Cite as: Keith M. Lundin, Lundin On Chapter 13, § 91.5, at ¶ ____, LundinOnChapter13.com (last visited __________).
When there is an objection to confirmation under § 1325(b) and when the plan does not pay the objecting creditor in full,1 the debtor must commit to pay all projected disposable income for “the three-year period beginning on the date that the first payment is due under the plan.”2 The three-year period in § 1325(b)(1)(B) is subject to several possible interpretations.3 Does the three-year period begin on the date that the first payment would be required by the confirmed plan, or does the three-year period begin on the date that the first payment would be required by § 1326(a)(1)?4 Does the three-year period measure a passage of time or a certain number of payments under the plan? If the plan calls for payments of $300 per month for three years to satisfy the disposable income test, what happens if three years pass and fewer than 36 payments have been made into the plan?
One court faced some of these questions in the context of a debtor’s motion to modify a plan after confirmation under § 1329.5 In In re Howell,6 the confirmed plan required the debtor to pay $300 per month until unsecured claim holders were paid 70 percent of allowed claims. At the time of confirmation, it was anticipated that the plan would require 53 payments. The debtor defaulted several times, and the trustee moved to dismiss the case. In response, the debtor moved to modify the plan to pay the trustee $300 per month for 10 more months with a dividend of approximately 15 percent to unsecured claims. This 10-month modification would bring the amended plan to the end of three years measured from the effective date of the original plan; but at the time of the motion to modify, the debtor was 15 payments in default under the original plan.
Without addressing whether § 1325(b) is applicable to postconfirmation modification under § 1329,7 the court held that the three-year period described in § 1325(b)(1)(B) requires a passage of time rather than a specific number of payments. As explained by the court:
The test provided by § 1325(b)(1)(B) is prospective . . . If the projected income is committed for a period of three years, the test is met. The test speaks of a period of time rather than a number of payments. The amended plan in this case obligates the debtor to make payments for 10 more months which is the number of months remaining in the three year period commencing with the date the first payment was due under the original plan. An order will be entered approving the amended plan.8
Applying the counting method from Howell, if the debtor is unable to make all of the payments required by the plan during the three years beginning on the date the first payment was due under the confirmed plan, § 1325(b) does not require the debtor to extend the plan or to make up missed payments. A different method of counting may be more true to the language of the Code.
The projected disposable income test is not a test of what will actually be received by the debtor during the life of the plan; rather, the test is satisfied when the debtor’s “projected” disposable income “to be received” during the three-year period is “applied to make payments under the plan.”9 That the debtor does not actually receive the precise amount of disposable income that was projected at confirmation is not determinative of what the debtor must pay to satisfy § 1325(b).10 If the debtor projected $100 of disposable income per month, § 1325(b)(1)(B) requires the debtor to pay $100 per month for at least three years beginning on the date that the first payment is due under the plan. This obligation is not satisfied by the mere passage of time.11 The debtor’s obligation under the plan can only be satisfied by making 36 payments of $100, for a total of $3,600 “applied” to payments under the plan.
If three years pass and the debtor has not made 36 $100 payments, it must be true that the debtor has defaulted under the plan. This default may or may not provoke a motion to dismiss or convert. But the debtor will not be entitled to a discharge under § 1328(a) because it cannot be said that the debtor has achieved “completion . . . of all payments under the plan.”12
It makes most sense to interpret the three-year period in § 1325(b)(1)(B) to require a certain number of payments in a specified amount totaling a known (projected) amount of money. The “base plan” concept for drafting Chapter 13 plans13 implements this view of § 1325(b)(1)(B).
In re Jones14 illustrates how this works. The “base plan” in Jones required the debtor to pay $133 per month for 36 months. After confirmation, the debtor became entitled to tax refunds, and the debtor modified the plan to pay the tax refunds to the trustee. But because the base amount was not changed to reflect the addition of the tax refunds, the plan as modified then violated the disposable income test:
Debtor’s proposal violates 11 U.S.C. § 1325(b)(1)(B) because the addition of the tax refund income (or any other extra income) would allow the Debtor to complete the Plan without committing all her projected disposable income to the Plan. Because Debtor’s Plan fails to require that the term of the Plan will be extended or that the base amount or percentage to unsecured creditors will be increased if additional income comes into the Plan, the Plan fails the disposable income test and may not be confirmed.15
As Jones demonstrates, there is a mathematical relationship between the minimum three-year period required by § 1325(b)(1)(B) and the base amount that must be paid to the trustee after confirmation. Increasing payments to the trustee without altering the base has the (perhaps unintended) effect of allowing the debtor to complete payments under the plan in less than the three years required by § 1325(b)(1)(B). Conversely, increasing or decreasing the base amount when the debtor’s income changes during the Chapter 13 case preserves the three-year minimum requirement in the disposable income test.
