Cite as: Keith M. Lundin, Lundin On Chapter 13, § 126.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
Section 1329(b)(1) provides, “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.”1 Section 1322(a) and (b) contain the mandatory and permissive provisions of Chapter 13 plans.2 Section 1323(c) deals with the effect of a prior acceptance or rejection of the plan by the holder of a secured claim.3 Section 1325(a) contains the conditions for confirmation, including the treatment of secured and unsecured claim holders, cramdown, the good-faith test and the best-interests-of-creditors test.4
It seems to have been the intent of Congress that modification after confirmation would be a process similar to confirmation of the original plan. A party opposed to postconfirmation modification should look to the plan and confirmation requirements in §§ 1322 and 1325(a) for a specific statutory basis for objection. For example, if the debtor proposes to reduce payments to unsecured claim holders, the holder of an allowed unsecured claim might object if the reduction would fail the best-interests-of-creditors test in § 1325(a)(4).5 In a district that allowed tardily-filed claims prior to the 1994 amendments,6 one court refused a postconfirmation modification that would have disallowed the tardily-filed claim of the IRS because the modification violated the IRS’s right to full payment under § 1322(a)(2).7
Application of the confirmation tests to a proposed postconfirmation modification is an imperfect fit, if for no other reason because of the passage of time. The obvious first question is: as of what point in time does the bankruptcy court measure the tests for approval of a proposed modified plan? For example, for purposes of determining whether the modified plan satisfies the best-interests-of-creditors test in § 1325(a)(4),8 should the court look at the debtor’s assets and perform the hypothetical liquidation analysis as of the date of the hearing on the proposed modification or retrospectively to the date of the petition? If the debtor has acquired property after the petition, the best-interests-of-creditors calculus may be quite different at the hearing on modification from what it was at the time of the original confirmation hearing. What if the debtor acquired no new property, but property owned at the petition has appreciated or depreciated with the passage of time? If the debtor disposed of property after the petition and before modification, would the best-interests-of-creditors test permit a smaller dividend to unsecured claim holders? Are creditors entitled to greater dividends if total debt was reduced by payments through the plan before modification?
These questions are complicated by the effects of confirmation under § 1327. If § 1327(b) was not neutralized by the plan or the order of confirmation, the estate vested in the debtor at confirmation.9 The hypothetical liquidation test in § 1325(a)(4) is worded in terms of “the estate of the debtor” measured “as of the effective date of the plan.”10 Under § 1329(b)(2), “the plan as modified becomes the plan.”11 For purposes of measuring whether a proposed modification satisfies the test in § 1325(a)(4), it might be reasonable to liquidate the estate on the effective date of the plan as modified. The effective date of the modified plan will probably be either the date of entry of the order approving the modified plan or some later date defined by the modified plan. If all property of the estate vested in the debtor at confirmation, then what property remains in the estate to be valued for purposes of the best-interests-of-creditors test at modification? Does the answer to this question depend on which of the four theories the court adopts with respect to the meaning of the vesting effect in § 1327(b)?12
Does a hypothetical liquidation under § 1325(a)(4) include a hypothetical regathering of the estate for purposes of a modified Chapter 13 plan? Absent a contrary provision of the confirmed plan, the revesting of the estate in the debtor at confirmation allowed the debtor to use and dispose of estate property.13 Can a Chapter 13 debtor change the best-interests-test calculation between confirmation and modification by disposing of assets or acquiring assets? Could the proponent of a modified plan undo the vesting of property in the debtor that occurred under § 1327(b) at confirmation to recapture assets acquired or disposed of by the debtor?
Not surprisingly, the reported decisions are not in agreement how to apply the best-interests-of-creditors test in § 1325(a)(4) as of the effective date of a modified plan. Some courts apply the test as if the estate that existed at confirmation still existed—in other words, the effective date of the plan in § 1325(a)(4) means the effective date of the original plan even at modification after confirmation under § 1329.
For example, in Forbes v. Forbes (In re Forbes),14 the debtor proposed a postconfirmation modification to cash out the plan with one lump sum payment from the settlement of a postpetition lawsuit. An objection was raised that the settlement proceeds were property of the estate that must be included in the best-interests-of-creditors test under § 1325(a)(4), applicable at modification after confirmation under § 1329(b)(1). The Bankruptcy Appellate Panel for the Eighth Circuit held that the effective date of the plan did not change at modification after confirmation, and thus the settlement proceeds did not impact the test in § 1325(a)(4). The BAP explained:
For so long as it exists in bankruptcy, there is, at any given time, only one effective plan; the plan is an [sic] unitary constant. . . . [T]here is ordinarily but a single plan confirmation . . . . The Bankruptcy Code does not provide for the “confirmation” of a modified plan; rather, the plan as modified becomes the plan if it is not disapproved. . . . The language contained within Section 1325(a)(4) concerning the valuation date under the test “as of the effective date of the plan” and “on such date”—has been the source of significant controversy among courts and commentators alike. . . . Regarding the effective date of the plan, there is only one plan. The effective date is not altered by modification of the plan, for the modified plan remains, ever constant, the plan. . . . [I]t is sufficient for the resolution of the issues before us that the Eighth Circuit in [Hollytex Carpet Mills v. Tedford, 691 F.2d 392 (8th Cir. 1982),] expressly rejected the suggestion that the “effective date of the plan” constitutes the date of postconfirmation modification. . . . In the instant matter, the cause of action, from which Robert ultimately received settlement proceeds, arose post-petition. Accordingly, it would not be included in property of the estate for purposes of the liquidation analysis under the best interests of creditors test. Therefore, its existence is irrelevant to the issue of the Chapter 13 plan modification as it was proposed . . . . [I]t was not error for the bankruptcy court to disregard the settlement in conducting the best interests of creditors test pursuant to Section 1325(a)(4).15
The approach in Forbes—that the effective date of the modified plan is the same as the effective date of the original plan—is arguably at odds with the logic of § 1329(a), which permits modification after confirmation to reflect changes after the effective date of the original plan. The Forbes approach is hard to square with the “changed circumstances” requirement for postconfirmation modification imposed by many courts.16 Application of the Forbes rule produces odd outcomes for other tests under § 1329(a).
