§ 127.11 — To Extend or Reduce the Time for Payments

Revised: June 9, 2004

[1]

Section 1329(a)(2) permits modification of a plan after confirmation to “extend or reduce the time” for payments on claims of a class provided for by the plan.1 This power gives Chapter 13 debtors flexibility to redesign plans that get in trouble and gives debtors and creditors a statutory basis to pay claims more quickly if the debtor’s circumstances improve after confirmation.

[2]

Extending or reducing the time for payments under the plan is often a by-product of the use of one or more of the other modification powers in § 1329(a). For example, when a plan is modified after confirmation to increase payments to creditors under § 1329(a)(1),2 often the modified plan will also extend payments beyond the time contemplated in the confirmed plan. When the debtor modifies the plan to account for the repossession of collateral, the surrender of collateral, the sale of collateral or an insurance payment upon loss of collateral under § 1329(a)(3),3 the modification may also reduce the time for payment.

[3]

Although § 1329(a)(2) is not always cited, many reported decisions recognize that debtors can use § 1329(a)(2) to modify a plan after confirmation to resolve claims more quickly than provided for by the confirmed plan. In Forbes v. Forbes (In re Forbes),4 the debtor was permitted to reduce the length of the plan from 60 months to 40 months by making a lump-sum payment from the settlement proceeds of a postpetition cause of action. In In re Duffy,5 the bankruptcy court overruled the trustee’s objection to modification of a plan that sold the debtors’ residence and paid off the balance of a 44-month plan from the exempt proceeds. The debtors borrowed money from their parents and modified the plan to accelerate and complete payments in a lump sum in In re Easley.6 In re Martin7 and In re Rangel8 recognize that the debtor can modify a plan after confirmation to cash out the balance of the plan from the sale or refinancing of a homestead so long as the debtor satisfies all of the tests for modification under § 1329(b)(1).9 Chapter 13 debtors routinely use insurance proceeds to accelerate the payment of claims secured by collateral that is lost or destroyed after confirmation.10

[4]

Other courts have permitted Chapter 13 debtors to reduce the time for payments under the plan without modifying the plan under § 1329(a)(2).11

[5]

The reported decisions are beginning to recognize that the disposable income test, if applicable at modification under § 1329(b)(1),12 can be a problem for debtors who want to reduce the time for payments under the plan. One way to satisfy the test in § 1325(b) is to commit all projected disposable income to funding the plan for at least 36 months.13 When the debtor attempts to modify the plan after confirmation to cash out the balance due in fewer than 36 months, upon the objection of the trustee or an allowed unsecured claim holder, some courts have applied the disposable income test to the proposed modified plan. Any modification that reduces the time for payments under the plan to less than 36 months collides with the 36-month minimum in § 1325(b).

[6]

For example, in In re Guentert,14 the confirmed plan required a 45 percent dividend. In the 23d month, the debtor moved to modify to pay off the 45 percent from insurance proceeds. The bankruptcy court acknowledged that the debtor can modify a plan to reduce the amount and the time for making payments, but the modified plan must satisfy the test that the debtor “apply all of her disposable income to her plan payments for at least three years or pay 100% of her unsecured creditors’ claims.”15 The court disapproved the proposed modification: “Ms. Guentert, by asking permission to make one lump sum payment at this time, is asking this Court to shorten the life of her Chapter 13 plan to twenty-three months while she pays her unsecured creditors’ [sic] forty-five percent of their claims. Nothing in the Code gives me the authority to do that.”16

[7]

The good-faith test in § 1325(a)(3) is also a limit on postconfirmation modification to extend or reduce the time for making payments. For example, in In re Vasquez,17 in the 46th month after confirmation, the debtors moved to reduce the time for payments to unsecured claim holders to “time served” and to declare the plan completed based on reduced earning capacity when one of the debtors was injured and unable to work. The bankruptcy court observed that the proposal probably fit within § 1329(a)(2) but failed the good-faith requirement for modification: by reducing the time for making payments rather than seeking a hardship discharge under § 1328(b), the debtors were “manipulating the provisions of the Code and thus the court must question the Debtors’ motivation and sincerity in proposing the modification.”18

[8]

