Chapter 13 Plan Modifications The Next BAPCPA Battleground

Journal Issue

Oct 2006

Column Name

Consumer Corner

Citation

ABI Journal, Vol. XXV, No. 8, p. 14, October 2006

Bankruptcy Code

1325

1329

Topic Tags

Consumer Bankruptcy

Legislation

Plan Confirmation

Journal HTML Content

Debtors,
chapter 13 trustees and courts around the country are wrestling with whether
"projected" disposable income is different than disposable income
on the B22C form, and whether "applicable commitment period" is a
time period or a multiplier under the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 (BAPCPA). But once these issues are resolved at the confirmation
stage, they are both likely to reappear in altered forms in post-confirmation
modification motions under §1329 of the Bankruptcy Code. Not only can we
expect the projected disposable income issue to persist when a debtor's income
increases or decreases during the life of the plan, but because BAPCPA arguably
requires above-median income debtors to remain in a plan for as long as 60 months
under §1325(b)(4), we can also expect debtors to explore how §1329
might be used to shorten the length of their plans.1
Plan Modifications Pre-BAPCPA 
Under §1329(a), the debtor, the trustee or the holder of an unsecured
claim has always had the authority to modify the plan to (1) increase or reduce
the amount or payments on claims of a particular class provided for by the plan,
and (2) extend or reduce the time for such payments. What was not clear was
whether the debtor could pay the amount of plan payments in less than 36 months
and obtain a discharge without paying 100 percent to unsecured claims, and whether
this early payoff of plan payments could be done without a motion to modify.2
These issues were front and center in two pre-BAPCPA cases decided in 2005.
In the first, In re Sunahara,3 the Ninth Circuit Bankruptcy
Appellate Panel (BAP) held that a debtor could seek to modify a plan under §1329
to pay off the plan in less than 36 months without paying the unsecured claims
in full. Moreover, the court held that the requirement of §1325(b)(1) that
a debtor commit payment of the debtor's projected disposable income for 36 months
(the so-called "best efforts" test) did not apply in a motion to modify
under §1329, citing the fact that unlike other requirements for confirmation
of the plan specifically mentioned in §1329(b)(1), §1325(b) is not
explicitly incorporated into §1329. In referring the matter back to the
trial court, the court directed that in determining if the modification was
filed in good faith, the trial court should consider the (1) current disposable
income of the debtor, (2) likelihood that the debtor's disposable income will
increase over the remaining term of the plan, (3) proximity of time between
confirmation of the original plan and the filing of the modification motion
and (4) risk of default over the remaining term of the plan versus the certainty
of immediate payment to creditors.4

Sunahara was followed in short order by In re Keller,5
another case where a debtor sought to pay off a plan prior to 36 months through
a refinance, without paying unsecured claims in full and without having to file
a motion to modify the plan. The court in Keller held that the debtor
could pay off the plan early at less than 100 percent to unsecured creditors,
but that it had to be done by means of a motion to modify the plan unless the
original plan provided for early payoff.6 The court went on to take
issue with the Sunahara court's holding that §1325 (b)(1) does not
apply to motions to modify under §1329, holding instead that the §1325(b)(1)
test is incorporated into §1325(a), which is specifically made applicable
to §1329 motions by §1329(b)(1). The Keller holding that §1325(b)
is included by reference in §1325(a), and thereby §1329, was based
on the general requirement of §1325(a)(1) that the court shall confirm
a plan if "the plan complies with the provisions of this chapter and with
the other applicable provisions of this title...."

While Keller never reached the question of what the debtors had to pay
into the plan to get a pre-36 month discharge, it appears that the debtors would
at least have had to pay the amount of their projected disposable income, as
determined at the time of the modification motion, for the period from modification
to the end of the plan.
Modifications after BAPCPA: Applicable Commitment Periods 
The new language that is the focus of the applicable commitment period issue
is found in §1325(b)(4), which provides that to determine whether the debtor's
projected disposable income "to be received in the applicable commitment
period"7 is committed to unsecured creditors, (1) the applicable
commitment period is either three years, or "not less than five years"
if the "current monthly income" (CMI) is above the median family income,
and (2) the applicable commitment period "may be less than three or five
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."
In the pre-BAPCPA Code, §1325 (b)(1)(B) provided that the debtor must
commit the debtor's projected disposable income "to be received in the
three-year period beginning on the date that the first payment is due under
the plan" to make payments under the plan. The predominant view was that
plans had to go at least 36 months, unless the debtor paid 100 percent of the
debtor's unsecured claims.8 But there was no specific prohibition
against modifying the plan to shorten the three-year plan duration through early
payoff with less than 100 percent payment to unsecured claims, and a number
of courts, including Sunahara and Keller, held that such a modification
was permissible.

