When there is an objection to confirmation, Section 1325(b)(1) requires the debtor to pay creditors in full or devote all “projected disposable income” to the payment of claims.

On a question where courts are divided, Bankruptcy Judge Laura K. Grandy of East St. Louis, Ill., decided that the section applies when a debtor is seeking confirmation of a post-confirmation, amended plan.

100% Plan: Now You See It, Now You Don’t

The below-median-income debtor confirmed a plan with 100% for unsecured creditors. Although the debtor could have used a 36-month plan, she elected to have a 60-month plan where her monthly payment would be $600, or less than half of her projected disposable income of almost $1,300 a month.

Over objection, Judge Grandy confirmed the plan because the debtor was promising to pay 100%, putting the plan under one of the alternatives in Section 1325(b)(1). The section provides:

If the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan —

(A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or

(B) the plan provides that all of the debtor’s projected disposable income to be 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.

The debtor’s income fluctuated after confirmation, but she did not report the changes to the court. Evidently, she was mostly able to keep up with plan payments because her income was still enough given that she was paying less than half of her projected disposable income.

In the third year of the plan, the debtor retired. Her income fell by more than half. At that point, she filed amended Schedules I and J and sought confirmation of an amended plan to pay about $100 a month, this time with nothing for unsecured creditors.

The debtor contended that the plan was confirmable because her disposable income after retirement was negative by $400 a month. The trustees objected to confirmation, contending that the debtor was not complying with Section 1325(b)(1).

In her April 1 opinion, Judge Grandy sustained the trustee’s objection to confirmation of the amended plan.

Why Section 1325(b)(1) Applies                 

To resolve the confirmation objection, the other applicable statute was Section 1329, titled “Modification of a plan after confirmation.” Subsection (b) provides:

(1) Sections 1322(a), 1322(b), and 1323(c) of this title and the requirements of section 1325(a) of this title apply to any modification under subsection (a) of this section.

(2) The plan as modified becomes the plan unless, after notice and a hearing, such modification is disapproved.

Notably, Section 1325(b)(1) is not listed among the sections that apply to post-confirmation plan modifications. Judge Grandy therefore said that courts “are split on the issue of whether § 1325(b) applies to post-confirmation plan modifications under § 1329(b).”

Other courts, Judge Grandy said, “have held that § 1325(b) does apply to modifications, because the preface of § 1325(a) cross-references § 1325(b).” [Emphasis in original.]

Judge Grandy found practical reasons for making Section 1325(b) applicable:

Failure to apply § 1325(b) requirements to plan modifications would invite abuses of the modification process. Debtors could simply attempt an end around of § 1325(b)'s requirements by confirming a plan that complied with § 1325(b), then modifying that plan to avoid further compliance with that section. This approach would render the disposable income test and applicable commitment periods a fleeting nullity.

Having decided that 1325(b) applies, Judge Grandy applied the law to the facts.

Before the debtor’s income declined in the first year after confirmation, Judge Grandy calculated that the debtor had almost $4,900 in excess disposable income, enough to have paid her $4,500 in unsecured claims in full. Over the three years of the plan, she calculated that “the Debtor had more than adequate funds to pay her allowed unsecured claims in full.”

Holding “that plan modifications are subject to the requirements of 11 U.S.C. § 1325(b),” Judge Grandy sustained the objection to confirmation of the amended plan, because the “Debtor in this case unquestionably failed to pay in all of her disposable income over the duration of the plan, and is now proposing a plan that pays less than 100% of allowed general unsecured claims.”