§ 126.6 — Modification after Confirmation after BAPCPA

Revised: March 29, 2006

[1]

BAPCPA amended § 1329 to add one new ground for modification of a Chapter 13 plan after confirmation and to change the counting of the duration of a modified plan. Perhaps more importantly, changes by BAPCPA to the basic tests for confirmation of a plan—in particular, the new definition of current monthly income (CMI)1 and the reformulation of the disposable income test in § 1325(b)2—will impact the modification of confirmed plans.

[2]

Section 1329(a) was amended by BAPCPA to add a fourth ground for modification after confirmation:

(a) At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to—
. . . .
(4) reduce amounts to be paid under the plan by the actual amount expended by the debtor to purchase health insurance for the debtor (and for any dependent of the debtor if such dependent does not otherwise have health insurance coverage) if the debtor documents the cost of such insurance and demonstrates that—
(A) such expenses are reasonable and necessary;
(B)(i) if the debtor previously paid for health insurance, the amount is not materially larger than the cost the debtor previously paid or the cost necessary to maintain the lapsed policy; or
(ii) if the debtor did not have health insurance, the amount is not materially larger than the reasonable cost that would be incurred by a debtor who purchases health insurance, who has similar income, expenses, age, and health status, and who lives in the same geographical location with the same number of dependents who do not otherwise have health insurance coverage; and
(C) the amount is not otherwise allowed for purposes of determining disposable income under section 1325(b) of this title;
and upon request of any party in interest, files proof that a health insurance policy was purchased.3
[3]

In contrast to the three pre-BAPCPA grounds for modification of a Chapter 13 plan after confirmation,4 the new fourth ground is quite specific to health insurance, and the conditions are prescribed in constricting detail. New § 1329(a)(4) permits a Chapter 13 debtor to reduce the amount paid under the plan only by the “actual amount” expended to purchase health insurance. The insurance must be for the debtor or for a dependent of the debtor—neglecting, perhaps, health insurance for a spouse who is not also a dependent of the debtor and omitting altogether insurance for a spouse’s separate dependents.5

[4]

This new ground for modification is only available if the debtor documents the cost of the health insurance, demonstrates that the expenses are reasonable and necessary and shows that the amount to be expended for health insurance is not materially larger than the cost the debtor previously paid for health insurance. If the debtor did not have health insurance, then the amount to be expended must not be materially larger than the “reasonable costs” of health insurance for a debtor who has “similar income, expenses, age and health status . . . in the same geographical location with the same number of dependents.”6 The amount to be expended for health insurance must not otherwise be already allowed for purposes of determining disposable income under § 1325(b).7 Upon the request of any party, the debtor must file proof that health insurance was actually purchased.

[5]

Health insurance often is addressed at confirmation as a budget item in Chapter 13 cases.8 In some districts, health insurance expenses are routinely allowed as an amount reasonably necessary to be expended for purposes of the disposable income test in § 1325(b)(2).9

[6]

After BAPCPA, for Chapter 13 debtors with CMI greater than applicable median family income, monthly expenses at confirmation under § 707(b)(2)(A)(ii)(I) “shall include reasonably necessary health insurance, disability insurance, and health savings account expenses for the debtor, the spouse of the debtor or the dependents of the debtor.”10 The new ground for modification after confirmation in some respects mirrors the deduction for health insurance allowed by BAPCPA at confirmation for Chapter 13 debtors with CMI greater than applicable median family income, but § 707(b)(2)(A)(ii)(I) includes health insurance expenses for the debtor’s spouse without regard to whether the spouse is a dependent.

[7]

Chapter 13 debtors with CMI less than applicable median family income might argue at confirmation that health insurance is always a reasonable and necessary expense for § 1325(b) purposes based on new § 1329(a)(4), which would allow modification after confirmation to reduce payments by the cost of reasonable health insurance that was not already accounted for as a reasonably necessary expense at confirmation. It certainly makes no sense that BAPCPA would consider health insurance to be reasonable and necessary only for wealthier Chapter 13 debtors.11

[8]

Curiously, the House Report describes the new ground for modification of a confirmed Chapter 13 plan in § 1329(a)(4) in these mandatory terms:

[T]he Act amends Bankruptcy Code section 1329(a) to require the amounts paid under a confirmed chapter 13 plan to be reduced by the actual amount expended by the debtor to purchase health insurance for the debtor and the debtor’s dependents (if those dependents do not otherwise have such insurance) if the debtor documents the cost of such insurance and demonstrates such expense is reasonable and necessary, and the amount is not otherwise allowed for purposes of determining disposable income under section 1325(b).12

The House Report makes no mention that this is a modification of a confirmed plan or that there is any discretion to disallow this reduction of amounts paid under a confirmed plan if the conditions in new § 1329(a)(4) are satisfied.