If the courts determine that "applicable commitment period" means
a commitment to stay in a plan for a period of time, we can expect an above-median
debtor who does not want to stay in a case for five years and cannot or does
not want to pay 100 percent of the unsecured claims to test this issue in a
motion to modify under §1329. That section was left relatively unchanged
by the BAPCPA amendments. Section 1329(c), dealing with the maximum length of
modified plans, was amended to specifically provide that a plan modified under
this section may not provide for extending payments over a period that expires
after the applicable commitment period of §1325(b)(1)(B). But the bigger
issue was not addressed: how to reconcile a debtor's right to reduce the time
of payments under §1329(a)(1) with the language of §1325(b) restricting
plans from paying off early absent 100 percent payment to unsecured claims.
A court taking the Sunahara approach to §1325(b)—i.e.,
that it is not incorporated into §1329—would not have to reach the
question. In fact, as discussed below, Sunahara would also effectively
write out the projected disposable-income requirements of §1325(b) in the
context of a modification motion for debtors, substituting its generalized "good
faith" approach to disposable income and length of plans. While no doubt
appealing in terms of the problems it skirts, the limited guidance offered to
the parties and the courts in Sunahara holds out the prospect of considerable
subjectivity and arbitrariness.9 Chapter 13 trustees will attest
that the process of developing and applying guidelines for when to object to
a debtor's motion to modify to pay off a plan early is a difficult task, made
more so if there is no §1325(b) best-efforts test.
A court taking the Keller approach will have to reconcile §1329(a)'s
permit to reduce the time for payments with §1325(b)(4)(B)'s prohibition
against shortening applicable commitment periods absent payment of unsecured
claims in full. Section 1329(a)(2) allows modification to reduce the time for
"such payments," which refers to "payments on claims of a particular
class provided for by the plan" in §1329(a)(1)." While under
§1329(b)(4)(B) an initial plan may not propose payments for less than the
applicable commitment period, the specific grant of that power in §1329
arguably trumps this.

Plan Modifications under BAPCPA: Projected Disposable Income 
Whether the courts interpret the requirement of §1325(b) regarding payment
of "disposable income" (CMI) to unsecured creditors as a starting
point that may be overridden if the debtor's actual projected income from Schedules
I and J is higher or lower,10 or treat projected disposable income
as a formula by multiplying the disposable income from the B22C by the months
in the applicable commitment period,11 debtors, trustees and unsecured
creditors will be asking to modify the plan payment because many debtors' incomes
increase or decrease over time from the moment of the CMI calculation or from
the effective date of the plan.
The court in Sunahara would not have to address the projected disposable-income
issue head-on because under its holding, §1325(b) is not applicable to
modification motions. A debtor seeking to lower a plan payment would only have
to show that there was a substantial change in the debtor's ability to pay12
and that the motion was filed in good faith, assuming the other confirmation
tests were met. A court using the Keller approach would have to apply
the "projected disposable income" test of §1325(b) to a debtor's
motion to modify if the trustee or the holder of an allowed unsecured claim
objected. Here, the new language of §1325(b) is the least helpful. The
reason for the motion is that the income has decreased, yet the definition of
"disposable income" (the historical CMI) is even more outdated than
at initial confirmation, and the notion of a projected disposable income
even more internally inconsistent. The simplest answer is that the calculation
of "disposable income" is just a starting point that may be rebutted
by evidence of actual current disposable income.13

