Cite as: Keith M. Lundin, Lundin On Chapter 13, § 127.10, at ¶ ____, LundinOnChapter13.com (last visited __________).
Section 1329(a)(3) of the Code authorizes modification of a plan after confirmation to “alter the amount of the distribution to a creditor whose claim is provided for by the plan, to the extent necessary to take account of any payment of such claim other than under the plan.”1 This power to modify will often overlap the power granted in § 1329(a)(1)2—if some or all of a claim has been paid “other than under the plan,” the proposed modification typically will “reduce the amount of payments” to that creditor. Also, when some or all of a claim is paid from an external source, modification to “reduce the time” for payment of that creditor is appropriate under § 1329(a)(2).3
Section 1329(a)(3) is implicated more often than it is cited in reported cases. Chapter 13 plans typically provide for lienholders by retaining the lien to the extent of each allowed secured claim and providing monthly installments with interest under the plan.4 But lots of things happen after confirmation to change the way secured claims are actually satisfied. Sometimes debtors default, relief from the stay is granted and creditors repossess their collateral after confirmation. Debtors sometimes realize they cannot afford all of the property they retained through the plan, and surrender of collateral to a secured claim holder is necessary. Cars and appliances break down and have to be traded in and sometimes replaced after confirmation. Collateral sometimes is lost or destroyed and an insurance company tenders cash in substitution for the property that was to be paid for through the plan. Any of these common events can cause the debtor to need to modify the plan to change the treatment of an allowed secured claim. Section 1329(a)(3) is the vehicle for modification after confirmation to account for payment of a claim other than as contemplated by the confirmed plan.
Anyone who does much Chapter 13 practice knows that the sorts of things described above happen all the time in Chapter 13 cases. Yet there are only a handful of reported decisions addressing the use of § 1329(a)(3) to modify plans to account for these events. A few cases acknowledge that § 1329(a)(3) applies when a creditor receives its collateral or the value of its collateral in a manner not contemplated by the confirmed plan; but most of these courts interpret § 1329(a)(3) narrowly to prohibit modifications that change the balance of an allowed secured claim notwithstanding payment from a source external to the confirmed plan.
For example, in In re Meeks,5 the confirmed plan treated GMAC as a secured creditor with a car as collateral. Four months after confirmation, a new baby caused the debtor to move to surrender the car and to reduce plan payments by the amount allocated for GMAC. The modification proposed to treat any deficiency after liquidation of the car as an unsecured claim. The bankruptcy court acknowledged that “the debtor can return collateral postconfirmation and receive a credit against future plan payments as contemplated by § 1329(a)(3),” but the court refused the provision for treatment of the deficiency as an unsecured claim: “the Bankruptcy Code does not allow the Debtors’ [sic] to modify the amount of an allowed secured claim post-confirmation.”6 Similarly, in In re Coleman,7 the confirmed plan required payment in full of a $25,867.69 claim secured by a Corvette. Just over a month after confirmation, the debtor moved to surrender the Corvette, to reduce payments through the plan and to allow any deficiency after liquidation of the Corvette as an unsecured claim. Citing § 1329(a)(3), the bankruptcy court observed, “If the car is surrendered or is the subject of an insurance loss, the claim is reduced by the amount of proceeds of the policy or the sale, but again, the secured status of the balance of the claim is unaffected. . . . The only change allowed in a modification under subsection (a)(3) is to the ‘distribution’ to a creditor from the Chapter 13 Trustee.”8
This constrained reading of § 1329(a)(3) is not required by the Code or by any manifest good policy argument. Section 1329(a)(3) seems obviously intended to deal with exactly the situations before these courts—the surrender or repossession of collateral after confirmation or the substitution of insurance proceeds for personal property destroyed after confirmation.9 Modifying the plan to reflect that the collateral no longer exists or has been surrendered to the lienholder is exactly what § 1329(a)(3) describes. That surrender or repossession or the tender of insurance proceeds would reduce the allowable balance of the secured claim is required by other sections of the Code—§ 506(a), for example. The reduction of the remaining secured claim (if any) by surrender or payment other than under the plan is simply a natural consequence of § 1329(a)(3); it is not a reason to refuse modification in the first instance. As explained by the Bankruptcy Court for the District of Arizona in In re Zieder,10 when a Chapter 13 debtor surrendered a pickup truck a year after confirmation, §§ 502(j) and 506(a) reconsider and reduce to zero the allowed secured claim; § 1329(a)(3) then permits the Chapter 13 debtor to alter distributions to the claim holder “to the extent necessary to take account of the satisfaction of its secured claim by payment other than under the plan, i.e., by surrender of the collateral and application of § 506(a).”11
The reluctance of some courts to find plain meaning in § 1329(a)(3) creates an unnecessary dilemma for Chapter 13 debtors: what’s a debtor to do when a secured claim is reduced from an outside source if § 1329(a)(3) doesn’t do what it says? This is hardly an academic question. Secured debt gets paid off in Chapter 13 cases in lots of ways, including surrender, repossession of collateral12 or even refinancing. There has to be a statutory mechanism for adjusting Chapter 13 plans after confirmation to account for external events that pay off secured claims.
