What happens when your plan needs to change?
Chapter 13 Plan Modifications Under 11 U.S.C. §1329
By Ben Lovell, Attorney at Law
Across North Carolina, debtors in Chapter 13 bankruptcy cases routinely move to modify Chapter 13 plans pursuant to §1329 of the Bankruptcy Code. Often, a debtor may have experienced job loss or medical trauma during the case that makes it difficult, if not impossible, to continue making the payments required by the confirmed plan. Other times, the debtor may experience a significant increase in expenditures that diminishes his or her disposable income to the point where a modification is necessary.
- Binding Effect of Confirmation and §1329
To fully grasp §1329 and post-confirmation modifications, one must first understand the importance of confirmation of a Chapter 13 plan. Section 1327(a) of the Code states that “the provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.” 11 U.S.C. §1327(a). Put another way, a creditor or debtor should not be permitted to re-litigate issues which were decided in the confirmation order or which were available at the time of confirmation but not raised by the parties. In re Butler, 174 B.R. 44, 47 (Bankr. M.D.N.C. 1994). A confirmed Chapter 13 plan has been described as “a new and binding contract, sanctioned by the court, between the debtors and their pre-confirmation creditors.” Matter of Penrod, 169 B.R. 910, 916 (Bankr. N.D. Ind. 1994). It has also been described by the Supreme Court as a final judgment. USA Funds, Inc. v. Espinosa, 559 U.S. 260, 130 S.Ct. 1367 (2010).
The exception to this binding effect of confirmation is found in the post-confirmation modification of a plan under §1329. Under §1329, a confirmed plan may be modified at any time after confirmation of the plan but before completion of payments at the request of the debtor, the trustee or the holder of an allowed unsecured claim. 11 U.S.C. §1329. Interestingly, the statute does not confer standing to modify a plan on secured creditors. The most common modifications relate to reducing or increasing plan payments, changing the amount to unsecured creditors, or extending or reducing the length of the plan. See 11 U.S.C. §1329(a)(1) and (a)(2). Under no circumstances can a plan be modified to extend the length of the plan beyond five years.
Section 1329(b)(1) provides that sections 1322(a), 1322(b), 1323(c) and 1325(a) apply to post-confirmation modifications. Section 1322(a) sets forth the mandatory requirements of a proposed Chapter 13 plan while section 1322(b) lists all permissible provisions which can be included in a plan. In re Murphy, 474 F.3d 143, 149 (4th Cir. 2007).
- The Threshold Requirement of “Change in Circumstances”
Simply stated, before a bankruptcy court may consider a requested modification to a confirmed plan under §1329, the bankruptcy court must first determine if the debtor has experienced a “substantial” and “unanticipated” change in his or her circumstances post-confirmation. In re Arnold, 869 F.2d 240, 243 (4th Cir. 1989); In re Murphy, 474 F.3d 143, 150 (4th Cir. 2007). Although this requirement can be found nowhere in §1329, it is necessary to “inform the bankruptcy court on the question of whether the doctrine of res judicata prevents modification of the confirmed plan.” Murphy at 150. There are jurisdictions outside of the 4th Circuit that do not have this threshold requirement. See In re Moran, 2012 WL 4464492 (Bankr. N.D. Tex. 2012) (citing In re Meza, 467 F.3d 874 (5th Cir. 2006)).
The question of what set of facts constitute an “unanticipated and substantial change in circumstances” is usually decided on a case-by-case basis. A substantial change in circumstances does not have to be a “catastrophic” event, such as what may be required to obtain a hardship discharge. See In re McNulty, 142 B.R. 106, 109 (Bankr. D. N.J. 1992); In re Bereolos, 126 B.R. 313 (Bankr. N.D. Ind. 1990). However, the proponent of the modification must demonstrate some sort of legitimate reason that upsets the performance of the original plan. For example, an increase in a debtor’s income from $80,000 to $200,000 per year is a substantial change in circumstances that would permit a modification of the plan. In re Arnold, 869 F.2d 240 (4th Cir. 1989). Likewise, a post-confirmation reduction in a debtor’s expenses is also a substantial change which would warrant an increase in plan payments. See In re Gronski, 86 B.R. 428 (Bankr. E.D. Pa. 1988). A wrecked car can meet the requirements of an unanticipated and substantial change in circumstances. See In re Butler, 174 B.R. 44, 47 (Bankr. M.D.N.C. 1994); see also In re Moore, 188 B.R. 671, 674 (Bankr. D. Idaho 1995). Among the most common changed circumstances seen in motions to modify filed by debtors in North Carolina are: job loss, medical issues and associated costs, divorce or separation, and even death.
- A Debtor’s Modification of the Plan for an “Early Payoff”
Section 1329(a)(2) provides that a confirmed plan may be modified to “extend or reduce” the time for payments of claims in a Chapter 13 case. A straightforward reading of the statute appears to provide that the time period of a plan may be reduced assuming the requirements of §1329(b) are met. Notwithstanding §1329(a)(2), courts are evenly split on the issue of an “early payoff” of the plan in the wake of the 2005 amendments to the Bankruptcy Code (“BAPCPA”) and the requirement of an applicable commitment period under 11 U.S.C. §1325(b).