For example, discussed in detail below,17 11 U.S.C. § 1329(a)(3) permits modification after confirmation to change the amount of distribution to a creditor “to the extent necessary to take account of any payment of such claim other than under the plan.”18 Applying the effective date logic of Forbes, how would a Chapter 13 debtor modify a plan after confirmation to deal with a secured claim holder that was partially paid after confirmation from a source external to the plan? Ordinarily, § 1329(b)(1) would direct the court to § 1325(a)(5) to determine the rights of the allowed secured claim holder that was partially paid after confirmation. But the Forbes rule would require the court to use the effective date of the original plan as the benchmark for determining the present value of distributions under the plan on account of the allowed secured claim. An illustration may make this problem with application of the Forbes rule clearer.
Assume an allowed secured claim of $3,000. The confirmed plan proposes to pay that $3,000 over 36 months with 10 percent interest and monthly payments of $97. After 12 regular payments, the principal balance remaining would be $2,098. In the twelfth month, the debtor’s parents make a gift of $1,000 of the balance of the secured claim, leaving $1,098 due. The debtor wants to modify the plan to pay the $1,098 balance over the remaining 24 months of the plan with 10 percent interest. If the effective date of the plan at modification for purposes of § 1325(a)(5)(B)(ii) is the date of modification, the present value calculation is simple enough: $1,098 payable over 24 months with 10 percent interest requires a monthly payment of $51. But if the Forbes rule applies, the present value calculation assumes an effective date that is 12 months earlier—the date of confirmation of the original plan. Any present value calculation that uses an effective date in the past will discount the stream of payments over a longer period of time, resulting in higher payments. In the example, a stream of payments that has a present value of $1,098 one year in the past when the stream of payments begins in the 13th month and continues for 24 months would require a monthly payment of $56 at a discount rate of 10 percent. In other words, the selection of the earlier effective date increases the debtor’s monthly payment by $5 per month to make up for the lost time value between the date of modification and the effective date of the original plan. Forbes penalizes debtors for modifying secured claims after confirmation.
Recognizing these problems, a majority of reported decisions fix the effective date for best-interests-of-creditors-test purposes at modification as the effective date of the plan as modified. Leading this trend is In re Barbosa.19 At confirmation in 1996, the debtors stipulated that investment property was worth $64,000. The confirmed plan paid $64,000 to a mortgage holder as a secured claim and 10 percent to unsecured claim holders. In 1999, the debtors sold the property for $137,500. The Chapter 13 trustee moved to modify the plan to increase payments to unsecured claim holders to 100 percent. The debtors objected.
The bankruptcy court concluded that the effective date of the plan for purposes of the best-interests-of-creditors test at modification after confirmation “is the effective date of the plan as modified.”20 Accordingly, the hypothetical liquidation test included the proceeds from the sale of the investment property:
Because § 541(a)(6) makes the proceeds and profits of property of the estate also property of the estate, because the Property was property of the estate at the commencement of the case, and because the Debtors are in possession and control of the excess proceeds from the sale of the Property, the Court finds that if the Debtors were to convert their case to a case under Chapter 7 in good faith, a Chapter 7 Trustee would be able to obtain the excess proceeds for distribution to the creditors of the Debtors’ estate. Accordingly, the same result should pertain to a hypothetical liquidation. . . . [T]he Debtors would be engaged in a bad faith manipulation of the Bankruptcy Code, if they insist on retaining the excess sale proceeds and obtaining the broad discharge afforded by § 1328(a).21
There is legislative history to support the view that the effective date of the plan for best-interests-of-creditors-test purposes at modification is the effective date of the plan as modified. In In re Nott,22 the debtor became entitled to an inheritance a year after confirmation. The debtor attempted to use the inheritance to pay off the confirmed 20 percent plan, arguing that the inheritance was not property of the Chapter 13 estate. The trustee responded that the inheritance should be committed to increasing payments to creditors or the case should be dismissed. Citing Barbosa and In re Walker,23 the bankruptcy court quoted legislative history to § 1329(b) for the conclusion that modification after confirmation required a shift in focus to the effective date of the modified plan:
“In applying the standards of proposed 11 U.S.C. § 1325(a)(4) to the confirmation of a modified plan, ‘the plan’ as used in the section will be the plan as modified. . . . Thus, the application of the liquidation value test must be redetermined at the time of the confirmation of the modified plan. H.R. Rep. No. 595, 95th Cong., 1st Sess. 431 (1977).”24
Applying this effective-date rule, the Nott court held the inheritance was property of the estate that would be captured for unsecured claim holders by a motion to modify under § 1329:
Since [the inheritance] was acquired postconfirmation but before the case has been closed, dismissed, or converted, the Court finds that the inheritance is property of the estate pursuant to § 1306(a) . . . . [I]t should be included in determining the amount that unsecured creditors would receive in a hypothetical chapter 7 case when applying the “best interest of creditors” test under § 1325(a)(4) to any modified plan proposed in this case.25
On interesting facts, the bankruptcy court in In re Profit26 also applied the best-interests-of-creditors test as of the effective date of a modified plan. In Profit, the debtor’s employer held a mortgage on the debtor’s residence. After confirmation, the employer forgave the debt. The debtors sold the residence and realized substantial proceeds. Before the debtors could tender completion of payments,27 the trustee moved to modify the plan to pay creditors the proceeds that resulted from the forgiveness of debt. Citing Barbosa, the bankruptcy court sided with the trustee:
[T]he best interests of the creditors test, or liquidation value test, of § 1325(a)(4) must be applied at time of plan modification because the effective date of the plan for purposes of that test at modification is the effective date of the plan as modified and not the effective date of the original plan. To find otherwise would in effect ignore the language of § 1329(b)(2). Therefore, the forgiveness of debt, as represented by the sales proceeds of the Palm Springs property, is property of the estate and, while not disposable income, must be considered at time of modification pursuant to §§ 1329(b)(1) and (2) and 1325(a)(4). Unless exempt, the Trustee’s Motion to Modify must be granted because the Palm Springs property sales proceeds must be made available for Debtor’s unsecured creditors.28
On appeal, the Bankruptcy Appellate Panel for the Ninth Circuit reversed, invoking several of the tests for modification after confirmation, including the best-interests-of-creditors test. The BAP held that the trustee’s motion to capture for creditors the forgiveness of debt failed to specify how the trustee would obtain this additional value. As explained by the BAP, “[t]here was no modified plan form or specific provisions . . . . [T]he order did not specify how trustee would obtain the proceeds or their value from debtors for distribution to the unsecured creditors. . . . [N]o written payment schedule was presented, nor was any implementation detail provided.”29 Because the trustee’s motion was filed in the 54th month of the plan without a deadline for payment of the additional value, the BAP held that the plan violated the 60-month duration limitation in § 1329(c). With respect to the best-interests-of-creditors test, the BAP offered this enigmatic footnote:
