If a debtor’s income falls below the median after filing and before confirmation, the chapter 13 debtor is entitled to lower the monthly payments and shorten the term of the plan to 36 months, for reasons explained by Bankruptcy Judge Maria L. Oxholm of Detroit.

At filing, the debtor’s income was about $2,000 a year above the median, based on the debtor’s income in the six months before filing. His disposable income worked out to about $750 a month for a 60-month plan.

Before confirmation, the debtor was fired from his second job, and with it, he lost the home provided him by his employer. The job loss cut the debtor’s income by a third and put him below the median. The job loss also required the debtor to begin paying $850 a month for rent. Even at the higher income, the liquidation analysis showed that unsecured creditors would receive nothing.

The chapter 13 trustee said she would have objected if the debtor had attempted before confirmation to modify the plan to 36 months with a lower monthly payment, to account for loss of the second job.

A year after confirmation, the debtor filed a modified plan, looking for a 36-month plan and a reduction in the monthly payment to $100. The debtor was up to date on payments to the trustee, even with the job loss. By that time, the debtor had paid about 30% of claims of unsecured creditors.

The chapter 13 trustee objected to modification on several grounds. The debtor responded by arguing that he could have dismissed the chapter 13 case and filed a chapter 7 petition where unsecured creditors would receive nothing.

About 18 months after filing, Judge Oxholm overruled the objections and approved the modified plan in an opinion on May 22.

Reducing the Commitment Period

Judge Oxholm first addressed the question of “whether 11 U.S.C. § 1329(a)(2) permits the Debtor to reduce the time of the applicable commitment period in 11 U.S.C. § 1325(b).”

Section 1329(a)(2) permits a debtor to modify a plan after confirmation and before completion of payments to “extend or reduce the time for such payments.” Judge Oxholm said that “§ 1329(a)(2) is only limited by subsection (b)(1), which sets forth the code sections applicable to any plan modifications,” namely “§§ 1322(a), 1322(b), 1323(c) and 1325(a).”

Judge Oxholm explained why “the express language of § 1325(b) does not apply to plan modifications.” Primarily, she said that “§ 1325(b) by its terms only applies to plan confirmation, not plan modifications,” because “modifying a confirmed plan does not involve another confirmation.”

The trustee cited three courts that had held to the contrary. The three cases, Judge Oxholm said, “ignore the express language of § 1325(b) . . . . and instead focus their analysis on legislative history.” Because the language was not ambiguous, she declined to rely on legislative history to create ambiguity.

Judge Oxholm therefore held that Section 1325(b) does not apply to plan modifications.

Lower Income Couldn’t Have Been Litigated Previously

Having lost round one, the chapter 13 trustee argued that the debtor could not modify the plan because his income had fallen before confirmation, and that he could not litigate an issue that could have been litigated and decided before confirmation, citing Section 1327, which binds the debtor to the terms of a confirmed plan.

Judge Oxholm responded by noting how the “applicable commitment period is based on pre-petition income; as a result, any post-petition and pre-confirmation changes in income do not affect the applicable commitment period.”

“Accordingly,” Judge Oxholm said, the “Debtor’s post-petition and pre-confirmation changes in income could not have been litigated at confirmation for purposes of determining the applicable commitment period.” She therefore held that “the Debtor’s plan modification does not violate § 1327.”

Good Faith

In the third round, the chapter 13 trustee challenged the debtor’s good faith in filing the amendment. Judge Oxholm said that the debtor had “provided a reason” by pointing to the loss of his second job and new housing expense. The trustee responded by saying that the debtor could obtain a second job.

Judge Oxholm concluded that the amendment was filed in good faith, in part because the debtor was current on his plan payments and had already paid unsecured creditors about one-third of their claims, when the debtor could have dismissed and filed a chapter 7 petition with nothing for unsecured creditors.

Judge Oxholm approved the plan modification.