- CASES THAT SUPPORT MODIFICATION OF CONFIRMED PLAN FOR EARLY PAYOFF
There are a number of cases that hold that a debtor may modify his or her plan under §1329(a) to shorten the term below the applicable commitment period. In re Barnes, 2014 WL 1016062 (Bankr. E.D. Wis. 2014); In re Tibbs, 478 B.R. 458 (Bankr. S.D. Fla. 2012); In re Davis, 439 B.R. 863 (Bankr. N.D. Ill. 2010); In re McCully, 398 B.R. 590 (Bankr. N.D. Ohio 2008); In re Hall, 2008 WL 2388628 (Bankr. N.D. Ohio 2008); In re White, 2008 WL 6069551 (Bankr. W.D.N.C. 2008); In re Ewers, 366 B.R. 139 (Bankr. D. Nevada 2007). The usual rationale behind allowing the modification is that §1325(b) is not found in §1329(b)(1), the list of requirements for post-confirmation plan modification, and therefore, the debtors may shorten the duration of their confirmed plan at any time, regardless of whether unsecured creditors are paid in full as required by §1325(b)(4). See In re Tibbs, 478 B.R. 458 (Bankr. S.D. Fla. 2012) (holding that above median debtors could modify confirmed plan to provide for payment of remaining amounts owing under plan in single payment, with funds contributed by relatives, before applicable commitment period had run and without paying allowed unsecured claims in full).
One of the earliest decisions on this issue came in 2008 from the Western District of North Carolina in In re White, 2008 WL 6069551. In that case, the debtor’s plan was confirmed to pay $580.00 per month for the applicable commitment period of 60 months (the debtor was above-median). Id. at 1. Subsequent to confirmation, the debtor experience injury and missed a significant amount of work. Id. at 2. Also, in 2007, the debtor lost his home to foreclosure after the lifting of the automatic stay. Id. As a result of these unforeseen circumstances, the debtor sought to modify the plan to reduce the plan payments to $125.00 per month and reduce the time period of the plan to 41 months rather than 60 months. Id. The Trustee objected to the shorter plan period on the basis that the debtor was an above-median debtor on Form B22C and, thus, is required to be in Chapter 13 for 60 months or pay all allowed unsecured claims in full. Id.; 11 U.S.C. §1325(b)(4)(B).
In addressing the requested modification, the court first noted that a significant number of pre-BAPCPA cases determined that the requirements of §1325(b) did not apply to post-confirmation modification of a Chapter 13 plan. Id. at 3; In re Sunahara, 326 B.R. 768, 781 (9th Cir. BAP 2005); In re Forbes, 215 B.R. 183, 191 (8th Cir. BAP 1997). As stated in Sunahara:
“Simply put, the plain language of §1329(b) does not mandate satisfaction of the disposable income test of §1325(b)(1)(B) with respect to modified plans. Had Congress intended to impose such a requirement, it could have easily done so by making the appropriate incorporating reference. If the absence of the reference to §1325(b) was indeed an oversight, it is the province of the legislature, and not the judiciary, to make the correction.” Sunahara at 781.
The court in White further reasoned that “when presented with the opportunity to add the reference to §1325(b) in §1329(b) with BAPCPA, Congress declined to do so.” White at 4. Additionally, despite being given the opportunity to discuss the issue of incorporating §1325(b) into post-confirmation modifications, the Fourth Circuit Court of Appeals in Murphy never made reference to §1325(b), “presumably because it was so evident to the Fourth Circuit that §1325(b) was not incorporated into any of the relevant provisions of §1329…that reference to §1325(b) was not even worthy of a footnote.” White at 5.
Finally, the court noted that there are “ample measures in place to protect creditors from erosion of the commitment period by post-confirmation modification.” White at 6. The debtor must have experienced a substantial and unanticipated change in circumstances to qualify for plan modification. Id. Additionally, the modified plan is subject to the requirement of good faith under §1325(a)(3). Id. Accordingly, the court held that §1325(b) does not apply to post-confirmation modifications under §1329; therefore, such modifications are not subject to compliance with the applicable commitment period as asserted by the Trustee. Id.
2. CASES THAT OPPOSE MODIFICATION OF A PLAN FOR EARLY PAYOFF
There is an abundance of case precedent in support of the idea that a §1329 modification incorporates the provisions of §1325(b), including the provision in §1325(b)(4)(B) that a plan may not be completed early unless all claims are paid in full. In re Williams, 2014 WL 274307 (Bankr. D. N.J. 2014); In re Cormier, 478 B.R. 88 (Bankr. D. Mass. 2012); In re Rhymaun, 2011 WL 9378787 (Bankr. S.D.Fla. 2011); In re Heideker, 455 B.R. 263 (Bankr. M.D.Fla. 2011); In re Buck, 443 B.R. 463 (N.D. Ga. 2010); In re King, 439 B.R. 129 (S.D. Ill. 2010). One of the leading cases in support of this notion is In re King, 439 B.R. 129, out of the Southern District of Illinois.