[T]his case did not involve a postpetition disposable income asset, but rather a non-income producing asset. Even if the proceeds were property of the estate and subject to disclosure, they were not distributable to creditors. . . . Then, assuming that the “best interests of creditors” test is recalculated at the time of plan modification, Debtors’ net disposable income would not have increased, the unsecured creditors would receive more from liquidation, and, thus, the modified plan was still unconfirmable.30
The convoluted resolution of Profit on appeal does not obscure several important points. When the trustee moves to modify a confirmed plan to capture a postconfirmation asset or appreciation in a prepetition asset, the trustee is the proponent and must provide the basic ingredients of a plan under § 1322(a) and (b), including a means to implement the proposed modification. Perhaps in Profit, it would have been enough for the trustee to propose that the debtors turn over the proceeds from the sale of the house.
The mix of the disposable income test and the best-interests-of-creditors test by the BAP is confusing, but it appears that the BAP “assumed” the best-interests-of-creditors test would be recalculated at modification and with that assumption, the debtors had to increase payments to creditors to satisfy the liquidation test. Because the trustee did not explain how this increase in payments could be accomplished, the trustee’s modified plan was “unconfirmable.” That the BAP based this conclusion on insufficient “net disposable income” was not helpful. The disposable income test would not apply on the trustee’s motion to modify.31
Defining the effective date of the plan at modification as the effective date of the modified plan respects the language in § 1329(b)(2) that substitutes the modified plan for the plan as originally confirmed. This interpretation recognizes that the passage of time between confirmation and modification changes the facts of a Chapter 13 case. Changes may benefit the debtor or benefit creditors, when the tests in §§ 1322 and 1325 are applied as of the effective date of the plan as modified.
But it has to be admitted that this construct leads to other difficult questions of statutory interpretation. Modification of Chapter 13 plans after confirmation was not well thought through in 1978 or in 1984 when § 1329 was amended to empower trustees and allowed unsecured claim holders to seek modification. Applying the regular tests for confirmation at the time of a proposed modified plan leads to many imponderables.
What about the debtor whose home is appreciating? Not unlike the debtors in Barbosa, imagine that the debtor’s home was worth $100,000 at confirmation and was subject to a $100,000 mortgage. Twenty-five months later, the home is worth $120,000 and, because of payments through the plan, the mortgage is now $90,000. How should the bankruptcy court apply the best-interests-of-creditors test if an unsecured claim holder moves to modify the plan in the 25th month to require the debtor to increase payments to creditors? Does the estate now contain $30,000 of additional “value” in a liquidation under Chapter 7? Under Forbes, the debtor’s postconfirmation equity in the appreciated homestead is safe from the modification motion of an unsecured claim holder. The effective date analysis in Barbosa would test the estate as of the 25th month and find that § 1325(a)(4) extracts a new price for modification of the plan—the appreciation belongs to creditors.
These thoughts lead immediately to the absurd result that a Chapter 13 debtor with appreciating property would be required by consecutive motions from unsecured claim holders to continuously modify the confirmed plan. Or perhaps more absurdly, that the debtor’s payments to a secured creditor through the plan would continuously increase equity in the collateral ($10,000 in the example) that could then be captured for unsecured creditors by motion to modify. Is it a cost of the enhanced discharge that a Chapter 13 debtor can be required by the trustee or the holder of an allowed unsecured claim to increase payments to creditors if the value of the debtor’s property increases after confirmation? Or is it just part of the debtor’s fresh start that changes in asset values after confirmation belong to the debtor? Is there a middle ground where reasonable changes in value belong to the debtor, but unreasonable changes in value are an entitlement of creditors that is realized through modification after confirmation?32
Some aspects of this problem were addressed by the same bankruptcy court that decided Barbosa. In In re Trumbas,33 at confirmation the debtors’ residence was valued at $35,000. Four years later, the house was revalued at $131,000. The holder of an allowed unsecured claim moved to modify the plan to require the debtors to sell or refinance the property to pay unsecured claim holders in full. Distinguishing Barbosa, the bankruptcy court refused to compel sale or refinancing:
A number of courts, including the Barbosa court, have considered post-confirmation sales of property which appreciated post-petition and have concluded that the debtor must make the proceeds available to unsecured creditors. . . . In this case, the fact that the Debtor has not realized proceeds from the appreciation of her home distinguishes her case from others and is outcome determinative. . . . [N]othing in the Bankruptcy Code requires the Debtor—after diligently making 57 months of plan payments (out of 60 plan payments) under a confirmed plan—to incur new debt or to sell her home as a condition precedent to obtaining her discharge.34
In In re Evora,35 the same bankruptcy court that decided Trumbas and Barbosa turned back a mortgage holder’s grab for a portion of the appreciated value of property when the debtors moved to refinance after confirmation. Treating the debtors’ motion to approve refinancing as a motion to modify the plan to reduce the time for payments to creditors,36 the bankruptcy court held that refinancing did not trigger redetermination of the allowable amount of a mortgage secured by appreciating property:
MHFA has cited no authority for the proposition that this Court must . . . redetermine the amount of its secured claim . . . . “[Section] 1329(a)(1) permits debtors to alter the amount of their payment on a claim to accelerate or reduce the rate at which a claim is paid. . . . However, the modification of payment amounts cannot alter the allowed amount of the secured claim or eliminate the requirement in § 1325(a)(5) that the claim be paid in full.”37
Reading Barbosa, Trumbas and Evora together, in the Bankruptcy Court for the District of Massachusetts: when the debtor sells appreciated property after confirmation, the best-interests-of-creditors test in § 1325(a)(4) captures the appreciation for unsecured claim holders on a motion to modify under § 1329; however, an unsecured claim holder cannot use a motion to modify after confirmation to force an unwilling debtor to sell or refinance appreciated property when the debtor has no intention to sell or refinance; when the debtor voluntarily refinances appreciated property after confirmation, allowed claims secured by that property do not change for purposes of modification under § 1329—a secured claim holder cannot back door its way into a share of appreciation when the debtor uses modification to accelerate payments under the plan by refinancing.
