§ 123.3     What to Do If Debtor’s Financial Condition Improves
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 123.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

There are lots of reasons why a debtor’s financial condition might improve after confirmation: the debtor receives a raise, the debtor starts getting overtime, the debtor gets a better job, the debtor’s spouse begins earning an income or more income, the debtor inherits money or receives a windfall. Absent a provision of the plan or order of confirmation to the contrary,1 § 1327(b) and (c) may vest in the debtor, free and clear of the claims of creditors, any postconfirmation increase in income, inheritance, windfall or other improvement in financial condition.2 But creditors are not helpless to persuade or require the debtor to commit an improvement in financial condition to funding the plan.

[2]

The first place to look for help is in the plan itself. Chapter 13 trustees and creditors are increasingly aware that the uncertainties of postconfirmation practice can be limited by carefully crafted plans that define the rights of creditors in postpetition property and income. A standard plan provision that preserves the Chapter 13 estate, overcoming the vesting effect in § 1327(b),3 has the incidental effect of protecting creditors from loss of leverage with respect to property acquired by the debtor after confirmation. If the plan or order of confirmation continues the estate, then assets or income received by the debtor after confirmation become property of the estate. At the very least, the debtor’s disposition of any postconfirmation property of the estate would be conditioned on notice to creditors and an opportunity to object.4 The value of postconfirmation property that comes into the (preserved) estate may be included to calculate the entitlements of creditors after confirmation.

[3]

For example, under § 1329, the Chapter 13 trustee and the holder of an allowed unsecured claim have standing to modify a confirmed plan to increase payments.5 If the debtor experiences an improvement in financial condition, a qualified creditor or the trustee can move to modify the plan to require the debtor to share the good times with creditors. Language in the plan preserving the Chapter 13 estate supports the argument that property acquired by the debtor after confirmation is included in the best-interests-of-creditors-test calculation at modification under § 1329.6

[4]

Sometimes an improvement in financial condition prompts a motion to modify from the debtor. For example, an inheritance or accident settlement might inspire the debtor to pay off the confirmed plan by modification to reduce the time for payments.7 In response, an allowed unsecured claim holder or the trustee can argue that the disposable income test in § 1325(b)8 requires more from the debtor. Although by no means clear, the disposable income test may apply at confirmation of a modified plan under § 1329.9 The disposable income test requires a Chapter 13 debtor to commit all projected disposable income to funding the plan for at least 36 months.10 If applicable at modification after confirmation, this test forces the debtor to commit an increase in income to funding the modified plan. The motion of a creditor or the trustee to modify the plan after confirmation to require the debtor to contribute an improvement in financial condition is sometimes enough leverage to provoke the debtor to improve the treatment of creditors even when § 1325(b) is not applicable.

[5]

The reported decisions demonstrate that courts will find a theory for requiring the debtor to increase payments into the plan to reflect a significant improvement in financial condition after confirmation.11 Creditors can be influential by making motions to modify the plan after confirmation when the debtor’s situation improves. One impediment to a creditor’s postconfirmation modification of the plan is that some courts have grafted onto the Code that an improvement in financial condition must be “substantial” and “unanticipated,” else the binding effect of confirmation under § 1327(a) precludes modification under § 1329.12


 

1  There are reasons to recommend that Chapter 13 plans provide “to the contrary.” See § 113.11  Retention of Property of the Estate: Overcoming 11 U.S.C. § 1327(b), § 120.3  11 U.S.C. § 1327(b): Vesting Effect on Property of Estate§ 120.5  Effects of Confirmation after BAPCPA and § 124.3  Does Confirmation Dissolve the Stay?.

 

2  See §§ 230.1 [ 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate ] § 120.3  11 U.S.C. § 1327(b): Vesting Effect on Property of Estate, 231.1 [ 11 U.S.C. § 1327(c): Free and Clear Effect on Liens ] § 120.4  11 U.S.C. § 1327(c): Free and Clear Effect on Liens and 237.1 [ Windfalls, Inheritances, Lotteries and the Like ] § 122.2  Windfalls, Inheritances, Lotteries and the Like.