[9]

Prior to BAPCPA, the duration of a plan modified under § 1329 was limited that the modified plan could not provide for payments over a period that expired “after three years after the time that the first payment under the original confirmed plan was due.”13 BAPCPA substituted “the applicable commitment period under § 1325(b)(1)(B)” for the three-year duration limitation under prior law. Under both prior law and BAPCPA, the court for cause can approve a longer duration for a modified plan but the court may not approve a period that is longer than five years after the first payment was due under the original confirmed plan.

[10]

Detailed elsewhere,14 “applicable commitment period” is not actually found in § 1325(b)(1)(B) but is defined in § 1325(b)(4). For Chapter 13 debtors with CMI less than applicable median family income, the applicable commitment period is three years.15 For Chapter 13 debtors with CMI greater than applicable median family income, the applicable commitment period is “not less than five years.”16 Applicable commitment period can be less than three years or five years if the plan provides for payment in full of all allowed unsecured claims over a shorter period.17

[11]

Applicable commitment period as used in § 1325(b)(1)(B) is not a temporal requirement or limitation.18 Instead, it is a number—the result of the mathematical computation in § 1325(b)(4)—that is used as the multiplier of disposable income in the test for confirmation in § 1325(b)(1). For purposes of modification after confirmation, the applicable commitment period is used differently by § 1329(c) as a maximum period of time beyond which the modified plan may not provide for payments.

[12]

The cross-reference to § 1325(b)(1)(B) in § 1329(c), as amended by BAPCPA, will fuel the dispute whether the disposable income test applies at modification of a Chapter 13 plan after confirmation.19 Applicable commitment period referenced in § 1325(b)(1)(B) and calculated in § 1325(b)(4) is a component of the disposable income test that is applicable at confirmation upon the objection of the trustee or the holder of an allowed unsecured claim.20 At modification after confirmation, §  1329(b)(1) lists several sections of Chapter 13 that “apply” to any modification; § 1325(b) is not among the listed sections. Although arguments from statutory construction can be made to capture § 1325(b) as an applicable test at modification after confirmation, reported decisions before BAPCPA split sharply, leaving open the question whether the disposable income test in § 1325(b) applies at modification after confirmation under § 1329.21

[13]

As amended by BAPCPA, § 1329(c) mandates consideration of the applicable commitment period under § 1325(b)(1)(B) to determine the maximum duration of a modified plan. Some will find in new § 1329(c) a statutory implication that § 1325(b) applies at modification after confirmation; others will cite the specific reference to § 1325(b)(1)(B) as evidence that the rest of the disposable income test was not already in play at modification after confirmation under § 1329.

[14]

If there was proper objection to confirmation by the trustee or the holder of an allowed unsecured claim at confirmation of the original plan, then there will be an applicable commitment period under § 1325(b)(1)(B) that can be consulted for purposes of the new duration rule in § 1329(c). Amended § 1329(c) could be read to impose the original commitment period calculation without consideration of postpetition changes in the debtor’s financial circumstances. Under § 1325(b)(1)(B) and § 1325(b)(4), the commitment period would be based on the debtor’s CMI, which measures the six months before the month in which the petition was filed under § 101(10A) and does not change during the course of the Chapter 13 case.22 In other words, the applicable commitment period calculation—whether performed at confirmation of the plan or at modification months or years after confirmation—would be based on the same historical CMI of the debtor.