A court using the Keller approach would have to apply the "projected
disposable income" test of §1325(b) to a debtor's motion to modify
if the trustee or the holder of an allowed unsecured claim objected. The issue
should not arise if the trustee or a creditor is moving to modify based on an
increase in income, whether using the Sunahara or Keller approach.
Although some courts have overlooked this point, the §1325(b) disposable-income
requirement is only an issue "if the trustee or the holder of an allowed
unsecured claim objects to the confirmation of the plan...." The leading
treatise on chapter 13 states:
<blockquote>
At the very least, the courts should agree that the disposable-income test
does not apply when the proponent of the modification is the trustee or the
holder of an allowed unsecured claim and the objecting party is the debtor.
This would be true as a matter of statutory construction because §1325(b)
applies only upon objection to confirmation by "the trustee or the holder
of an allowed unsecured claim."14 
</blockquote>

If §1325(b) does not apply to a trustee or creditor motion to modify then
regardless of the formula used to calculate projected disposable income at confirmation,
a trustee or creditor who concludes that the debtor's ability to pay substantially
exceeds the disposable income calculation at confirmation, but who may be barred
from making that objection by the court's interpretation of projected disposable
income, may have the option of moving to modify the plan to capture that added
income. At the very least, if the debtor's projected disposable income increases
from the point when it was determined for purposes of confirmation, the trustee
can move to modify the plan to increase the plan payment.15 The debtor
may in turn argue that the debtor's ability to pay has not changed substantially
since confirmation.
 Conclusion
Those parties troubled by court rulings that an "applicable commitment
period" is a fixed temporal commitment to stay in chapter 13 for three
or five years absent 100 percent payment to unsecured creditors, or that "projected
disposable income" is an artificial number unrelated to the debtor's ability
to pay creditors, may find relief in §1329. From a trustee perspective,
a disposable-income test rooted in real current income and expenses provides
the best guidance for motions to modify, whether the goal is to shorten the
duration of a plan, or increase or decrease the plan payments.
<blockquote> </blockquote>

<hr>
<h3>Footnotes</h3>
1 In the Portland Division of the District of Oregon, between Oct.17, 2005,
and June 30, 2006, almost 40 percent of the chapter 13 filings have involved
debtors with above-median family income. 
2 Lundin, Chapter 13 Bankruptcy, 3d Edition (2000 & Supp. 2004))
§268.1.

3 In re Sunahara, 326 B.R. 768 (9th Cir. B.A.P. 2005). 
4 Id. at 781-82. 
5 In re Keller, 329 B.R. 697 (Bankr. E.D. Cal. 2005). 
6 Keller suggests that the debtor could propose early payoff of plan
payments at less than 100 percent in the original plan, supra at 701,
but for a contrary view, see In re Schiffman, 338 B.R. 422 (Bankr.
D. Ore. 2006).

7 11 U.S.C. §1325(b)(1)(B). 
8 Lundin, supra at §199.1.
 9 See discussion in In re Keller, supra at 702-04.

10 In re Jass, 340 B.R. 411 (Bankr. D. Utah 2006). 
11 In re Alexander, 344 B.R. 742 (Bankr. E.D.N.C. 2006). 
12 Anderson v. Satterlee (In re Anderson), 21 F.3d 355, 358 (9th
Cir. 1994). 
13 In re Jass, supra at 415.

14 Lundin, supra at 255.1. 
15 The absence of the §1325(b) disposable-income test in connection with
a motion by a trustee or creditor to modify a plan creates the same problem
alluded to when discussing Sunahara's limitations, i.e., the absence
of objective criteria to determine what a debtor should have to contribute for
the remainder of the modified plan. One option used by another court was to
look to the requirement of §1322(a)(1) that debtors commit their future
income as necessary for execution of the plan in deciding motions by trustees
to increase plan payments. In re Profit, 269 B.R. 51 (Bankr. D. Nev.
2001), rev'd on other grounds, 283 B.R. 567 (B.A.P. 9th Cir. 2002). A simpler
answer is that a disposable-income test based on actual income and expenses
is implicit in the requirement that the modification proposed by a trustee or
creditor be feasible under §1325(a)(6).

Journal Authors

Brian D. Lynch

Journal Date

Sunday, October 1, 2006 - 12:00

Bankruptcy Rule

2006

none