

the $30,000 would be subject to a further order. The Trustee was permitted to disburse the

amount needed to complete the scheduled plan payments, but was required to place the

remaining funds in escrow. The Trustee moved for reconsideration and moved to modify the

plan payments to allow for payment of all pending unsecured claims in full. The Bankruptcy

Court modified the confirmed plan to provide for full payment. The debtor appealed, and the

District Court affirmed. The debtor appealed this decision to the Fourth Circuit Court of

Appeals.

According to the Fourth Circuit, “when a bankruptcy court is faced with a motion for

modification pursuant to §§1329(a)(1) or (a)(2), the bankruptcy court must first determine if the

debtor experienced a substantial and unanticipated change in his post-confirmation financial

condition. This question will inform the bankruptcy court on the question of whether the

doctrine of res judicata prevents modification of the confirmed plan.”47 If the change faced by

the debtors is not substantial and unanticipated then the proposed modification may not be

approved. If, however, the debtor does experience a change in her financial condition which is

substantial and unanticipated, then the Bankruptcy Court may consider whether the

modification may be authorized under §1329.48

With respect to the Goralskis, the Fourth Circuit agreed with the Bankruptcy Court and

District Court, holding that the debtors, through the refinance, did not experience a substantial

47 Id. at 150. 48 Id.


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change in their financial condition. Instead, the debtors “eliminate[d] a portion of their equity

in the property for cash in exchange for a corresponding amount of debt. Thus, even when one

considers that the Goralskis’ residence appreciated in value post-confirmation, at most, they

simply received a large loan in place of a small loan.”49 As such, the debtors did not receive

any income. While the Goralskis received a lower interest rate on the new loan, this was not

enough to show a substantial improvement in their financial condition. Accordingly, based

upon the doctrine of res judicata, the refinance was not a sufficient basis for a modification of

the confirmed plan.

As to Murphy, the Court held that the sale constituted a substantial, unanticipated, post-

confirmation change in circumstances that justified modifying the plan to provide for a

distribution of 100%. This was based primarily on an increase of value of $120,000 in only

eleven months. The Court stated:

[u]nquestionably, the money received by Murphy on the sale of his condominium represents a ‘substantial’ improvement in Murphy’s financial condition. Unlike the Goralskis’ refinancing, Murphy, by selling his condominium, received a substantial amount of readily available cash without any debt. Thus, his financial condition substantially changed with the receipt of this income, while the Goralskis’ condition did not improve in light of the new debt they assumed.50 Next, the Court considered whether the change in financial condition by Murphy could

have been reasonably anticipated at the time the plan was confirmed. The Court held that while

the Trustee should be charged with a general knowledge of real estate market trends in his

district, he could not be charged with reasonably anticipating that the value of Murphy’s

condominium would increase by 51% in less than one year.51

49 Id. 50 Id. at 152. 51 Id.


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Murphy has been cited often for the suggestion that early payoff of a chapter 13 plan

through a sale or refinance of real estate is not a plan modification.52 Some courts have

disagreed with the approach taken in Murphy. For example, in the 2006 case In re Turek, the

Bankruptcy Court for the Middle District of Pennsylvania concluded that if a debtor proposes

to pay off creditors in less time than the time period proposed in the confirmed plan, this is a

proposed modification pursuant to §1329.53 Other courts have agreed, treating motions to

refinance as motions to modify a plan.54 Some debtors even treat a proposed refinance as a

proposed modification, as seen in the recent case, In re Demske.55 Here, the debtors filed a

Motion to Modify Confirmed Chapter 13 Plan, stating that they wished to use the proceeds from

a refinance to pay off their plan early and receive their discharge.56 The Bankruptcy Court

agreed with the debtors that the proceeds from the refinance should not be considered

disposable income, but noted that the proposed refinancing could increase or decrease the

debtors’ disposable income, creating the possibility that the debtors could pay more into the

plan than what was originally proposed in the confirmed plan. “If the refinancing increases

Debtors’ disposable income, then that increase must be projected for the balance of the three

years so as to determine what the unsecured creditors would receive over the time of the three-