The flip side of the appreciating-property problem is the effect claims disallowance can have on the best-interests-of-creditors test at postconfirmation modification. Particularly in jurisdictions that confirm Chapter 13 plans before the claims bar date,38 the best-interests-of-creditors test is often based on estimates of what the allowed claims will be once all claims are filed, the claims bar date passes and all objections to claims are resolved. It is not unusual for actual allowed claims to be different. If estimates turn out significantly inaccurate, a postconfirmation modification problem results.
For example, in In re Boehm,39 the confirmed plan provided 100 percent to unsecured creditors. The debtor scheduled unencumbered real property valued at $35,000. The confirmed plan contained no provision for postpetition interest to unsecured claim holders. One creditor filed a proof of claim for $19,154.53. After confirmation, the trustee moved to determine whether interest should be paid to the one allowed unsecured claim holder. The trustee argued that the debtor’s unencumbered residence would produce a 100 percent dividend plus postpetition interest in a hypothetical liquidation. The bankruptcy court held that the best-interests-of-creditors test required the debtor to pay postpetition interest to the unsecured claim holder.40
Exemptions may also change between filing of the petition and modification after confirmation. The reported decisions are not consistent in the methodology for determining exemptions at modification.
In one reported decision, the state opted out of the federal exemptions after the petition and before the debtor’s proposed modification. The court held that modification on the same day the state opt-out law took effect did not preclude the debtor from use of the federal exemptions.41
In In re Boothe,42 at confirmation, the debtor’s car was valued at $1,900, and the car lender’s allowed secured claim was limited to that amount. After confirmation, the car was destroyed, and an insurance company tendered a check for $2,900. At the time of destruction of the car, the balance of the allowed claim secured by the car had been reduced to $1,038 by payments under the plan. The debtor proposed to modify the plan to use the difference—$1,862—as a down payment on a replacement car.
The modified plan was disapproved because the court found that the $1,862 was disposable income for purposes of the test in § 1325(b) and the modified plan failed to commit the additional $1,862 to payments to creditors.43 The court rejected the debtor’s argument that the balance of the insurance proceeds was exempt property at modification of the plan:
Exemptions are determined as of the date of filing. . . . So too the value of the automobile was determined as of the date of the filing. The Court determined that the value of the vehicle was $1,900 and that, thus, [the car lender’s] lien was limited to $1,900. That means there was no equity in the vehicle to which any exemption claimed by the Debtors could attach.44
Compare this outcome to the exemption discussion in In re Walker.45 The plan confirmed in Walker in 1989 valued a mortgage holder’s collateral at $49,000. The mortgage holder filed a claim for $56,160.43. The confirmed plan required a 70 percent dividend to unsecured claim holders. In 1991, the debtor moved to modify to reduce the dividend to zero percent. The mortgage holder objected on the ground that the modified plan would fail the best-interests-of-creditors test because the real property had appreciated to $63,000.
In contrast to Boothe, the Walker court held that exemptions are determined as of the effective date of the modified plan. The equity that accumulated because of appreciation between confirmation and the effective date of the modified plan could be exempted by the debtor to satisfy the best-interests-of-creditors test. The court explained:
Pursuant to 11 U.S.C. § 1329(b)(1), a modified plan must meet the requirements of § 1325(a). . . . The legislative history to 11 U.S.C. § 1329(b) states, in relevant part, . . . “In applying the standards of proposed 11 U.S.C. § 1325(a)(4) to the confirmation of a modified plan, ‘the plan’ as used in the section will be the plan as modified. . . . Thus, the application of the liquidation value test must be redetermined at the time of the confirmation of the modified plan.” . . . [T]he best interests test should be applied as of the effective date of the modified plan. . . . [C]laims are determined as of the filing of the petition by virtue of § 502. . . . In other words, except as provided in § 506(b) . . . claims do not change during the life of a bankruptcy case. . . . [T]he debtor has not yet been required to claim an exemption in the property. It is reasonable to assume that if she were required to do so today, she would claim the maximum allowed by law. In that event, if the case were converted to one under chapter 7, . . . unsecured claims would receive nothing on account of this asset.46
Walker and Boothe are engaged in the same debate as Forbes and Barbosa above: as of what date are the tests in §§ 1322 and 1325 applied at modification after confirmation. Walker found legislative history to support the same outcome as Barbosa—the effective date of a modified plan is the effective date of the plan as modified, not the earlier date of confirmation of the original plan.
