§ 127.8     To Decrease Payments to Creditors
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 127.8, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

One postconfirmation modification that is clearly contemplated in § 1329(a) is that the plan can be changed to “reduce the amount of payments on claims of a particular class provided for by the plan.”1 The statute makes no distinction between reducing payments on secured or unsecured claims.

[2]

Modifications to reduce payments to secured claim holders most commonly involve surrender or repossession of collateral and are discussed above.2 It has been said that § 1329 does not permit a debtor to reduce the amount of a secured claim provided for in the confirmed plan.3 This result is not required by § 1329 and confuses the claims allowance process with the rules for modification of plans after confirmation. There are many reported decisions that permit modification after confirmation to affect the treatment of secured claims.4 Debtors have routinely been allowed to modify to improve the treatment of secured claims, for example, to include an omitted provision for payment of interest or to retain liens consistent with § 1325(a)(5)(B)(i).5

[3]

Although not always citing § 1329(b)(1) and its incorporation of the good-faith test in § 1325(a)(3), several reported decisions have granted or denied postconfirmation modifications that reduce payments to creditors based on assessment of the debtor’s good faith, sincerity and intentions. For example, in In re Smura,6 the debtor was not permitted to modify a 100 percent plan to a 9 percent plan to pay an omitted prepetition debt that survived discharge in the debtor’s prior Chapter 7 case.7 The court found that modification to “add” the omitted creditor “would be inequitable . . . and manipulative of the Code.”8 The debtor in In re Roundtree9 was denied modification to reduce payments to creditors less than one month after confirmation of the original plan. In Combs v. Combs,10 postconfirmation modification to reduce payments to unsecured claim holders from 100 percent to 10 percent was refused when the cause was the debtor’s failure to reveal a state court alimony action pending at confirmation of the original plan. One court disapproved a modified plan that would reduce payments to unsecured claim holders based in part on the debtors’ bad-faith decision to pay their children’s school tuition instead of paying creditors.11 That the debtor married a disabled, unemployed man and chose to buy a car after confirmation while in arrears under the plan convinced one court to deny a postconfirmation motion to reduce payments to unsecured creditors from $19,000 to $3,450.12 The death of a codebtor justified reducing payments to unsecured creditors from 100 percent to 25 percent.13

[4]

Modification to reduce payments was denied in In re Beasley,14 when the only reason given by the debtor was the failure of some unsecured claim holders to timely file proofs of claim. Other courts have granted15 and denied16 modifications to account for the failure of creditors to file proofs of claim, when the motion was filed by the Chapter 13 trustee rather than by the debtor.

[5]

The debtor in In re Walker17 was permitted to reduce payments to unsecured claim holders from 100 percent to 34 percent based on the debtor’s postconfirmation marriage and new financial responsibility to support a wife and minor child. A debtor was permitted to modify a confirmed plan to exclude interest payments on a priority claim of the IRS when, after confirmation, the bankruptcy court decided in another case that postpetition interest was not payable to priority claim holders in Chapter 13 cases.18 The district court in Atlantic Finance Federal v. Frost (In re Frost)19 broadly acknowledged a Chapter 13 debtor’s power to increase or reduce the amount of payments on claims through modification under § 1329(a)(1), observing that it is “pointless to interpret § 1329(a)(1) as denying a debtor the right to reduce the amount to be paid pursuant to a modification motion when the debtor can achieve the same result through dismissing and refiling.”

[6]

The best-interests-of-creditors test in § 1325(a)(4),20 applicable to a modified plan under § 1329(b)(1), is a limit on postconfirmation modification to decrease payments to creditors. In In re Haas,21 the debtor proposed to reduce payments to unsecured claim holders from 100 percent to 20 percent. The court denied modification because the debtor failed to prove that the modified plan would pay unsecureds at least as much as they would be paid in a Chapter 7 liquidation. Similarly, in In re Martin,22 on the debtor’s motion to modify the plan two years after confirmation to reduce payments to reflect unfiled proofs of claim and to cash out the balance of the plan from the refinancing of the debtor’s home, the bankruptcy court held that the effective date of the plan for purposes of the best-interests-of-creditors test was the effective date of the plan as modified under § 1329(b)(2); the modified plan could not be approved because the debtor did not provide a liquidation analysis from which compliance with § 1325(a)(4) could be determined. The Martin court also noticed that the disposable income test in § 1325(b) applied to the debtor’s proposed reduction of payments.23 Satisfaction of § 1325(b) could not be determined either because of a lack of evidence of the debtor’s financial condition at the time of modification.

[7]

In contrast, the debtor in In re Walker,24 survived a best-interests-of-creditors-test objection to a modified plan that reduced the dividend to unsecured claim holders from 70 percent to 0 percent. At confirmation of the original plan, the debtor had real property valued at $49,000. Two years after confirmation, on the debtor’s motion to modify, the (undersecured) mortgage holder objected on the ground that the real property had appreciated to $63,000, thus increasing the entitlement of unsecured claim holders under the best-interests-of-creditors test. The court agreed it was appropriate to revalue the estate for liquidation purposes under § 1325(a)(4) at the effective date of the modified plan. However, the debtor had a homestead exemption available that fully exhausted the appreciation for purposes of § 1325(a)(4).

