Cite as: Keith M. Lundin, Lundin On Chapter 13, § 127.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
Probably the most common postconfirmation modification is a debtor’s request to suspend payments into the plan for some (usually brief) period of time.1 The typical grounds for a motion to suspend payments are loss of a job, illness, maternity leave, loss of overtime, extraordinary expenses, an accident or breakdown of a car. Any proposal to suspend payments into the plan is a motion to modify the plan.2 A motion to suspend payments should include some provision to increase future payments into the plan or decrease payments to creditors to adjust for money lost during the suspension. Some courts require that every motion to suspend payments must be accompanied by a current budget. In some districts, the debtor gives notice of the proposed suspension and modified plan to all creditors.3
There has to be some flexibility during the three- to five-year duration of Chapter 13 plans to allow for short periods during which the debtor is unable to make payments. When the suspension is short and the effect on creditors is nominal, suspensions are granted routinely, and creditors rarely object. When the suspension affects creditors more dramatically—for example, missed payments to secured claim holders with depreciating collateral—opposition can be expected, and the motion to suspend must also endeavor to cure the lost payments. The debtor might propose to increase payments into the plan after the suspension or to extend the plan past its original duration. If the debtor is not able to increase payments or extend the plan, the modification may effect a reduction in the percentage to be paid to unsecured claim holders.4
A motion to suspend payments is sometimes used to deal with a postconfirmation default under the plan. The debtor’s loss of a job or temporary disability becomes known to debtor’s counsel when a creditor or the trustee files a motion to dismiss or to convert or for relief from the stay. Rehabilitating the case may include a responsive motion to modify the plan under § 1329.5 Of course, it is better to make the motion to modify in advance of the default under the plan; but counsel rarely has the luxury of knowing in advance that the debtor will be unable to make payments under the plan.
For unsecured claim holders, a motion to suspend payments after confirmation rarely justifies an objection or a motion for conversion or dismissal. Unless the debtor is solvent and conversion to Chapter 7 would mean an immediate dividend, the Chapter 13 case is the unsecured claim holder’s best bet for payment. Keeping the debtor in Chapter 13, even at the expense of a temporary suspension of payments, is better than the alternatives.
Secured claim holders have more at risk in a suspension of payments, especially when the collateral is depreciating. For example, a creditor with a security interest in the debtor’s car may have to be compensated for payments missed during a suspension. The debtor’s proposed modification might include “kick payments”—larger payments than required by the original plan—to make up the lost installments. In the unusual case, the debtor may offer additional collateral—a security interest in something else the debtor owns—to protect the creditor from the delay in regular payments caused by the suspension.
Home mortgage holders have extra ammunition to oppose a suspension of payments after confirmation. Section 1322(b)(2) prohibits modification of most home mortgages.6 As interpreted by the Supreme Court in Nobelman v. American Savings Bank,7 § 1322(b)(2) prohibits modification of all of the contract and state law rights of a claim holder secured only by real property that is the debtor’s principal residence. Because of Nobelman and § 1322(b)(2), Chapter 13 plans typically cure default and maintain payments on home mortgages as permitted by § 1322(b)(5).8 It is not obvious that the debtor can modify the plan after confirmation to suspend payment of the home mortgage for even a short period without violating the prohibition against modification in § 1322(b)(2). On the other hand, most courts are reluctant to routinely grant relief from the stay to a home mortgage holder when the debtor has defaulted on payments under the plan but the circumstances are temporary and excusable and the debtor can make up the payments within a reasonable time. The debtor’s best position is to move to modify the plan under § 1329, characterizing the postpetition default as curable under § 1322(b)(5) and proposing a cure through the modified plan as quickly as possible.9
There will be cases when the suspension of payments cannot be balanced with a proposal for restoring the payments lost. Then, the suspension request must be measured against the standards for modification of a confirmed plan under § 1329. If the modified plan satisfies the tests in §§ 1322(a), 1322(b), 1323(c) and 1325(a), it can be approved even if it reduces total distributions to creditors.10 A modified plan that provides nothing more than just a suspension of payments usually comes down to measurement of the debtor’s good faith and intentions. If the debtor has been a victim of circumstances and not the architect, most courts will find good faith in a brief suspension and permit the debtor to continue in the plan as modified.
1 See § 250.3 [ Modification and Suspension of Income Deduction Orders ] § 125.5 Modification and Suspension of Income Deduction Orders. See also §§ 239.1 [ What to Do If Creditor Is Not Receiving Payments ] § 123.1 What to Do If Creditor Is Not Receiving Payments and 239.2 [ What to Do If Debtor Defaults ] § 123.2 What to Do If Debtor Defaults.
2 In re Hansen, 125 B.R. 831 (Bankr. D. Colo. 1991) (Motion to suspend payments after confirmation is a motion to modify confirmed plan under § 1329. “When a debtor desires to suspend payments, whether or not he also seeks an extension to the term of the plan, he must comply with § 1329. This means that, in accordance with § 1329(b)(1), he must file a motion to modify plan, a modified plan, a new plan analysis, and a current budget. . . . He must send notice of the motion to modify plan to all creditors.”).
3 See Fed. R. Bankr. P. 3015(g).
4 See § 265.1 [ To Decrease Payments to Creditors ] § 127.8 To Decrease Payments to Creditors.
5 See also §§ 239.2 [ What to Do If Debtor Defaults ] § 123.2 What to Do If Debtor Defaults and 244.1 [ Postconfirmation Default and Relief from the Stay ] § 124.4 Postconfirmation Default and Relief from the Stay.
6 See § 118.1 [ Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman ] § 79.1 Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman.
7 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993).
8 See discussion on curing defaults beginning at § 81.1 Overview: General Rules for Saving Debtor’s Home, § 82.1 Prepetition Defaults—When is Property “Sold” at Foreclosure?, § 83.1 In General: Rake and Contracts before October 22, 1994 and § 84.1 In General.
9 Management of postconfirmation defaults through postconfirmation modification is discussed in §§ 131.1 [ Postpetition Defaults ] § 82.2 Postpetition Defaults and 259.1 [ To Cure Postconfirmation Default ] § 127.2 To Cure Postconfirmation Default.
10 See § 265.1 [ To Decrease Payments to Creditors ] § 127.8 To Decrease Payments to Creditors.