[15]

The applicable commitment period calculation in § 1325(b)(4) requires comparison of the CMI of the debtor to applicable median family income. If the applicable commitment period calculation is performed only once in the Chapter 13 case—at confirmation of the original plan—then the debtor’s household size and the applicable state and appropriate median family income amount from the Census Bureau charts would be fixed as of that time. New § 1329(c) does not address whether applicable commitment period should be recalculated (or calculated for the first time) as of the date of modification. Some relevant facts under § 1329(b)(4) could change between confirmation and modification. CMI would not change, but the applicable state might change, the size of the debtor’s household might change and the applicable median family income charted by the Census Bureau might change. If these changes move the debtor’s CMI from below applicable median family income to above applicable median family income, or vice versa, the timing of the calculation could make quite a difference in the maximum duration of the modified plan under § 1329(c) or in the amount of disposable income at modification—if § 1325(b) is applicable. The timing of the applicable commitment period calculation for purposes of new § 1329(c) is not resolved by the statute as amended by BAPCPA.

[16]

Perhaps the most important issues with respect to modification after confirmation after BAPCPA are not found in the changes to § 1329. The big question is whether Chapter 13 trustees and allowed unsecured claim holders will be able to use modification after confirmation under § 1329 to manage the fundamental mess that BAPCPA made of the tests for confirmation of a Chapter 13 plan.

[17]

Because the definition of CMI in § 101(10A) is anchored in static historical income for the six months before the month in which the petition was filed and because the disposable income test in § 1325(b) is based on an artificial formula derived mathematically, not from the debtor’s actual circumstances, there is a crucial disconnect between the debtor’s ability to pay creditors and the amount the debtor will be required to pay to satisfy the tests for confirmation after BAPCPA.23 Especially with respect to Chapter 13 debtors with CMI greater than applicable median family income, it is likely that a fair number will have actual income and expenses at confirmation that would permit a greater dividend to unsecured claim holders than will be produced by the confirmation tests as amended by BAPCPA.

[18]

The issue under § 1329 then becomes whether a motion by the trustee or the holder of an allowed unsecured claim to modify a confirmed plan will trigger the same or different calculations of the rights of creditors in the new world of BAPCPA. For example, if a month or a year after confirmation, it appears that the debtor’s actual income and expenses permit an increase in the dividend to unsecured creditors, can the trustee capture that additional dividend by a motion to modify under § 1329(a)(1)? Arguably, at modification after confirmation under § 1329 on the motion of the trustee or the holder of an allowed unsecured claim, the disposable income test in § 1325(b) is not applicable—without regard to whether a particular court has applied § 1325(b) at modification after confirmation under other circumstances.24 When the disposable income test as crippled by BAPCPA is not in play, what is the measure of the entitlement of unsecured creditors at modification after confirmation under § 1329?

[19]

Prior to BAPCPA, many courts recognized a nonstatutory barrier to modification after confirmation that the moving party must demonstrate “changed circumstances” or, perhaps, “substantial changed circumstances.”25 Will these same courts consider after BAPCPA that it is a “substantial changed circumstance” that the debtor’s actual income and expenses were not accounted for at confirmation by the peculiar reformulation of the confirmation tests brought about by BAPCPA? Can Chapter 13 debtors be forced via § 1329 to commit actual income reduced only by actual expenses to payments under the plan notwithstanding complete satisfaction of the tests for confirmation and no other change in circumstances?

[20]

It is not that these issues, more or less, have not been addressed by the courts before BAPCPA—they have, with inconsistent results.26 But BAPCPA adds significant new urgency because it will now be true in many more Chapter 13 cases that the actual financial circumstances of the debtor will not be accurately reflected in the strange mathematics of confirmation. More often and more powerfully the trustee or an allowed unsecured claim holder will have incentive to look for a statutory hook on which to hang a greater distribution entitlement than that produced by historical income figures and artificial mathematical formulas.

[21]

Prior to BAPCPA, difficult issues under § 1329 were sometimes triggered by the disposition of an asset after confirmation. For example, when the debtor sold a homestead after confirmation, and because of appreciation, paydown through the plan or other factors, the proceeds from the sale were greater than accounted for at confirmation, Chapter 13 trustees and unsecured creditors were angered and inspired to move to modify the plan to capture some or all of the unexpected proceeds for payment to unsecured creditors.27 Sometimes with success, the movant would argue that at modification under § 1329(b)(1), the best-interests-of-creditors test in § 1325(a)(4) required revaluation of the estate at the time of modification, and the resulting increase in the value of the estate created a greater entitlement of unsecured creditors.28 When this argument didn’t work, trustees and unsecured creditors would fall back to the alternative that the proceeds of sale were disposable income captured for creditors by § 1325(b).