Any other method of counting the three-year period threatens to reward the debtor for defaulting under the plan. For the debtor who has defaulted in payments during the original three-year period required by § 1325(b)(1)(B), completion of payments under the plan is easily determined by continuing to make payments until the base amount of projected disposable income has actually been “applied to make payments under the plan.”
Ordinarily, the debtor is required by § 1326(a)(1) to commence making the payments proposed by the plan within 30 days after the plan is filed.16 This is the date identified by the Code for the commencement of payments, and it applies in all jurisdictions despite local variations in many other aspects of Chapter 13 practice. For example, in a jurisdiction that delays the hearing on confirmation until after the claims bar date,17 timing the three-year period in § 1325(b)(1)(B) from the date the first payment is due under the confirmed plan would delay the counting of the three-year period for many months after the first payment would be required by § 1326(a)(1). The economic effort measured by the disposable income test should not depend on the timing of the hearing on confirmation but should be counted uniformly from the date that payments must commence—a date that will be within a maximum of 45 days after the petition in almost every Chapter 13 case.18
Some courts have held that the disposable income test can be satisfied by a plan that pays less than all of the debtor’s disposable income but for a period longer than the three years in § 1325(b). In In re Gonzales,19 the debtors’ three-year plan failed the disposable income test because expense deductions for an advanced university degree were not reasonably necessary for support.20 The debtors responded with an alternative plan that extended payments at the same (insufficient) monthly amount for an additional 12 months. The court approved the modified plan using the following formula to determine whether an extension of the payment period satisfies the disposable income test:
The only value judgment necessary in deciding whether a plan exceeding three years satisfies the disposable income test where a similar three-year plan would not is in determining how much of the disputed amount is disposable income. The analysis is strictly mathematical thereafter. After the court determines the extent to which the debtor’s budget exceeds what the court deems to be a reasonable amount, it adds that amount to the monthly payment proposed by the debtor in the plan. It then multiplies that result by 36. . . . The result represents the total amount that the debtor would have to pay under a three-year plan in order to satisfy § 1325(b)(1)(B). Next, the court computes the total amount to be paid by the debtor pursuant to the extended plan. It then compares that amount with the three-year minimum payment, adjusted to include the interest that those payments would have earned during the extension period.21
The Gonzales methodology may be inconsistent with § 1325(b)(1)(B). The mathematical test offered in Gonzales permits a Chapter 13 debtor to satisfy the disposable income test by paying less than all projected disposable income but for a period of months that exceeds the three-year minimum specified in § 1325(b), so long as the discounted value of the longer stream of payments is equal to or greater than the amount determined by multiplying the debtor’s monthly projected disposable income by 36. Section 1325(b) requires the plan to provide that all of the debtors’ projected disposable income “to be received in the three-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan.”22 Under the alternative plan in Gonzales, the debtors would receive projected disposable income during the three-year period that would not be applied to make payments under the plan. The debtors would make up the shortfall by extending the plan beyond three years. Literal compliance with § 1325(b)(1)(B) requires exhaustion of projected disposable income during the initial three-year period without regard to whether the debtors volunteer to extend the plan and notwithstanding that an extension would produce payments that exceed three years of projected disposable income.23
In re Norris24 addressed the related question whether a Chapter 13 debtor can be required to pay all disposable income during any (voluntary) extension of the plan beyond 36 months. In Norris, the debtor tried to prove cause for extension of the plan to 60 months.25 The plan proposed to pay $835.79 for 36 months and $740.05 for months 37 through 60. The extension to 60 months was necessary to pay a large priority tax claim. The court framed the question as “whether debtors, whose income is not expected to decrease over the life of the plan, must continue to commit all of their disposable income to fund the plan for the additional two years of the plan while paying their priority and secured creditors over the life of the plan.”26 The court concluded that the debtors must pay all projected disposable income even during the 24-month extension:
