Breaking the Information Monopoly The Perils to a Debtor of Modifying a Chapter 13 Plan

Should you let a sleeping dog lie? Chapter 13 plans, once confirmed, can be modified. However,
modification triggers a re-examination of the debtor's affairs, including his or her income and assets.
Absent a modification of a chapter 13 plan, usually only the debtors are aware of their financial status
and prospects; they have, in effect, an information monopoly. Modifying a plan requires disclosing
financial information by debtors and the break-up of that monopoly. Three recent cases raise caution
flags about waking the sleeping dog that is a confirmed plan.

</p><h3>Paying Off Early</h3>

<p>Debtors should be wary when paying off a plan early even if they have the means to do it. The court
and creditors will expect an explanation, and probably more money.

</p><p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Delmonte,</i> 237 B.R. 132 (Bankr. E.D. Tex. 1999)</a>, the debtors proposed paying 65 percent
to their unsecured creditors over 36 months. There was one secured creditor to which the debtors
surrendered the collateral. The debtors somehow obtained enough funds to pay off their confirmed plan
two months after confirmation. In other words, the debtors could, in one lump sum, pay to the trustee the
percentage required under the plan to be paid to all unsecured creditors (then filed), over the 36 months.
The debtors, being perhaps a little too cute, paid that to the trustee and requested their discharge.

</p><p>The one fly in the ointment was their primary secured creditor, who had foreclosed on its collateral
and filed a substantial deficiency claim as an amendment to the secured claim. The trustee objected to
paying that claim as untimely, however, since it was filed after the completion of all payments under the
plan. Apparently, the debtors had done the math and preferred to pay 65 percent of a little now, rather
than 65 percent of a lot over time. So, the debtors raced to the trustee with 65 percent of a little, before
the secured creditor could file its amended deficiency claim.

</p><p>The court refused to let the debtors get away with this. Instead, it allowed the amended deficiency
claim and put the debtors back into their chapter 13 for 36 months. The court did not believe "that the
debtors have repaid their creditors to the extent of their ability during the chapter 13 period." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=…; at 138</a>.
The court called into question the debtors' good faith and noted that the debtors had "failed to
demonstrate that they have paid their disposable income to their creditors for a 36-month period. This
is a fatal flaw and they have not completed their plan." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=…;

</p><p>Notably, once a debtor has confirmed a chapter 13 plan, he is no longer required to demonstrate that
he has paid his disposable income for the plan period; the <i>Delmonte</i> court, in effect, treated the
pre-payment as a modification of the plan (by cutting short the plan period) and required the debtors
to meet a burden that was otherwise not present. Thus, the message to chapter 13 debtors seems to
be: If your situation improves to the point that you can pay off your plan, put the money in the bank
instead of paying it over to the chapter 13 trustee.

</p><h3>Selling Assets in Chapter 13</h3>

<p>Debtors also should be wary about selling assets during their chapter 13, if those assets have gone
up in value. Generally, the appreciation in value of property during the pendency of a chapter 13
belongs first to creditors, and then to the debtor. If an asset is unexpectedly sold after confirmation, the
chapter 13 plan may be considered "modified." Any increase in value must be paid to the trustee, and
the debtor again establish that he is paying over the remainder of the plan period all of his disposable
income.

</p><p>In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Barbosa,</i> 236 B.R. 540 (Bankr. D. Mass. 1999)</a>, the debtors sold real estate held for
investment purposes for $73,000 more than they had valued it two years prior. The debtors sought to use
the proceeds to "pre-pay" the chapter 13 plan, while the trustee sought to modify the plan by (1) paying
the increase in value to unsecured creditors and (2) requiring the debtors to recalculate their projected
disposable income for purposes of determining payments for the remainder of the plan period. The court
adopted the position that the "effective date" of a modified plan was the date of modification, and
therefore the best interest of creditors and liquidation tests would be reapplied upon such a modification.
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=…; at 552-554</a>. Assuming that the debtors could have performed the plan without selling the property,
without any modification, the debtors would have been able to retain the increase in value of the property
following the completion of their plan.

</p><h3>Early Lien Stripping</h3>

<p>Early lien stripping can be done, but hold on to the collateral. A chapter 13 plan that provided that
a secured creditor's lien on a car would be released once the debtor paid off the secured portion of the
claim was confirmed in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… re Shorter,</i> 237 B.R. 443 (N.D. Ill. 1999)</a>. Ford Motor Credit Co. (FMCC)
objected, asserting that if the case were converted after the payment of the secured portion of the claim,
FMCC would have no collateral against which to enforce its remaining claim. The <i>Shorter</i> court
determined that FMCC's claim, once bifurcated, was forever bifurcated upon full payment of the secured
portion. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=…; at 446</a>. The modification of a secured creditor's rights, through the bifurcation pursuant to
§1322(b), was permanent upon confirmation once the secured portion was of the claim was paid. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=…; at 447</a>.

</p><p>Once the secured portion of a claim is paid, a debtor could conceivably sell the collateral, but that
requires court approval, which might trigger a modification, which would in turn cause a recalculation
and re-evaluation of projected disposable income, the best interests of creditors test and the liquidation
analysis. Debtors with high-value, low-depreciation vehicles would be most at risk, since there is a
greater likelihood that the vehicle's value would exceed the exemption limits.

</p><h3>Conclusion</h3>

<p>After confirmation of a chapter 13 plan, debtors can be expected to act in their best interests, rather
than the best interests of their creditors. A decision of whether to modify or not will usually be made by
the debtor, rather than a creditor or a trustee. Because debtors have more information about their
individual financial condition and prospects than do creditors or trustees, and because debtors can expect
to maintain this information advantage over creditors or trustees during a confirmed case, debtors can
be expected to make those decisions to their post-discharge advantage. While creditors can obtain this
information, discovery is expensive and often not fruitful.

</p><p>A debtor can be expected to release information to creditors by modifying a plan only when such a
release would be beneficial to that particular debtor; since chapter 13 is in many respects a zero-sum
game, that release of information would usually be prejudicial to creditors. It is impossible to say how
much, if any, advantage is given to debtors by this information monopoly. Yet, in a booming economy
with strong inflation in certain areas and little in others, debtors can be expected to reap some advantages
somewhere, sometime. The forces behind the new bankruptcy legislation seem to believe that this
information monopoly is of substantial benefit to debtors, and are moving to limit it. In the meantime,
debtors can be expected to exploit one of the advantages they have in chapter 13, and that is the
opportunity to modify a confirmed plan.

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