[22]

This alternative argument may have been punctured by BAPCPA. Assuming—and these are big assumptions—that the disposition of an asset after confirmation creates “income” and that the disposable income test in § 1325(b) applies at modification after confirmation, because § 101(10A) determines CMI based on income received by the debtor and derived during the six months before the month in which the petition was filed, the “income” from postconfirmation disposition of an asset will not be included in CMI at modification under § 1329.

[23]

The proponent of modification will have to shift attention to § 1322(a)(1) which requires the plan to provide for the submission of “future earnings or other future income of the debtor” as is “necessary for the execution of the plan.”29 There is no question that § 1322(a)(1) does apply at modification after confirmation under § 1329(b)(1).30 Future earnings and future income for § 1322(a)(1) purposes arguably is not hobbled by the historical antecedents of CMI in new § 101(10A). At confirmation of the original plan, the trustee or a creditor cannot play plan proponent and thus cannot leverage the debtor with respect to future earnings. But under § 1329, the trustee or the holder of an allowed unsecured claim has standing to move for modification of the plan and may assert § 1322(a)(1) to reach the debtor’s actual earnings and actual income at the time of modification. It can be anticipated that great battles will be fought in this context as the fundamental warping of Chapter 13 by BAPCPA becomes apparent.

[24]

It will be interesting to see what the courts do after BAPCPA when a Chapter 13 debtor moves to modify a confirmed plan to surrender collateral or to account for repossession. Under pre-BAPCPA law, perhaps a majority of courts, led by the United States Court of Appeals for the Sixth Circuit, concluded that a Chapter 13 debtor could not modify a confirmed plan to change the treatment of an allowed secured claim based on surrender or repossession of collateral after confirmation.31 Many of these courts adopted the illogic, “once secured, always secured” to support the conclusion that surrender or repossession of collateral could not change the required treatment of the lienholder.32

[25]

Many of the claims at issue in the modification cases involving postconfirmation surrender or repossession were secured by cars. Detailed elsewhere,33 BAPCPA added a hanging sentence at the end of § 1325(a) that prescribes special treatment for purchase money security interests in cars acquired for the personal use of the debtor within 910 days of the petition or when the collateral is any other thing of value and the debt was incurred within one year of the petition. With respect to such claims, § 506 “shall not apply.” Treatment through the Chapter 13 plan may include a requirement that the debt is paid in full with postpetition interest without regard to the value of the collateral.34

[26]

When the collateral for a 910-day PMSI car claim is surrendered or repossessed after confirmation, it can be anticipated that the debtor will move to modify the plan under § 1329(a)(1) to align payments on the remaining unsecured claim with the treatment of other unsecured creditors. Because § 506(a) does not apply and the claim cannot be said to be a secured claim, courts that have refused to allow modification under these circumstances must reexamine the logic of that conclusion in light of BAPCPA. After surrender or repossession, modification of the plan may be appropriate both to reduce payments to the lienholder and perhaps to increase payments to other unsecured claim holders to reflect the new availability of funds for fair distribution among all unsecured claims.


 

1  See 11 U.S.C. § 101(10A), discussed in §§ 379.1 [ Form B22C: Statement of Current Monthly Income ] § 36.19  Form 122C-1: Statement of Current Monthly Income and 468.1 [ Current Monthly Income: The Baseline ] § 92.3  Current Monthly Income: The Baseline.

 

2  See 11 U.S.C. § 1325(b). See also discussion of disposable income and current monthly income beginning at § 92.1  In General§ 93.1  Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income§ 94.1  Big Picture: Too Many Issues§ 95.1  In General§ 96.1  Average Monthly Payments on Account of Secured Debts§ 97.1  Total Priority Debts and Divide by 60§ 98.1  Additional Expenses or Adjustments to CMI and § 99.1  In General

 

3  11 U.S.C. § 1329(a)(4).