In King, the debtors had “above-median” household income which required a 60 month applicable commitment period at confirmation on August 11, 2006. King at 131. In 2009, the debtors attempted to modify their plan to shorten the duration from 60 months to 44 months, which would reduce the amount paid to allowed unsecured claims from $12,300 to $8,151.52. Id. The Trustee objected, arguing that the requirements for confirmation set forth in 11 U.S.C. §1325(b) apply to post-confirmation modifications; therefore, the debtors could not amend their plan to provide for a duration of less than 60 months unless they also paid all allowed unsecured claims in full. Id.
In analyzing the arguments, the court first acknowledges that, in the context of plan confirmation, the phrase “applicable commitment period” refers to a time period rather than a multiplier to be used in calculating the amount of disposable income to be paid to unsecured claims. King at 132. In support of this position, the court cites In re Tennyson, 611 F.3d 873 (2010) in which the Eleventh Circuit Court of Appeals concluded that the “applicable commitment period” is a temporal term that “prescribes the minimum duration of a debtor’s Chapter 13 bankruptcy plan.” Tennyson at 889. Additionally, the Eleventh Circuit held that “the only exception to this minimum period is if unsecured claims are fully repaid.” Id.
Secondly, the court addresses the argument by the debtors that §1329(a)(2) permits debtors to shorten the length of their Chapter 13 plan and that §1325(b) is inapplicable to such plan modifications. King at 134. The court rejects this argument for two reasons. First of all, the first clause of §1325(a) states that “the court shall confirm a plan except as provided in subsection (b)”; therefore, under the plain language of this clause, the requirements of §1325(b) are necessarily incorporated into §1325(a), and are also included in the modification requirements of §1329(b)(1). Id.; see In re Keller, 329 B.R. 697 (Bankr. E.D. Cal. 2005). To argue otherwise is to ignore the fundamental principle of statutory construction that “effect must be given, if possible, to every word, clause and sentence of a statute…so that no part will be inoperative, superfluous, void, or insignificant.” King at 135 (quoting Indianapolis Power and Light Co. v. I.C.C., 687 F.2d 1098, 1101 (7th Cir. 1982). Furthermore, section 1325(a)(1) requires that a plan comply with the provisions of Chapter 13 and other applicable provisions of the Bankruptcy Code in order to be confirmed. 11 U.S.C. §1325(a)(1). Section 1325(b) is a provision of Chapter 13 and must apply to plan modifications through §1325(a)(1) and §1329(b)(1). King at 135; In re Buck, 443 B.R. 463, 469 (Bankr. N.D. Ga. 2010)(stating that §1325(a)(1) requires that a modification comply with the provisions of “this chapter and with the other applicable provisions of this title”…section 1325(b) is one of the provisions of Chapter 13).
Additionally, the court notes that “an interpretation of §1329 which imposes the temporal requirements of §1325(b) is the only construction which gives meaning to §521(f)”. King at 136. Section 521(f) allows a court and other parties in interest to monitor a debtor’s financial situation through submission of tax returns throughout the bankruptcy and to seek modification of the plan if the circumstances so warrant. Id.; see In re Slusher, 359 B.R. 290, 304 (Bankr. D. Nev. 2007). The debtors’ reading of §1329 would render §521(f) “virtually meaningless” and lead to a situation where a debtor, in anticipation of receiving increased income, could elect to pay off the case and deprive unsecured creditors of the benefit of the debtor’s improved financial circumstances. King at 136.
While there is significant disagreement on the issue of early payoffs and the applicability of §1325(b) to plan modifications at the trial court level, the appellate courts are strangely silent on the issue. It is widely acknowledged that the Eleventh Circuit in Tennyson held that an above median debtor must submit to a minimum plan of five years, but the decision was in the context of plan confirmation and did not involve plan modifications under §1329. See In re Heideker, 455 B.R. at 272. The Fourth Circuit Court of Appeals has not directly addressed the issue. Some bankruptcy courts that have been presented with the issue have punted, instead disallowing a proposed modification on the grounds that the good faith standard of §1325(a)(3) was not met. See In re Savage, 426 B.R. 320, 324 (Bankr. D. Minn. 2010) (“But, for the case at bar and on the record at bar, one need not go there. There is another threshold issue, at a more immediate level, and its outcome cannot be favorable to the Debtors.”) It is clear, however, that reasonable minds can differ on whether a debtor should be permitted an early payoff.
Benjamin E. Lovell is an attorney with Narron Wenzel, P.A. His area of practice is business and consumer bankruptcy law. Prior to joining the firm in 2022, he practiced as the staff attorney for the Chapter 13 trustee in Durham for 24 years.