In both Boothe and Walker, equity developed in property after confirmation. In Boothe, this occurred because the debtor made payments under the plan and then an insurance company paid more than the balance of the allowed secured claim. In Walker, real property appreciated after the petition. If increased value in the Chapter 13 estate is available to creditors through the best-interests-of-creditors test or the disposable income test at modification of the plan—a proposition inspiring to creditors and frightening to debtors—then it is attractive logic that the debtor has new exemption rights at modification after confirmation.
The Boothe outcome might have been explained without violence to the debtor’s exemption rights at modification of a plan. The Boothe court’s conclusion that excess insurance proceeds were payable to creditors was based on the disposable income test in § 1325(b). As detailed below,47 there is controversy whether the disposable income test applies at modification under § 1329. If the test applies, there are no exemptions from income for purposes of § 1325(b). The exemption discussion in Boothe was not necessary to the court’s holding that the disposable income test required the debtor to pay the excess insurance proceeds to creditors.
Barbosa and Walker are a wake-up call for Chapter 13 debtors who own appreciating property. The debtor in Walker was lucky to have room left in her exemptions to eat up the appreciation between confirmation and modification. In the absence of additional exemptions, Walker says appreciation in property during the Chapter 13 case is included in the best-interests-of-creditors-test calculation at modification—the “new” equity belongs to unsecured creditors. Barbosa is Walker without room for exemptions, and the outcome is not good for the debtors. Because Chapter 13 plans can be modified after confirmation on the motion of the holder of any allowed unsecured claim, the nightmare lurking in these cases is serial motions to modify as appreciating property produces new equity during the years of administration.
One possible foil to the Barbosa logic is suggested above: let the Chapter 13 estate drain into the debtor’s hands at confirmation under § 1327(b).48 The confirmed plans in most of the cases that follow Barbosa contained provisions overcoming the vesting of the estate in the debtor at confirmation under § 1327(b).49 If vesting in the debtor is not prevented by the plan, or if the jurisdiction applies a § 1327(b) theory that limits the Chapter 13 estate after confirmation,50 the § 1325(a)(4) calculation will change—the estate available for liquidation contains less property.
The downside in allowing § 1327(b) to vest all property of the estate in the debtor is not good for Chapter 13 debtors in many other respects.51 Failing to maintain the estate exposes the debtor and the debtor’s property to creditor actions that would otherwise remain subject to the automatic stay. At least one court of appeals has held that a Chapter 13 debtor is not permitted to retain property in the estate after confirmation except as necessary to perform the plan.52 Some courts interpret § 1327(b) to vest in the debtor only the property that exists at the moment of confirmation, with the estate refilling from property acquired after confirmation—further convoluting application of Barbosa at modification after confirmation.
Creditors have a stake in this issue since a plan that doesn’t overcome the vesting effect in § 1327(b) could preclude modification after confirmation to capture postconfirmation assets or appreciation. Also, vesting property in the debtor exposes creditors to the risk that the debtor will dispose of assets, then convert or dismiss.
And Barbosa doesn’t answer the problems found by the BAP in Profit. Appreciation of an asset may change the liquidation value of the estate, but without an increase in income, how will the proponent of the modified plan force the debtor to increase payments? Unless and until the courts embrace forced liquidations or refinancing through § 1329, grabbing the increased value for creditors will be difficult. When the debtor sells an appreciated asset after confirmation, the trustee or allowed unsecured claim holder has a stronger position if the motion to modify catches the debtor with the cash.53
The good-faith test in § 1325(a)(3)54 is applicable at modification after confirmation.55 When the debtor is the proponent, analyzing good faith at postconfirmation modification would be little different from analyzing the debtor’s good faith at confirmation of the original plan.56 Good faith at modification is probably limited to consideration of the debtor’s actions after confirmation of the original plan. For example, in In re Knappen,57 the debtor’s car was repossessed after confirmation, and the debtor moved to modify to reduce the car lender’s secured claim to zero.58 The bankruptcy court held that the good-faith test applied to the debtor’s modified plan with this content:
In this context, the requirement that the modification be proposed in good faith, § 1325(a)(3), is particularly relevant. For example, were the debtor to fail to maintain insurance on a vehicle, and then lose the value of the collateral for that reason, or were the debtor to fail to reasonably care for the collateral, such as periodically changing the oil in the vehicle with a resultant loss of value, the motion to modify would probably be denied.59
One reported decision finds a lack of good faith when the debtor sought to declare a 60-month plan completed in the 46th month. In In re Vasquez,60 the confirmed plan called for 60 monthly payments and a 57 percent distribution. After 46 months, the debtors moved to modify to reduce payments to unsecured claim holders to .01 percent and declare the plan completed. The motion explained that Mrs. Vasquez was rendered unable to work by an injury. The bankruptcy court found the modification was permitted by § 1329(a)(1) and (2)61 but held that the modification failed the good-faith requirement in § 1325(a)(3):
By the modification, the Vasquezes are making virtually no payments on their unsecured debt while still obtaining the broader Chapter 13 discharge. . . . The difficulties encountered by the Debtors here—reduced earning capacity resulting from Mrs. Vasquez’s injury and thus inability to complete payments under a confirmed plan—appears to be a textbook example of a case for which the hardship discharge provision of § 1328(b) is perfectly suited. By seeking a modification rather than a hardship discharge, the Debtors are indeed manipulating the provisions of the Code and thus the court must question the Debtors’ motivation and sincerity in proposing the modification. Given the totality of the circumstances here, the court finds that the Vasquezes’ modification is not proposed in good faith, is not practicable, and thus must be denied.62
The good-faith test could present some awkward moments when the proponent of the modified plan is the holder of an allowed unsecured claim or the trustee as is permitted by § 1329.63 The statute requires that the court assess the claim holder’s or the trustee’s good faith to determine compliance with § 1325(a)(3) and § 1329(b)(1). Section 1325(a)(3) is worded that “the plan has been proposed in good faith”—if the modified plan was proposed by the trustee or the holder of an allowed unsecured claim, then the good-faith test is focused on the “proposer.”