 

3  See § 207.1 [ Retention of Property of the Estate: Overcoming 11 U.S.C. § 1327(b) ] § 113.11  Retention of Property of the Estate: Overcoming 11 U.S.C. § 1327(b) for discussion of plan provisions that preserve the Chapter 13 estate.

 

4  See 11 U.S.C. §§ 363(b), 1303. See also § 263.1 [ To Sell or Refinance Property of the Estate ] § 127.6  To Sell or Refinance Property of the Estate.

 

5  11 U.S.C. § 1329, discussed beginning at § 126.1  Standing, Timing and Procedure and § 127.1  To Suspend Payments.

 

6  The best-interests-of-creditors test in § 1325(a)(4) is discussed beginning at § 90.1  In General: Plan Payments vs. Hypothetical Liquidation and § 90.5  Discount Rates and Interest If Liquidation Would Produce Dividend. Application of the best-interests-of-creditors test at modification after confirmation under § 1329 is discussed in § 126.2  Application of Tests for Confirmation.

 

7  See § 268.1 [ To Extend or Reduce the Time for Payments ] § 127.11  To Extend or Reduce the Time for Payments. See, e.g., In re Martin, 232 B.R. 29 (Bankr. D. Mass. 1999) (Nothing in Code prohibits Chapter 13 debtor from modifying a confirmed plan to accelerate payment; however, from the evidence presented, court cannot determine whether proposed cash out from refinancing of home satisfies disposable income test in § 1325(b) and best-interests-of-creditors test in § 1325(a)(4).).

 

8  See discussion of disposable income before and after BAPCPA beginning at § 91.1  In General§ 92.1  In General§ 93.1  Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income§ 94.1  Big Picture: Too Many Issues§ 95.1  In General§ 96.1  Average Monthly Payments on Account of Secured Debts§ 97.1  Total Priority Debts and Divide by 60§ 98.1  Additional Expenses or Adjustments to CMI and § 99.1  In General.

 

9  See § 255.1 [ Does Disposable Income Test Apply? ] § 126.3  Does Disposable Income Test Apply?.

 

10  See discussion of disposable income and plan length before and after BAPCPA beginning at § 91.1  In General§ 92.1  In General§ 93.1  Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income§ 94.1  Big Picture: Too Many Issues§ 95.1  In General§ 96.1  Average Monthly Payments on Account of Secured Debts§ 97.1  Total Priority Debts and Divide by 60§ 98.1  Additional Expenses or Adjustments to CMI, § 99.1  In General and § 100.1  Applicable Commitment Period Calculation.

 

11  See §§ 237.1 [ Windfalls, Inheritances, Lotteries and the Like ] § 122.2  Windfalls, Inheritances, Lotteries and the Like and 266.1 [ To Increase Payments to Creditors ] § 127.9  To Increase Payments to Creditors. See, e.g., Arnold v. Weast (In re Arnold), 869 F.2d 240 (4th Cir. 1989) (On motion of unsecured claim holder, it is appropriate to increase monthly payment into the plan from $800 to $1,500 and to extend the payment period from 36 months to 60 months when debtor experienced extraordinary increase in income from $80,000 per year to $200,000 per year.); In re Powers, 140 B.R. 476 (Bankr. N.D. Ill. 1992) (Trustee’s motion to amend after confirmation to increase dividend from 54% to 100% to reflect income from liquidation of real property is granted.); In re Euerle, 70 B.R. 72 (Bankr. D.N.H. 1987) (Chapter 13 debtor who receives $300,000 inheritance after confirmation is obligated to advise the trustee of the inheritance and is obligated to file a supplemental schedule listing this additional asset pursuant to Bankruptcy Rule 1007(h). Trustee’s motion to modify the confirmed plan to require 100% payment of unsecured claims is granted in a case filed in 1983 without discussion of trustee’s standing to seek postconfirmation modification under former § 1329.); In re Koonce, 54 B.R. 643 (Bankr. D.S.C. 1985) (Court permits postconfirmation modification on trustee’s motion to increase dividend to unsecured claim holders to 100% to reflect that debtors won $1,300,000 in the Massachusetts State Lottery.).

 

12  See § 257.1 [ Changed-Circumstances Requirement? ] § 126.5  Changed-Circumstances Requirement?.