The Court holds that because § 1322(c) [redesignated as § 1322(d) by the Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 301, 108 Stat. 4106 (1994)] creates a 36-month standard time period for a chapter 13 plan and allows for a longer period only in unusual circumstances, that the use of the 36-month time period in § 1325(b)(1)(B) is not exclusive of a 60-month plan. Section 1325 requires use of all disposable income to fund a plan regardless of the duration of the plan. Because debtors do not propose to pay 100 percent on their unsecured claims, they must commit all of their disposable income to the plan. . . . [P]rinciples of equity and fair play require debtors to fully fund their plan for 60 months. Debtors are receiving the benefit of extending their plan payments. They cannot receive this grant, which allows them to pay off their priority and secured debts, without also accepting the burden of committing all of their disposable income to fund the plan. The Court holds that debtors must commit all of their disposable income to fund the plan for the full 60 months of the plan.27
There is no language in § 1325(b)(1) that requires a Chapter 13 debtor to pay projected disposable income beyond the three years described. Norris extends the statutory requirement based on “principles of equity and fair play”—principles that Congress presumably considered when the three-year version of the disposable income test was added to the Code in 1984. Norris imposes a sort of penalty on debtors who voluntarily extend a plan beyond three years. Good arguments can be made that the rules for confirmation should favor, not penalize, voluntary extensions of plans. Other reported decisions conclude that § 1325(b)(1) does not require a debtor to commit projected disposable income during an extension of plan payments beyond the three years required by § 1325(b)(1)(B).28
Creditors will think twice about raising disposable income test objections to plans that extend beyond three years even when the objection is a winner under § 1325(b). Consider what happened to creditors in Villanueva v. Dowell (In re Villanueva).29 The debtor wanted to keep some jewelry and proposed a 60-month plan that paid the jewelry claim in full and 50 percent to unsecured claim holders. The Chapter 13 trustee objected to confirmation, forcing the debtor to surrender the jewelry and eliminate the secured claim that had inspired the 60-month plan. The debtor then amended the plan to commit all projected disposable income for 36 months. Mathematically the resulting dividend to unsecured claim holders fell to 19 percent. Creditors and the trustee attacked the shorter plan without success: § 1325(b) required nothing more than 36 months of disposable income, “there is no exception in the Code for a debtor who has initially proposed a longer plan term.”30
Villanueva painfully illustrates that sometimes a longer plan works to the benefit of unsecured claim holders even when § 1325(b) could be used to force the debtor to increase payments during the first three years. A strategically intelligent decision not to object to confirmation can be the best outcome for unsecured creditors (and for the debtor).
2 11 U.S.C. § 1325(b)(1)(B).
3 As is the similar language fixing the three- to five-year duration of the plan in § 1322(d) and the duration of a modified plan in § 1329(c). See §§ 200.1 [ How to Calculate the Length of the Plan ] § 112.3 How to Calculate the Length of the Plan and 256.1 [ Duration of Modified Plan ] § 126.4 Duration of Modified Plan.
5 Postconfirmation modification is discussed beginning at § 126.1 Standing, Timing and Procedure.
6 76 B.R. 793 (Bankr. D. Or. 1987).
7 See § 255.1 [ Does Disposable Income Test Apply? ] § 126.3 Does Disposable Income Test Apply?.
8 76 B.R. at 795.
9 11 U.S.C. § 1325(b)(1)(B).
10 Any other interpretation of § 1325(b)(1) would be inconsistent with the view that projected income does not mean “whatever actual income turns out to be.” See § 164.1 [ Projected (Disposable) Income ] § 91.2 Projected (Disposable) Income.
11 See In re Nissly, 266 B.R. 717, 720 (Bankr. N.D. Iowa 2001) (Plan fails three-year requirement in § 1325(b) when amended schedules show $500 of monthly disposable income, original plan called for payments of $413 for the first six months and modified plan did not increase the plan payment to $500 for the first six months. “If the disposable income figure of $500.00 is more accurate, it was more accurate at the beginning of the 36 month plan period, not merely six months into the plan. The failure to extend the plan period to cure the failure of the plan to provide disposable income during the first six months is fatal to the debtors’ obtaining confirmation of this plan. Debtors may not offer less than disposable income, and when an objection is filed, provide the appropriate amount of disposable income only prospectively for any balance of the 36 months.”).
12 11 U.S.C. § 1328(a). See § 343.1 [ Timing and Procedure for Discharge and Objecting to Discharge ] § 156.1 Timing and Procedure for Discharge and Objecting to Discharge.
13 See § 170.1 [ Methods of Paying Unsecured Claims ] § 101.3 Methods of Paying Unsecured Claims. In re Jones, 301 B.R. 840, 846 (Bankr. E.D. Mich. 2003) (“Base plan” that required $133 per month for 36 months failed disposable income test when it was modified before confirmation to pay tax refunds to the trustee but neither the plan nor the base amount was changed. “Debtor’s proposal violates 11 U.S.C. § 1325(b)(1)(B) because the addition of the tax refund income (or any other extra income) would allow the Debtor to complete the Plan without committing all her projected disposable income to the Plan. Because Debtor’s Plan fails to require that the term of the Plan will be extended or that the base amount or percentage to unsecured creditors will be increased if additional income comes into the Plan, the Plan fails the disposable income test and may not be confirmed.”).