Is it good faith that the unsecured claim holder wants to be paid more money? Is it good faith for an unsecured creditor to reach for the equity from postconfirmation appreciation in the debtor’s homestead? Is the creditor’s financial condition relevant? Is it good faith that the unsecured claim holder thinks the debtor should extend the plan beyond 36 months even though the debtor does not desire to pay for more than 36 months? Would it make a difference if the proponent holds a claim that would be nondischargeable in a Chapter 7 case, and the extension is to pay the nondischargeable claim? There are reported decisions assessing the good faith of debtors in such situations;64 § 1329 admits of the possibility that courts will also have to assess the bona fides from the other side of the equation. How would the various good-faith factors65 work when the trustee or a creditor is the proponent of modification?
One reported decision ducks all of these questions. In Southtrust Mobile Services, Inc. v. Englebert,66 the Chapter 13 trustee proposed a modified plan under § 1329(a). The district court conceded that ordinary statutory construction would require the trustee to demonstrate good faith as the proponent of modification, but the court refused to require the trustee to carry this burden:
Using the rules of English grammar, it is the “good faith” of the proposer of a plan modification that is the proper subject for inquiry. In this sense, [the Chapter 13 trustee] proposed the change in the plan. . . . There is nothing in the record to demonstrate that the debtors were the authors of the proposal. Therefore, it logically should be the Trustee’s “good faith” which should be under examination. . . . [W]hether a Trustee’s proposal is made in “good faith” is an entirely different question from whether or not some different proposal made by the debtor is in “good faith.” . . . If Congress had intended that the “good faith” of the Trustee be a subject for inquiry, dispositive on the question of whether to confirm his plan, this court will wait for some higher court to instruct the lower courts to conduct such an inquiry.67
Although § 1329 applies all of § 1322(b) to modification after confirmation, one reported decision finds an unexpected limit on postconfirmation modification in the permissive powers in § 1322(b). In In re Baines,68 the confirmed plans provided that lawsuit proceeds and workers’ compensation would be paid to the Chapter 13 trustee. After confirmation, the trustee received the money and moved for “special distribution” to pay the proceeds to unsecured creditors. The bankruptcy court cited § 1322(b)(4) to support the debtors’ position that the extra funds should be distributed consistent with the confirmed plan, not just to unsecured claim holders:
[A]ssuming that the Trustee’s proposed modification fits under one of Section 1329(a)’s categories, he has failed to show that the proposed modification otherwise complies with the Code . . . . According to Section 1322(b)(4), a debtor may choose, at his sole discretion, to pay his unsecured and secured creditors contemporaneously. . . . Neither the trustee nor any unsecured creditor can compel a Chapter 13 debtor to exercise his Section 1322(b)(4) option. . . . [T]he Trustee cannot force [the debtors] to reorder their distribution scheme upon an increase in their disposable income during the life of their confirmed plans. The Trustee, according to Section 1329(a)(1) and (2), may move to modify the plan to increase plan payments or plan length, thereby ultimately putting more money into the hands of the unsecured creditors, or decrease plan length, thereby putting money into their hands sooner. Short of this, however, the Trustee may not force the Debtors to do, through modification, what he cannot force them to do at plan confirmation.69
The outcome in Baines is odd. Section 1322(b)(4) permits the plan to provide for payments on unsecured claims “concurrently with payments on any secured claim or any other unsecured claim.”70 Although only the debtor can propose the original plan,71 the trustee and the holders of allowed unsecured claims have standing to seek modification of a confirmed plan under § 1329.72 Section 1322(b)(4) is a “limit” on the content of a modified plan only in the sense that the plan as modified is permitted (but not required) to provide for payments on unsecured claims concurrently with payments on secured or other unsecured claims. Section 1329(a)(1) and (2) authorize modification of the plan after confirmation to increase payments “on claims of a particular class” or to “reduce the time for such payments.” This seems to be what the trustee proposed to do in Baines—use the lawsuit proceeds and workers’ compensation to increase and accelerate payments to the class of unsecured claim holders. It is not obvious that any provision of §§ 1322, 1325 or 1329 prohibits that modification.
1 11 U.S.C. § 1329(b)(1).
2 See Part 4.
4 See Part 4.
5 See discussion beginning at § 90.1 In General: Plan Payments vs. Hypothetical Liquidation.
6 See § 289.1 [ Untimely Filed Claims in Cases Filed before October 22, 1994: The Hausladen Phenomenon ] § 135.6 Untimely Filed Claims in Cases Filed before October 22, 1994: The Hausladen Phenomenon.
7 In re Buck, 172 B.R. 271, 273 (Bankr. D. Minn. 1994) (“A modified chapter 13 plan must meet the requirements of § 1322. 11 U.S.C. § 1329(b)(1).” Plan cannot be modified after confirmation to disallow tardily-filed claim of the IRS because modification would violate IRS’s rights as a priority claim holder. Although IRS filed proof of claim two years after the petition, the tardily-filed claim is entitled to priority and to payments “in futuro” until the debtor completes payments under the plan.). Accord In re Friauf, 172 B.R. 273 (Bankr. D. Minn. 1994) (Postconfirmation modification of plan to disallow tardily-filed claim of IRS is “unnecessary” because tardy filing is “irrelevant” to priority status, and the debtor will complete payments under the confirmed plan before the late-filed claim will be paid in full “due to the extreme and purposeful delay of the IRS in filing its claim.”).
8 See discussion beginning at § 90.1 In General: Plan Payments vs. Hypothetical Liquidation.
9 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) and 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.
10 11 U.S.C. § 1325(a)(4). See § 160.1 [ In General: Plan Payments vs. Hypothetical Liquidation ] § 90.1 In General: Plan Payments vs. Hypothetical Liquidation.
11 11 U.S.C. § 1329(b)(2) (emphasis added).
12 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.
13 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 and 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. See also § 263.1 [ To Sell or Refinance Property of the Estate ] § 127.6 To Sell or Refinance Property of the Estate.