[8]

In In re Emly,25 the court rejected a best-interests-of-creditors-test objection to a modified plan that would pay state and federal tax refunds to the debtor instead of to the Chapter 13 trustee. The modified plan did not change the monthly payments provided in the original plan, and payment of tax refunds to the debtor did not upset the best-interests-of-creditors-test calculation for these reasons:

Without evidence to the contrary, it is presumed the “best interests of creditors” test was originally met on the basis of those monthly payments. The determination of whether the test has been met could not have taken into consideration the use of income tax refunds because the extent of those refunds was unknown at the time of confirmation. Thus, the “property to be distributed under the plan” is the same, and the requirements of Section 1325(a)(4) are still deemed to be met by the modification.26
[9]

Generalizations are risky in this area, but there appears to be greater inclination to permit postconfirmation modification to reduce payments to creditors when significant time has passed since confirmation and the debtor has demonstrated a commitment to the Chapter 13 case. Put another way, when faced with a debtor’s motion to modify a plan to reduce payments to creditors, the bankruptcy courts generally evaluate all of the circumstances since the filing of the Chapter 13 case. A few of the reported decisions speak in terms of respecting the res judicata effect of confirmation of the original plan, but, more true to the statute, these courts are engaging in the good-faith analysis required at modification by §§ 1325(a)(3) and 1329(b)(1).27

[10]

A modification to reduce payments to creditors can be an effort by the debtor to declare the plan completed.28 One reported decision allowed a debtor to modify a 70 percent plan to become a 25 percent plan when, after five years of effort, payments had been sufficient to retire only 25 percent of the unsecured claims.29 Several other reported decisions refuse motions to modify near the end of the original repayment period, when the effect is to declare the plan completed by reducing payments to whatever the debtor has been able to pay.30 In In re Vasquez,31 the court found a lack of good faith when the debtors sought to modify the plan in the 46th month to reduce payments to unsecured creditors and declare the plan completed based on an injury that reduced the debtors’ earning capacity. The court found that the modification probably fit within § 1329(a)(1), but “[b]y seeking a modification rather than a hardship discharge, the Debtors are . . . manipulating the provisions of the Code and thus the court must question the Debtors’ motivation and sincerity in proposing the modification.”32

[11]

As mentioned above,33 a motion to modify to surrender collateral or account for the repossession of collateral often includes reducing payments under the plan. This only makes common sense—if a secured claim holder has been satisfied by surrender or repossession, the creditor is not entitled to a second recovery by continuing payments through the plan.


 

1  11 U.S.C. § 1329(a)(1).

 

2  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. See, e.g., In re Knappen, 281 B.R. 714, 717 (Bankr. D.N.M. 2002) (Motion to modify plan to reduce secured claim to zero when creditor repossessed and disposed of its collateral after confirmation fits within § 1329(a)(1). “The language of § 1329(a)(1) of the Code explicitly allows the debtor to ‘reduce the amount of payments on claims of a particular class.’ Since each secured claim is generally treated as a separate class . . . reducing to nothing the amount of payments on Ford’s secured claim fits within the language of the statute.”); In re Zieder, 263 B.R. 114 (Bankr. D. Ariz. 2001) (When a debtor surrenders a pickup truck a year after confirmation, §§ 502(j) and 506(a) reconsider the secured claim and reduce the allowable secured claim to zero; § 1329(a)(1) and (a)(3) then permit the debtor to reduce the amount of payments on account of the secured claim to reflect the reduced amount of the claim.).

 

3  Kitchen v. Malmstrom Fed. Credit Union, 64 B.R. 452 (Bankr. D. Mont. 1986).

 

4  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.

 

5  See, e.g., National City Bank v. Purdy, 16 B.R. 847 (N.D. Ga.1981). See also § 266.1 [ To Increase Payments to Creditors ] § 127.9  To Increase Payments to Creditors.

 

6  84 B.R. 327 (Bankr. W.D.N.Y. 1988).

 

7  Accord Nichols v. Robinson (In re Robinson), 276 B.R. 475, 477 (Bankr. N.D. Miss. 2000) (Modification after confirmation to reduce dividend to unsecured creditors from 100% to 2% is denied when debtor failed to schedule the claim of her former boyfriend for fraudulent alteration of a check and the addition of that claim prompted motion to modify. The debtor “has displayed a total lack of candor and good faith in dealing with this court in the administration of her bankruptcy case.”). See also In re Weissman, 126 B.R. 889 (Bankr. N.D. Ill. 1991) (Debtor cannot use § 1329(a)(1) to modify a confirmed plan to add an unscheduled creditor to be paid 10% with other unsecured creditors under the plan. “The proposed modification is improper because the debtor is not proposing to modify the payments on the claims of a particular class provided for by the plan, but seeks to provide for payments on an unscheduled debt of one member of the unsecured class of creditors for whom no provision for payment outside the plan exists nor to whom any payments have been made.”).

 

8  84 B.R. at 329.

 

9  37 B.R. 525 (Bankr. D.R.I. 1984).