14 301 B.R. 840 (Bankr. E.D. Mich. 2003).
15 301 B.R. at 846.
17 See § 216.1 [ Timing of Hearing on Confirmation ] § 115.1 Timing of Hearing on Confirmation before BAPCPA.
19 157 B.R. 604 (Bankr. E.D. Mich. 1993).
20 See § 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3 Reasonably Necessary for Maintenance or Support.
21 In re Gonzales, 157 B.R. at 613. Accord In re McGovern, 278 B.R. 888, 900 (Bankr. S.D. Fla. 2002) (“[U]nder the disposable income requirement, the Debtor is required to make plan payments totaling at least $50,847.84, plus the net amount of the two bonuses received post-petition. If the Debtor is unwilling to make payments totaling such amount over a thirty-six month period, cause exists to extend the plan to sixty months to enable him to satisfy the disposable income requirement.”), rev’d on other grounds, 297 B.R. 650 (S.D. Fla. 2003); In re Mendoza, 274 B.R. 522, 526 (Bankr. D. Ariz. 2002) (Debtors can satisfy disposable income test by extending plan beyond three years even if they continue to make retirement contributions that are not reasonably necessary for support. “A number of courts have held that the disposable income test can be satisfied by a plan that pays less than all of a debtor’s disposable income for a period longer than the three years required by § 1325(b). . . . [T]he Debtors may choose to extend the Plan’s term by slightly more than seven months . . . and continue to make their retirement contributions or they can limit the Plan’s term to 36 months and pay their creditors their entire disposable income.” As part of this calculation, “the creditors are entitled to simply interest . . . to compensate for the delay in payment.”); In re Elrod, 270 B.R. 258, 261 (Bankr. E.D. Tenn. 2001) (Disposable income test can be satisfied by extending the plan to 60 months. Plan proposed to pay mortgage holder $25 more per month than prepetition contract and to extend plan to 60 months. Trustee objected. “The debtors’ proposed plan will be $900 short of satisfying [§ 1325(b)(2)] after the first 36 months of the plan, (based on the court’s assumption that $25 of the monthly payment to Citifinancial is disposable income). But the proposed plan calls for 60 months of payments. . . . Other courts have held that if the debtor’s payments after the first 36 months will pay the shortage plus interest, then the plan passes the disposable income test. Interest is added because unsecured creditors would not receive the money in the first 36 months of the plan. . . . The court agrees with this reasoning. . . . In the final 24 months of the plan, the debtors’ payments will pay much more on the unsecured claims than the $900 shortage plus interest.”); In re Brooks, 241 B.R. 184, 187 (Bankr. S.D. Ohio 1999) (Court denies confirmation of 36-month plan that would pay $8,000 for a recreational motor home and only 25% to unsecured creditors. “The court notes that, as an alternative, the Debtors may consider extending their plan beyond thirty-six months to include payment of the secured portion of National City’s debt without causing additional detriment to unsecured creditors. See, e.g., In re Walsh, 224 B.R. 231, 237 (Bankr. M.D. Ga. 1998). This alternative is not required by the court or the Bankruptcy Code, but is an option for the Debtors to consider if they desire to keep the motor home while in bankruptcy.”); In re McKown, 227 B.R. 487, 491 (Bankr. N.D. Ohio 1998) (Mortgage payment on real property that is not the debtors’ principal residence is not reasonably necessary for purposes of § 1325(b)(1)(B), but debtors satisfy disposable income test by extending the plan to 60 months. “The Debtors’ aggregate payments under the amended Plan ($39,300) are greater than the aggregate payments which would be made if Schedule J omitted this mortgage payment and the Debtors made plan payments for merely 36 months ($28,368). Moreover, even if the payments made to creditors under a hypothetical three-year plan (which omitted the $133 per month mortgage payment) were safely invested and generated 3.5% interest per year during years four and five, the resulting aggregate value of $30,388.51 in plan distributions is less than unsecured creditors will receive within five years under the amended Plan. Consequently, the amended Plan satisfies section 1325(b)(1) of the Bankruptcy Code. See In re Gonzales, 157 B.R. 604, 612–13 (Bankr. E.D. Mich. 1993).”); In re Walsh, 224 B.R. 231, 237–38 (Bankr. M.D. Ga. 1998) (To satisfy disposable income test when debtors desire to keep a car that is not necessary, debtors must extend plan beyond the minimum 36-month requirement. “In analyzing a case to determine whether confirmation is appropriate, the trustee should consider the reasonable budget amount to be paid for an item such as a car and require that any excess proposed to be paid by the debtor to a secured creditor be funded by an extension of the plan beyond 36 months. . . . [T]he Court is not requiring the debtors to extend the duration of plans in order to fund a dividend to unsecured creditors. Instead, any such extension would be made, if at all, for the purpose of funding a payment which exceeds the reasonable amount which would be appropriate for that item in the budget of that debtor. . . . Where a debtor does not propose to pay unsecured creditors the amount required by the disposable income analysis, the court will deny confirmation. The only remedy to a debtor who prefers to retain such property is to fund a plan for a duration in excess of 36 months sufficient to accomplish the payment of the dividend required by the 36-month disposable income analysis.”); In re Coburn, 175 B.R. 400, 406 (Bankr. D. Or. 1994) (“[I]t appears the debtors’ monthly expenses total $2784, leaving disposable income of $1036 monthly. If the debtors paid this sum to the trustee for a period of 36 months as required by § 1322(c) and § 1325(b), the total paid into the plan would be $37,296. . . . Thus, the court will not confirm the present plan or any plan that does not propose to pay to the trustee at least $37,296 over its life. For example, if an amended plan were filed which called for monthly payments to the trustee of $622 for 60 months, it would meet this requirement.”).