14 215 B.R. 183 (B.A.P. 8th Cir. 1997).
15 215 B.R. at 188–90. See also In re Easley, 240 B.R. 563, 565 (Bankr. W.D. Mo. 1999) (For purposes of entitlement to hardship discharge in advance of the completion of payments, liquidation analysis is performed as of the date of confirmation of the plan and is not recalculated based on the value of assets at the time of the request for a hardship discharge. The Easleys listed a boat, motor and trailer on their bankruptcy schedules as nonexempt personal property. They scheduled the value of this property at $10,000. “[T]he liquidation analysis, or best interest of creditor’s test, is performed only once in Chapter 13, and that is at the time of confirmation. If the Easleys valued their boat, motor, and trailer at $10,000.00 prior to confirmation, and the plan was confirmed based upon that valuation, then that is the value to be used throughout the case for purposes of the liquidation analysis.”).
16 See § 257.1 [ Changed-Circumstances Requirement? ] § 126.5 Changed-Circumstances Requirement?.
17 See § 267.1 [ To Account for Payments Other Than under the Plan ] § 127.10 To Account for Payments Other Than under the Plan.
18 11 U.S.C. § 1329(a)(3).
19 236 B.R. 540 (Bankr. D. Mass. 1999), aff’d on other grounds, 243 B.R. 562 (D. Mass.), aff’d, 235 F.3d 31 (1st Cir. 2000).
20 236 B.R. at 542.
21 236 B.R. at 554–56, aff’d on other grounds, 243 B.R. 562 (D. Mass.), aff’d, 235 F.3d 31 (1st Cir. 2000) (Postpetition income and assets become property of Chapter 13 estate notwithstanding vesting effect in § 1327(b); res judicata did not bar modification of plan to pay creditors appreciated value of property, and bankruptcy court did not abuse its discretion in ordering the amendment.). Accord In re Stinson, 302 B.R. 828, 832–33 (Bankr. D. Md. 2003) (On trustee’s motion two years after confirmation, best-interests-of-creditors test requires increase in base amount of plan to reflect proceeds from sale of debtors’ residence. “When considering a plan modification where assets have not re-vested and thus are estate assets at the time of sale, the court is required to perform a liquidation analysis under Section 1325(a)(4) as of the time of the requested modification, not as of the date of confirmation of the original plan. . . . Here, the liquidated value of the Property at modification equals its sale price, $133,900. That price is $23,900 greater than the value of the Property accepted at confirmation. The Plan currently provides for 60 monthly payments of $390 for a total funding of $23,400. Accordingly, the Plan’s current funding fails the ‘best interests’ test because the estate is worth more than the Debtors propose to pay through the Plan. The plan base should be increased from $23,400 to $45,000 in order to provide the unsecured creditors with a fund that is equivalent to the amount that would be available if the estate were liquidated under Chapter 7.”); In re Jefferson, 299 B.R. 468 (Bankr. S.D. Ohio 2003) (Citing Barbosa v. Solomon, 235 F.3d 31 (1st Cir. 2000), at modification after confirmation, the best-interests-of-creditors test is recalculated based on the effective date of the modified plan.); In re Morgan, 299 B.R. 118, 124–25 (Bankr. D. Md. 2003) (Best-interests-of-creditors test is recalculated at modification and appreciation in value is captured for creditors. Debtor valued real property in schedules at $135,990. Six months after confirmation, debtor moved to sell the property for $193,000. Confirmed plan delayed the vesting of property under § 1327(b). Citing In re Barbosa, 236 B.R. 540 (Bankr. D. Mass. 1999), aff’d, 243 B.R. 562 (D. Mass.), aff’d, 235 F.3d 31 (1st Cir. 2000), “This court finds most persuasive . . . Barbosa, at least where (as in the instant case) the assets have not revested and thus are estate assets at the time of sale. Barbosa opinion appears to interpret the Section 1325(a)(4) as the legislative history indicates the section was intended. . . . The Debtor’s assertion that to apply the best interest test as of the date of the modification yields an inequitable result is not borne out in this case. What Debtor argues would be equitable is that unsecured claimants would receive a small percentage of their claims while Debtor receives a significant sum of money from the liquidation of estate assets.”); In re Martin, 232 B.R. 29 (Bankr. D. Mass. 1999) (On debtors’ motion to modify plan two years after confirmation to reduce payments to reflect unfiled proofs of claim and to cash out unsecureds from refinancing of debtors’ home, compliance with § 1325(a)(4) cannot be determined because the debtors did not provide a liquidation analysis. “Effective date of the plan” for purposes of § 1325(a)(4) means the effective date of the plan as modified, to give effect to § 1329(b)(2).).
22 269 B.R. 250 (Bankr. M.D. Fla. 2000).
23 153 B.R. 565 (Bankr. D. Or. 1993). See below in this section.
24 269 B.R. at 255.
25 269 B.R. at 257–58.
26 269 B.R. 51 (Bankr. D. Nev. 2001), rev’d, 283 B.R. 567 (B.A.P. 9th Cir. 2002).
27 See § 253.1 [ Standing, Timing and Procedure ] § 126.1 Standing, Timing and Procedure.
28 269 B.R. at 58–59.
29 283 B.R. at 576.
30 283 B.R. at 577 n.13.
31 See § 255.1 [ Does Disposable Income Test Apply? ] § 126.3 Does Disposable Income Test Apply?.
32 See also § 148.3 Effects of Conversion from Chapter 7 to Chapter 13 and § 148.4 Conversion to Chapter 13 after BAPCPA for similar issues at conversion to Chapter 7.
33 245 B.R. 764 (Bankr. D. Mass. 2000).
34 245 B.R. at 767 & n.6.
35 242 B.R. 560 (Bankr. D. Mass. 1999).