Consider the issue from its flip side. In In re Bacon,13 the debtor paid off a claim secured by real property by refinancing a mortgage. The debtor did not modify the confirmed plan to account for this payment. As a result, the trustee continued to send distribution checks. After a while, the former mortgage holder returned the distributions to the trustee. The debtor argued that the returned funds should be refunded to the debtor; the trustee argued for pro rata distribution to unsecured creditors consistent with the confirmed plan. The bankruptcy court sided with the trustee, reasoning that the trustee was obligated to disburse in accordance with the confirmed plan and, “[i]f the debtor did not want these funds to be distributed according to the Plan, it was her responsibility, pursuant to § 1329, to modify her Plan.”14
The cases refusing to reconsider or reduce allowed secured claims based on payments other than under the plan don’t square with Bacon. The refinancing in Bacon has exactly the same economic impact as surrender or repossession—the allowed secured claim is paid in full. Section 1329(a)(3) is the statutory vehicle for Chapter 13 debtors to account for such changes in the allowed amounts of secured claims when payment comes from an outside source.
As discussed above,15 § 1329(b)(1) states the statutory conditions for modifying a plan to account for payments other than under the plan. The debtor who surrenders the burned-out hulk of an uninsured car cannot expect to cakewalk a modified plan that wipes out the car lien. The issue in this circumstance is not whether § 1329(a)(3) permits modification to reflect the surrender of collateral and satisfaction of a secured claim; rather, the issue is the debtor’s good faith in modifying the plan to shift the consequences of driving without insurance to the lienholder. This modified plan will be disapproved because the debtor cannot demonstrate good faith in the failure to insure the car after confirmation.
Putting all of this another way, § 1329(a)(3) has gotten a bum rap in the reported cases out of apparent fear by the courts of abuses that are fully managed by other provisions of the Code. The result has been a stifling of good analysis with respect to the rights of Chapter 13 debtors to modify plans to account for payments from sources external to the plan such as the sale of collateral, repossession, the surrender of collateral, insurance proceeds or the like.
One enterprising Chapter 13 debtor argued § 1329(a)(3) in support of a postconfirmation modification to require the IRS to apply payments under the plan at the debtor’s direction. In In re Klaska,16 the debtor moved to modify the plan after confirmation to require the IRS to allocate payments first to regular income taxes and then to nondischargeable employee withholding taxes. This proposal raised two interesting issues. First was the question whether the Supreme Court’s decision in United States v. Energy Resources Co.17 permits a Chapter 13 debtor to control the allocation of payments under a plan among different kinds of tax liabilities. The Klaska court concluded that Energy Resources is applicable in Chapter 13 cases, and under appropriate circumstances, Chapter 13 debtors can force the allocation of payments among different tax claims.18
More to the point at hand, the court then held that § 1329(a)(3) authorized this unusual plan modification. The debtor in Klaska proposed to pay ordinary income taxes first and nondischargeable trust fund taxes later. This was counterintuitive—typically debtors invoke Energy Resources to require the IRS to allocate payments first to nondischargeable trust fund taxes and then to ordinary income taxes. In Klaska, the debtor’s proposal was backward because a former partner was also making payments toward the employee withholding taxes, and the debtor wanted to maximize the benefit of those payments. The court concluded that the plan modification fit § 1329(a)(3) by altering distribution to the IRS to “take account of” payment of the withholding taxes from a source outside the plan and would result in reduction of the time for payment under the plan, consistent with § 1329(a)(1).