52 In re Turek, 346 B.R. 350, 355 (Bankr. M.D. Pa. 2006) (citing In re Miller, 325 B.R. 539 (Bankr. W.D. Pa. 2005)). 53 Id. at 356. See also, In re Witkowski, 16 F.3d 739, 742 (7th Cir. 1994). 54 See, e.g., In re Sunahara, 326 B.R. 768 (9th Cir. BAP 2005); In re Easley, 205 B.R. 334 (Bankr. M.D. Fla. 1996); In re French, 2005 WL 548081 (Bankr. D. Vt. 2005). But see, In re McCollam, 363 B.R. 789 (E.D. La. 2007) (holding that the proceeds from the sale of the debtor’s house was not disposable income, such that the proceeds did not have to be devoted to the payment of creditors under the plan and that accelerated payment of the full amount owing under the confirmed plan from the proceeds could not be considered a modification to plan). 55 372 B.R. 85 (Bankr. M.D. Fla. 2007). 56 Id. at 87.


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year plan.”57 Here, there was insufficient evidence presented to the Court regarding how the

refinancing would affect the debtors’ disposable income, so the Court was unable to grant the

debtor’s motion to modify plan.58

C. Reduction in Income

In In re Ireland59, the debtors, at the time of filing, were above-median income debtors,

and therefore proposed a chapter 13 plan with a term of 60 months, and which proposed a sum

that would pay all unsecured creditors in full. On September 13, 2006, the plan was confirmed.

One week later, the Debtors filed an amended Schedule I showing a reduction in net monthly

income due to the Debtor’s husband’s job change and a modified plan, which reduced the plan

payment amount (although the plan term remained at 60 months), resulting in the unsecured

creditors now receiving approximately 19% of the amount owed. In this case, the Chapter 13

Trustee argued that §1325(b) precluded the debtors from changing the monthly payment

amount to unsecured creditors since this figure was based upon the current monthly income

figure listed on Form B22C, which figure was permanently fixed, regardless of a change in

circumstances. Even if this was true, the Court noted that this would result in “an absurd

result,” and thus should not be adopted.60 The Court reasoned that “[t]here is no indication that

with the enactment of BAPCPA, Congress intended to repeal, by implication, the provisions of

11 U.S.C. §1329 that give the Bankruptcy Court flexibility to deal with changed circumstances

after a plan has been confirmed.” Thus, the Court concluded, in order to determine the

57 Id. at 89-90. 58 Id. at 90. 59 366 B.R. 27 (Bankr. W.D. Ark. 2007). 60 Id. at 33.


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projected disposable income in a modified plan is to consider Schedules I and J.61 In this case,

the debtors’ proposed the modified plan in good faith and met the requirements of §1329, and

therefore the Court overruled the Trustee’s objection to confirmation of the modified plan.

V. Post-Confirmation Modification of Applicable Commitment Period Based on Post-Confirmation Income Reduction

There are very few cases that deal with whether a chapter 13 debtor may modify a

confirmed plan in order to adjust the applicable commitment period based on an income

reduction. As time goes on however, and as more courts rely solely upon Form B22C to

determine a debtor’s projected disposable income when the Form does not accurately reflect the

debtor’s actual income, it is logical that more cases will deal with this topic. There is one case,

In re Ewers62, which deals squarely with this topic. In Ewers, the chapter 13 debtors’ income

was above the median in the area the debtors lived at the time the petition was filed and at the

time the original chapter 13 plan was filed. As a result, they proposed a five-year plan, which

was confirmed. Not long after confirmation, the debtors retired from their jobs and they filed a

modified plan, which reduced the applicable commitment period from five to three years. The

Trustee objected, arguing that §1329 does not allow a debtor to shorten a plan term to less than

the debtor’s applicable commitment period in §1325(b), unless the debtor proposes full payment

to unsecured creditors. In support of her position, the Trustee argued that: (1) the applicable

commitment period is a temporal requirement in which a debtor must pay into a chapter 13 plan

and cannot be modified without full repayment to unsecured creditors pursuant to

§1325(b)(4)(B); (2) the applicable commitment period may not be modified under §1329(a),

61 Id. at 34. 62 366 B.R. 139 (Bankr. D. Nev. 2007).


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since a debtor’s applicable commitment period is determined by a debtor’s current monthly

income, which does not take into account post-petition income; and (3) §1329(a) does not