36 See §§ 262.1 [ To Incur New Debt ] § 127.5 To Incur New Debt, 266.1 [ To Increase Payments to Creditors ] § 127.9 To Increase Payments to Creditors and 268.1 [ To Extend or Reduce the Time for Payments ] § 127.11 To Extend or Reduce the Time for Payments.
37 242 B.R. 561–62.
39 202 B.R. 99 (Bankr. N.D. Ill. 1996).
40 A variation of this issue is discussed in §§ 253.1 [ Standing, Timing and Procedure ] § 126.1 Standing, Timing and Procedure, 266.1 [ To Increase Payments to Creditors ] § 127.9 To Increase Payments to Creditors and 268.1 [ To Extend or Reduce the Time for Payments ] § 127.11 To Extend or Reduce the Time for Payments with respect to Chapter 13 plans that reach completion of payments in fewer than 36 months because proofs of claims are not timely filed or are filed in amounts less than anticipated.
41 Hollytex Carpet Mills v. Tedford, 691 F.2d 392 (8th Cir. 1982).
42 167 B.R. 943 (Bankr. D. Colo. 1994).
43 Application of the disposable income test at modification after confirmation is discussed in § 255.1 [ Does Disposable Income Test Apply? ] § 126.3 Does Disposable Income Test Apply?.
44 In re Boothe, 167 B.R. at 945. See § 255.1 [ Does Disposable Income Test Apply? ] § 126.3 Does Disposable Income Test Apply? for further discussion of the impact of exemptions on the disposable income test at modification after confirmation.
45 153 B.R. 565 (Bankr. D. Or. 1993).
46 In re Walker, 153 B.R. at 568–70. Accord In re Guentert, 206 B.R. 958 (Bankr. W.D. Mo. 1997) (Disposable income test and best-interests-of-creditors test apply at modification under § 1329; insurance proceeds are property of postconfirmation estate, and trial will be necessary to determine exemption in proceeds for purposes of best-interests-of-creditors test); In re Jackson, 173 B.R. 168, 171 (Bankr. E.D. Mo. 1994) (At postconfirmation modification, the best-interests-of-creditors test under § 1325(a)(4) operates, but workers’ compensation proceeds received after confirmation are exempt and do not increase the minimum amount that the debtors have to pay to creditors.).
47 See § 255.1 [ Does Disposable Income Test Apply? ] § 126.3 Does Disposable Income Test Apply?.
48 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) and 243.1 [ Does Confirmation Dissolve the Stay? ] § 124.3 Does Confirmation Dissolve the Stay?.
49 See, e.g., In re Stinson, 302 B.R. 828, 832 (Bankr. D. Md. 2003) (“When considering a plan modification where assets have not re-vested and thus are estate assets at the time of sale, the court is required to perform a liquidation analysis under Section 1325(a)(4) as of the time of the requested modification, not as of the date of confirmation of the original plan.”); In re Morgan, 299 B.R. 118, 124 (Bankr. D. Md. 2003) (“This court finds most persuasive . . . Barbosa, at least where (as in the instant case) the assets have not revested and thus are estate assets at the time of sale.”).
50 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.
51 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) and 243.1 [ Does Confirmation Dissolve the Stay? ] § 124.3 Does Confirmation Dissolve the Stay?.
52 Black v. United States Postal Serv. (In re Heath), 115 F.3d 521 (7th Cir. 1997). 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.
53 See § 266.1 [ To Increase Payments to Creditors ] § 127.9 To Increase Payments to Creditors for discussion of modifications that require the debtor to increase payments to creditors.
54 See discussion of good faith before and after BAPCPA beginning at § 103.1 In General, § 104.1 In General, § 105.1 Prepetition Conduct and Misconduct—In General, § 106.1 In General, § 107.1 Greed, Not Need, § 108.1 Economic Components of Good Faith—In General, § 109.1 Smell Tests and § 110.1 Good-Faith Filing Requirement after BAPCPA.
55 11 U.S.C. § 1329(b)(1).
56 See, e.g., In re Gress, 257 B.R. 563 (Bankr. D. Mont. 2000) (At modification after confirmation, good-faith test in § 1325(a)(3) applies; debtor’s failure to schedule live-in girlfriend’s income does not demonstrate a lack of good faith because girlfriend never contributed to debtor’s household expenses and girlfriend moved out before confirmation.).
57 281 B.R. 714 (Bankr. D.N.M. 2002).
58 For further discussion of modifying a confirmed plan to reflect the surrender or repossession of collateral, see §§ 264.1 [ To Surrender Collateral, Account for Repossession or Change the Treatment of a Secured Claim ] § 127.7 To Surrender Collateral, Account for Repossession or Change the Treatment of a Secured Claim and 265.1 [ To Decrease Payments to Creditors ] § 127.8 To Decrease Payments to Creditors.
59 281 B.R. at 720.
60 261 B.R. 654 (Bankr. N.D. Tex. 2001).
61 See §§ 265.1 [ To Decrease Payments to Creditors ] § 127.8 To Decrease Payments to Creditors and 268.1 [ To Extend or Reduce the Time for Payments ] § 127.11 To Extend or Reduce the Time for Payments.
62 261 B.R. at 659.
63 See § 253.1 [ Standing, Timing and Procedure ] § 126.1 Standing, Timing and Procedure.
64 See discussion beginning at § 106.1 In General.
65 See discussion of good faith beginning at § 104.1 In General, § 105.1 Prepetition Conduct and Misconduct—In General, § 106.1 In General, § 107.1 Greed, Not Need and § 108.1 Economic Components of Good Faith—In General.
66 137 B.R. 975 (N.D. Ala. 1992).
67 137 B.R. at 986–87.
68 263 B.R. 868 (Bankr. S.D. Ill. 2001).
69 263 B.R. at 873.
70 11 U.S.C. § 1322(b)(4). See § 113.7 Order of Payments to Creditors before BAPCPA and § 113.8 Order of Payments to Creditors after BAPCPA.
72 See § 253.1 [ Standing, Timing and Procedure ] § 126.1 Standing, Timing and Procedure.