Klaska is good statutory analysis and clever lawyering. Although its application of Energy Resources in a Chapter 13 case is controversial,19 its analysis of § 1329(a)(3) is right on the money.
1 11 U.S.C. § 1329(a)(3).
2 See § 265.1 [ To Decrease Payments to Creditors ] § 127.8 To Decrease Payments to Creditors.
3 See § 268.1 [ To Extend or Reduce the Time for Payments ] § 127.11 To Extend or Reduce the Time for Payments.
4 See discussion of providing for secured creditors beginning at § 74.1 General Rules before BAPCPA, § 75.1 In General: Modification Without § 506, § 76.1 Valuation, Claim Splitting and Dewsnup, § 77.1 “Value, As of the Effective Date of the Plan” Means Interest and § 78.1 Full Payment of Allowed Secured Claim.
5 237 B.R. 856 (Bankr. M.D. Fla. 1999).
6 237 B.R. at 861.
7 231 B.R. 397 (Bankr. S.D. Ga. 1999).
8 231 B.R. at 400. See also Hospital Auth. Credit Union v. Smith (In re Smith), 207 B.R. 26, 30 (Bankr. N.D. Ga. 1997) (Debtor cannot modify to surrender car in full satisfaction of lienholder’s secured claim because car is in possession of transmission repair shop. “Assuming that the statute permitted her to [surrender the car], whether as a payment under section 1329(a)(3) or as a distribution or surrender under section 1325(a)(5)(B) or (C) . . . she does not have the vehicle to surrender. . . . She cannot pay, distribute or surrender something that she can neither deliver nor tender.”).
9 See also §§ 238.1 [ Loss, Destruction or Surrender of Property after Confirmation ] § 122.3 Loss, Destruction or Surrender of Property after Confirmation and 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.
10 263 B.R. 114 (Bankr. D. Ariz. 2001).
11 263 B.R. at 118. Accord In re Taylor, 297 B.R. 487, 490–91 (Bankr. E.D. Tex. 2003) (Distinguishing Chrysler Financial Corp. v. Nolan (In re Nolan), 232 F.3d 528 (6th Cir. 2000), and adopting In re Zieder, 263 B.R. 114 (Bankr. D. Ariz. 2001), modification of confirmed plan “for the limited purpose of taking account of the payment received from another source” is allowed when debtor surrenders car three weeks after confirmation and car lender sells the car at auction. “GECC took possession of the vehicle. In so doing, GECC received the indubitable equivalent of its claim. . . . [H]aving sold the Vehicle at auction, GECC received payment on its claim as contemplated under 11 U.S.C.A. § 1329(a). . . . [T]here has been a novation between the parties.”); In re Knappen, 281 B.R. 714, 718 (Bankr. D.N.M. 2002) (Modification to reduce payments to a car lender to zero fits within § 1329(a)(3) when the car was repossessed and disposed of after confirmation. “[Section] 1329(a)(3) allows the Debtor to ‘alter the amount of the distribution to a creditor whose claim is provided for by the plan to the extent necessary to take account of any payment of such claim other than under the plan.’ Ford’s repossession and sale of the vehicle and application of the sale proceeds to the debt was not provided for in the Plan. . . . Ford has already stated that it has credited against the secured claim the amount it received from the sale of the vehicle. Section 1329(a)(3) requires the creditor to do this . . . . The reduction of the remaining obligation thus necessarily results in a reduction of the amount of the claim.”).
12 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.
13 274 B.R. 682 (Bankr. D. Md. 2002).
14 274 B.R. at 685.
15 See § 126.2 Application of Tests for Confirmation, § 126.3 Does Disposable Income Test Apply?, § 126.6 Modification after Confirmation after BAPCPA and § 127.7 To Surrender Collateral, Account for Repossession or Change the Treatment of a Secured Claim.
16 152 B.R. 248 (Bankr. C.D. Ill. 1993).
17 495 U.S. 545, 110 S. Ct. 2139, 109 L. Ed. 2d 580 (1990).