 

10  34 B.R. 597 (Bankr. S.D. Ohio 1983).

 

11  In re McNulty, 142 B.R. 106, 109 (Bankr. D.N.J. 1992) (Confirmation of modified plan that would surrender real property and reduce payments to unsecured claim holders is denied. At confirmation of the original plan, hypothetical liquidation analysis indicated sufficient equity in real properties that unsecured claim holders had to be paid 100%. After confirmation, debtors paid tuition instead of mortgage, and mortgage holders were granted relief from the stay. Proposed modified plan recalculated the hypothetical liquidation value of the estate, including for the first time approximately $71,000 of projected capital gains taxes, substantially reducing the minimum percentage that would be required by the best-interests-of-creditors test. “[T]he debtors could have argued in connection with confirmation of the original plan that capital gains taxes on the sale of the real property would reduce the liquidation threshold for unsecured creditors. They are therefore barred by the doctrine of res judicata from doing so in connection with the modified plan.” Debtors’ decision to pay children’s tuition instead of mortgage payments demonstrated bad faith in proposing the modified plan. Court refuses modification of exemption schedules because proposed amendment would shift the cost of the debtors’ decision not to make mortgage payments to the debtors’ creditors.).

 

12  In re Nelson, 189 B.R. 748 (Bankr. D. Minn. 1995).

 

13  In re Baker, 194 B.R. 881 (Bankr. S.D. Cal. 1996).

 

14  34 B.R. 51 (Bankr. S.D.N.Y. 1983).

 

15  In re Bostwick, 127 B.R. 419 (Bankr. N.D. Ill. 1991) (Court sustained trustee’s motion to modify confirmed plan to require debtor to pay 100% of allowed unsecured claims, when the debtor successfully objected to a proof of claim and several other unsecured creditors did not file proofs of claim. Changes in circumstances sufficient to justify postconfirmation modification include changes in debtor’s ability to pay creditors that are not based on a change in debtor’s income or expenses. The failure of creditors to file proofs of claim is a change in debtor’s financial condition.).

 

16  In re Woodhouse, 119 B.R. 819 (Bankr. M.D. Ala. 1990) (Court denied trustee’s motion to require debtor to continue making payments when the failure of creditors to file proofs of claim allowed the plan to complete in less than three years. Trustee’s proposed extension would increase payments to unsecured creditors from 7% to 19%. Section 1329(b)(1) does not require a modification to meet the disposable income test in § 1325(b)(1), but “it does not forbid it either.” There being no showing of a substantial unanticipated change in debtor’s ability to pay, modification was precluded by principles of res judicata under Arnold v. Weast (In re Arnold), 869 F.2d 240 (4th Cir. 1989).).

 

17  114 B.R. 847 (Bankr. N.D.N.Y. 1990).

 

18  In re Jourdan, 108 B.R. 1020 (Bankr. N.D. Iowa 1989).

 

19  123 B.R. 254 (S.D. Ohio 1990).

 

20  See discussion of best-interests-of-creditors test beginning at § 90.1  In General: Plan Payments vs. Hypothetical Liquidation.

 

21  76 B.R. 114 (Bankr. S.D. Ohio 1987).

 

22  232 B.R. 29 (Bankr. D. Mass. 1999).

 

23  See § 126.3  Does Disposable Income Test Apply? and § 126.6  Modification after Confirmation after BAPCPA.

 

24  153 B.R. 565 (Bankr. D. Or. 1993).

 

25  153 B.R. 57 (Bankr. D. Idaho 1993).

 

26  153 B.R. at 58.

 

27  See § 126.2  Application of Tests for Confirmation and § 126.6  Modification after Confirmation after BAPCPA.

 

28  See also §§ 253.1 [ Standing, Timing and Procedure ] § 126.1  Standing, Timing and Procedure, 259.1 [ To Cure Postconfirmation Default ] § 127.2  To Cure Postconfirmation Default and 268.1 [ To Extend or Reduce the Time for Payments ] § 127.11  To Extend or Reduce the Time for Payments.

 

29  In re Eves, 67 B.R. 964 (Bankr. N.D. Ohio 1986).

 

30  See, e.g., In re Debing, 202 B.R. 291 (Bankr. D. Minn. 1996) (Debtors failed to prove extraordinary circumstances to justify modification in the 60th month to reduce dividend to unsecured claim holders to the amount actually paid.); In re Richardson, 192 B.R. 224, 226 (Bankr. S.D. Cal. 1996) (Denies debtor’s motion to reduce payments to unsecured claim holders from 100% to 46%. Debtor added creditors after confirmation and defaulted on payments several years before motion to modify. “[I]nability to complete performance of a confirmed plan within the sixty months allowed by 11 U.S.C. § 1322(d) is not, by itself, a sufficient ground to support modification of a confirmed plan.”); In re Guernsey, 189 B.R. 477 (Bankr. D. Minn. 1995) (Denies modification two months before completion of payments to reduce dividend from 14% to 7%.).

 

31  261 B.R. 654 (Bankr. N.D. Tex. 2001).

 

32  261 B.R. at 659.

 

33  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.