“expressly say that a debtor can shorten the applicable commitment period.”63 The Court

rejected the Trustee’s arguments, reasoning that “if the trustee were correct, then §1329(a)

would be rendered meaningless.”64 The Court concluded that the plain language of the statutes

do allow a debtor, who is an above-median income debtor as of the date of filing, to seek a

modification (shortening the term of the plan), if that debtor experiences a substantial reduction

in income following confirmation of a chapter 13 plan. That is the purpose of §1329. “While it

is true that the 3 and 5-year periods in §1325(b) refer to plan lengths, and are “time periods” as

the trustee contends, these two applicable commitment periods do not forever define the

duration of a chapter 13 plan.”65 The Court held that the term of a modified plan is not

restricted to the applicable commitment period that is first established by §1325(b). As long as

a modified plan meets the requirements of §1329(b), and is proposed in good faith, then the

debtors’ plan may be modified from 5 to 3 years.66

VI. Reconsideration of Claims Post-Confirmation

11 U.S.C. §1327(a) provides that a confirmed plan binds the debtor and all creditors,

whether or not the claims of the creditors are provided for by the plan, and whether or not the

creditors have objected to, have accepted or have rejected the plan. Courts have noted that the

63 Ewers, 366 B.R. at 140-41. 64 Id. at 141. 65 Id. at 143. 66 Id.


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binding effect of a confirmed plan may result in res judicata on claims that were or could have

been decided in the confirmation process.67

11 U.S.C. §502(j), however, provides for an exception to the res judicata effect of a

confirmation order, and provides a separate and independent authority for reducing claims

based on the equities of the case.68 Courts may consider a motion pursuant to §502(j) at any

time, even following confirmation of the plan.

For example, in the bankruptcy case In re Ross, the debtors filed for bankruptcy relief on

May 27, 2005, and listed Daimler Chrysler as a secured creditor with a claim in the amount of

$11,827.50. Daimler Chrysler filed a secured claim in the approximate amount of $20,000 on

June 8, 2005, to which the debtors objected. The Bankruptcy Court entered an order allowing

the claim as secured in the approximate amount of $14,000 with the remaining balance of

approximately $6,000 to be treated as unsecured. On October 12, 2005, the debtors’ plan was

confirmed. On April 1, 2007, the debtors sought to reconsider the amount of Daimler

Chrysler’s claim following repossession and sale post-confirmation of the vehicle securing the

claim.69 The debtors did this by filing an objection to the claim asking that the secured claim be

limited to those amounts already disbursed to the creditor by the Trustee.70 Daimler Chrysler

filed a response, arguing that §1329 and the doctrine of res judicata precluded the debtors from

trying to change the classification of its claim.71

67 See, e.g., In re Simpson, 240 B.R. 559, 561 (8th Cir. BAP 1999). 68 In re Ross, 373 B.R. 656 (Bankr. W.D. Mo. 2007). 69 Id. at 658. 70 Id. 71 Id.


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The Court held that the debtors may file a pleading, pursuant to §502(j), seeking a

determination of whether cause exists to reconsider a creditor’s claim, even after confirmation

of a chapter 13 plan.72 This section provides the Court with the authority to reconsider a claim

and determine whether it should be allowed or disallowed73, and reconsideration may occur

even after confirmation of a plan.74 In cases where the collateral is repossessed and sold after

the claim has been allowed, reconsideration of such claim is appropriate in order to properly

determine the value of the collateral and how much its claim should be for, if anything,

following sale.

There is a split in authority, at least with respect to pre-BAPCPA cases, concerning what

claim remains to be paid to a secured creditor through a chapter 13 plan post-confirmation after

either repossession or surrender of collateral. May a debtor may modify a confirmed plan in

order to address the treatment of a creditor who was a secured creditor at the time of

confirmation of the plan, but later the debtor wishes to surrender the property and reclassify the

creditor as an unsecured creditor? Some courts have approved such modifications.75 One

determining factor considered by courts deciding whether to allow such modification is whether

the creditor, after receiving proper notice, objected to the proposed modification and

treatment.76 However, in the recent case In re Arguin77, chapter 13 debtors sought modification