22 11 U.S.C. § 1325(b)(1)(B) (emphasis added).
23 See In re Helms, 262 B.R. 136, 141–42 (Bankr. M.D. Fla. 2001) (Forty-two month plan that continues repayment of 401(k) loans does not satisfy § 1325(b) notwithstanding that unsecured creditors would receive more than they would through a 36-month plan in which the 401(k) loan payment was contributed to funding the plan. “Debtors . . . contend that they should be allowed to apply [the 401(k) loan repayment expenditure] to an unnecessary expense rather than to plan payments because the First Amended Plan has been lengthened in order to make up for the funds dedicated to 401(k) loan repayment . . . . Section 1325(b) clearly states that, unless a plan provides for a one hundred percent payout, all disposable income must be applied to plan payments. Section 1325(b)(2) then defines disposable income as income not allocated to reasonably necessary expenditures. There is no ‘good faith’ corollary to this definition.”); In re Gilliam, 227 B.R. 849, 851–52 (Bankr. S.D. Ind. 1998) (Repayment of retirement loan violates projected disposable income test and cannot be cured by extending the plan beyond three years. “The Debtors’ proposal to extend the Amended Plan beyond 3 years, does not save the Amended Plan from failing to meet the Section 1325 requirements for confirmation. Section 1325(b)(1)(B) clearly requires that all of a debtor’s disposable income, for the three-year period beginning with the first payment due under the plan, be paid into the plan. Section 1325(b)(1)(B) could have provided, but does not provide, that all of the debtor’s disposable income, for three years or any relevant extended payment period, be paid into the plan. . . . [A]llowing a plan to run past three years, as the Debtors have proposed, creates a significant opportunity for a debtor to do mischief. . . . ‘After the borrowed funds are restored to the pension fund, there is nothing to prevent the debtors from seeking an early exit from the Chapter 13 proceedings.’”).
24 165 B.R. 515 (Bankr. M.D. Fla. 1994).
25 See § 201.1 [ Cause for Extension beyond Three Years ] § 112.4 Cause for Extension beyond Three Years for discussion of cause to extend plan beyond 36 months.
26 165 B.R. at 517.
27 165 B.R. at 517–18.
28 See In re Messinger, 241 B.R. 697, 700 (Bankr. D. Idaho 1999) (Plan that requires level payment for 60 months and commits tax refunds for the first 36 months satisfies disposable income test notwithstanding that secured claims being paid directly by the debtor will be paid in full approximately three years into the plan. “The Debtor proposes to turn over all tax refunds he would receive to the Trustee for the first 36 months of his plan. This proposal complies with § 1325(b)(1)(B) which requires all Debtor’s projected disposable income be committed to the plan for 36 months. While a debtor may propose a plan longer than 36 months, up to a maximum of 60 months, § 1325(b)(1)(B) by its terms does not require commitment of disposable income in months after the 36th. . . . [Section 1325(b)(1)(B)] does not require that Debtor must commit the presumptively ‘disposable’ funds into the plan which will become available in its fourth and fifth year by virtue of the payoff of three credit union obligations. Thus, Debtor need not apply to the plan the funds made available when the secured claims are paid off.”).
29 274 B.R. 836 (B.A.P. 9th Cir. 2002).
30 274 B.R. at 841.