 

4  See 11 U.S.C. § 1329(a)(1), (2) and (3), discussed beginning at § 127.1  To Suspend Payments.

 

5  See discussion of the related issues at confirmation in § 473.1 [ Accounting for Spouses ] § 94.3  Accounting for Spouses.

 

6  11 U.S.C. § 1329(a)(4)(B)(ii).

 

7  See 11 U.S.C. § 1325(b), discussed beginning at § 92.1  In General, § 93.1  Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income, § 94.1  Big Picture: Too Many Issues, § 95.1  In General, § 96.1  Average Monthly Payments on Account of Secured Debts, § 97.1  Total Priority Debts and Divide by 60, § 98.1  Additional Expenses or Adjustments to CMI and § 99.1  In General.

 

8  See Schedule J to Official Form 6, discussed in §§ 35.10 [ Schedules I and J—Income and Expenditures ] § 36.16  Schedules I and J—Income and Expenditures and 478.1 [ Health and Disability Insurance ] § 95.21  Health and Disability Insurance.

 

9  See § 165.1 [ Reasonably Necessary for Maintenance or Support ] § 91.3  Reasonably Necessary for Maintenance or Support.

 

10  11 U.S.C. § 707(b)(2)(A)(ii)(I), discussed in § 478.1 [ Health and Disability Insurance ] § 95.21  Health and Disability Insurance.

 

11  But see § 363.7 [ Six: The Rich Fare Better Than the Poor ] § 3.7  Six: The Rich Fare Better Than the Poor.

 

12  H.R. Rep. No. 109-31, at 69.

 

13  11 U.S.C. § 1329(c) before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, discussed in § 256.1 [ Duration of Modified Plan ] § 126.4  Duration of Modified Plan.

 

14  See § 493.1 [ Applicable Commitment Period Calculation ] § 100.1  Applicable Commitment Period Calculation.

 

15  11 U.S.C. § 1325(b)(4)(A)(i), discussed in § 493.1 [ Applicable Commitment Period Calculation ] § 100.1  Applicable Commitment Period Calculation.

 

16  11 U.S.C. § 1325(b)(4)(A)(ii), discussed in § 493.1 [ Applicable Commitment Period Calculation ] § 100.1  Applicable Commitment Period Calculation.

 

17  11 U.S.C. § 1325(b)(4)(B), discussed in § 493.1 [ Applicable Commitment Period Calculation ] § 100.1  Applicable Commitment Period Calculation.

 

18  See § 493.1 [ Applicable Commitment Period Calculation ] § 100.1  Applicable Commitment Period Calculation.

 

19  See § 255.1 [ Does Disposable Income Test Apply? ] § 126.3  Does Disposable Income Test Apply?.

 

20  See 11 U.S.C. § 1325(b)(1), discussed in §§ 163.1 [ In General ] § 91.1  In General and 466.1 [ In General ] § 92.1  In General.

 

21  See § 255.1 [ Does Disposable Income Test Apply? ] § 126.3  Does Disposable Income Test Apply?.

 

22  11 U.S.C. § 101(10A), discussed in §§ 379.1 [ Form B22C: Statement of Current Monthly Income ] § 36.19  Form 122C-1: Statement of Current Monthly Income and 468.1 [ Current Monthly Income: The Baseline ] § 92.3  Current Monthly Income: The Baseline.

 

23  See § 494.1 [ Projected Disposable Income ] § 101.1  What Do Unsecured Creditors Get?.

 

24  See § 255.1 [ Does Disposable Income Test Apply? ] § 126.3  Does Disposable Income Test Apply?.

 

25  See § 257.1 [ Changed-Circumstances Requirement? ] § 126.5  Changed-Circumstances Requirement?.

 

26  See discussion of modification after confirmation beginning at § 126.1  Standing, Timing and Procedure and § 127.1  To Suspend Payments.

 

27  See § 263.1 [ To Sell or Refinance Property of the Estate ] § 127.6  To Sell or Refinance Property of the Estate.

 

28  Id.

 

29  11 U.S.C. § 1322(a)(1), discussed in § 203.3 [ Submission of Future Income ] § 113.5  Submission of Future Income.

 

30  See § 254.1 [ Application of Tests for Confirmation ] § 126.2  Application of Tests for Confirmation.

 

31  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.

 

32  Id.

 

33  See § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

34  Id.