72 Id. at 659. 73 Id. at 660 (citing In re International Yacht & Tennis, Inc., 922 F.2d 659, 662 n.5 (11th Cir. 1991)). 74 Id. (citing In re Zieder, 263 B.R. 114, 116-120 (Bankr. D. Ariz. 2001)). 75 See, e.g., Zieder, 263 B.R. 114; In re Jefferson, 345 B.R. 577 (Bankr. N.D. Miss. 2006); In re Mason, 315 B.R. 759 (Bankr. N.D. Cal. 2004); In re Hernandez, 282 B.R. 200 (Bankr. S.D. Tex. 2002).. 76 See, e.g., In re Bowman, 2007 WL 1466743 (Bankr. W.D. Tex. May 15, 2007) (slip copy). 77 345 B.R. 876 (Bankr. N.D. Ill. 2006).


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of their confirmed chapter 13 plan in order to surrender a vehicle that no longer worked, and

adjust the secured claim of the creditor to zero, which the Bankruptcy Court for the Northern

District of Illinois would not approve. 78 The Court held that the debtors were collaterally

estopped from modifying their plan to surrender the vehicle and increase the creditor’s

unsecured claim, observing that according to Adair v. Sherman79, in the Seventh Circuit a

secured claim which is filed pre-confirmation without objection is allowed and treated

accordingly in a confirmed chapter 13 plan, cannot later be attacked as to the secured value,

thus precluding the debtors from obtaining the relief they sought. The Court held that the

debtors could not use §1329 to strip down a secured claim that was crammed down at

confirmation.

Following the enactment of BAPCPA there have been very few cases involving whether

a deficiency in a secured claim following post-confirmation surrender or repossession of

collateral may be reclassified as an unsecured claim. The only reported decision is In re Lane80,

out of the Bankruptcy Court for the District of Kansas. Here, the chapter 13 debtors bought a

2004 Ford Focus in June of 2004 from Loathe Ford, and financed by Ford Credit, which holds a

PMSI. On April 6, 2006, following the enactment of BAPCPA, and less than 910 days after the

purchase, the debtors filed for bankruptcy relief under chapter 13. The debtors’ plan was

confirmed in August of 2006, and provided that Ford Credit would be treated as a secured

creditor and receive monthly payments until the amount of the claim filed by Ford Credit was

78 See also, In re Nolan, 232 F.3d 528 (6th cir. 2000)(holding debtor is not permitted to surrender collateral post-confirmation and amending plan to reclassify creditor’s unpaid secured claim component as an unsecured deficiency balance); In re Coleman, 231 B.R. 397 (Bankr. S.D. Ga. 1999). According to this line of cases, §1329 does not allow a debtor to alter, reduce or reclassify a previously allowed secured claim to unsecured status. Nolan, 232 F.3d at 532. 79 230 F.3d 890, 894-95 (7th Cir. 2000). 80 374 B.R. 830 (Bankr. D. Kan. 2007).


26

paid in full. In September 2006, the vehicle was totaled and the insurance company paid Ford

Credit approximately $10,000, leaving a balance owed of approximately $5,000. In October

2006, the debtors filed an objection to Ford Credit’s claim, asking that since the collateral was

no longer in their possession and because Ford Credit had received plan payments and

insurance proceeds, it’s claim should be allowed as a secured claim only in this amount, and be

deemed to have an unsecured claim in the remainder amount. Ford Credit objected to this

treatment.

In reaching its decision, the Bankruptcy Court considered the language of the Hanging

Paragraph and the pre-BAPCPA treatment of secured claim deficiency following post-

confirmation repossession or surrender of collateral, deciding that the debtors may amend their

plan to reclassify Ford Credit.81 Next, the Court had to consider, what if any deficiency there

was still owed by the debtors to Ford Credit and how it should be treated. While the debtors

argued that since surrender of the collateral securing a 910 claim would be in full satisfaction of

a creditor’s claim, they should not owe anything else to Ford Credit, the Court rejected this

argument.82 The Court noted that surrender pursuant to §1325(a)(5)(C) is not available to

debtors following confirmation of a plan which elected to retain the collateral and proposed to

pay the obligation in full. The application of the insurance proceeds destroyed the conditions

for application of the Hanging Paragraph.83 The court concluded that what is left is an

unsecured claim for the deficiency balance, as would be the result if applying state law.84

81 Id. at 833-838. 82 Id. at 841. 83 Id. 84 Id.