That the confirmed plan will complete payments in less than 36 months is a common ground for a motion by the trustee or by the holder of an allowed unsecured claim to extend the time for payments.19

[9]

Although § 1329(a)(2) is not always cited, reported decisions have allowed extensions and reductions of time for the making of payments through modification after confirmation. For example, on the motion of an unsecured claim holder, the U.S. Court of Appeals for the Fourth Circuit modified a plan to extend payments from 36 months to 60 months when the debtor experienced an extraordinary increase in income after confirmation.20 In In re East,21 the debtor modified the plan after confirmation to extend the payment of mortgage arrearages from 34 months to 52 months. One debtor reduced the time for payments from 53 months to 36 months, notwithstanding that this reduction caused unsecured claim holders to receive substantially less than under the original confirmed plan.22

[10]

Other reported decisions have rejected efforts by debtors and trustees to extend or reduce the time for making payments under § 1329(a)(2), though it is not always clear what provision of the Code prohibited the modification. For example, in In re Stamm,23 the confirmed plan provided for 60 monthly payments and a dividend of 10 percent to unsecured claim holders. Forty-four months after confirmation, the debtors moved to modify the plan to reduce the term of the plan to 50 months while paying the same 10 percent dividend to unsecured claim holders. The debtors explained that proofs of claim actually filed by unsecured creditors were lower than expected and thus they could pay the 10 percent contemplated by the original plan in 50 months instead of 60. The bankruptcy court found that the original plan was a “pot” plan24 that would not be completed upon payment of the 10 percent dividend unless the debtors also satisfied the 60-monthly-payments requirement. The court held that modification to shorten the plan to 50 months did not “satisf[y] their obligations under Chapter 13.”25

[11]

What provision of Chapter 13 required the debtors in Stamm to maintain the size of the original “pot”? The 10 percent in 50 months proposal may have been less than unsecured would receive if the original 60-month plan continued, but isn’t modification to decrease payments what is contemplated by § 1329(a)(1)?26 Perhaps a failure to articulate exactly how § 1329 supported the proposed modification lies at the bottom of Stamm.

[12]

In In re Baines,27 the confirmed plans provided that lawsuit proceeds and workers’ compensation would be paid to the trustee. When the trustee received the money, the trustee moved for a “special distribution” to only unsecured creditors. The trustee argued that the special distribution would increase payments to the class of unsecured claim holders under § 1329(a)(1) and would decrease the time for paying unsecured claim holders for purposes of § 1329(a)(2). The bankruptcy court denied the trustee’s motion, finding that “neither category . . . contemplates modification of the distribution scheme.”28 The court held that only the debtor has discretion to determine in what order secured and unsecured creditors will be paid through a confirmed Chapter 13 plan, citing § 1322(b)(4).29

[13]

The outcome in Baines is not altogether satisfying. It is always true that modification under § 1329(a)(1) or (a)(2) changes the “distribution scheme.” Debtor control of the order of distributions in the original plan is not preclusive of modification under § 1329. Section 1322(b)(4) permits the plan to determine the order of payments, and § 1322(b)(4) applies at modification through § 1329(b)(1).30 Increasing or reducing payments or extending or reducing the time for making payments to creditors in a particular class is permitted by § 1329 without exception for the collateral effect of altering the order of distributions to creditors. The trustee and allowed unsecured claim holders have standing to change the order of distributions by modification under § 1329.31

[14]

Any proposed modification that extends payments beyond the three years in § 1329(c) will require a showing of “cause” by the proponent.32


 

1  11 U.S.C. § 1329(a)(2).

 

2  See § 266.1 [ To Increase Payments to Creditors ] § 127.9  To Increase Payments to Creditors.

 

3  See §§ 263.1 [ To Sell or Refinance Property of the Estate ] § 127.6  To Sell or Refinance Property of the Estate, 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 and 267.1 [ To Account for Payments Other Than under the Plan ] § 127.10  To Account for Payments Other Than under the Plan.

 

4  215 B.R. 183 (B.A.P. 8th Cir. 1997).

 

5  240 B.R. 60 (Bankr. D. Nev. 1999).

 

6  205 B.R. 334 (Bankr. M.D. Fla. 1996). See also In re McNichols, 249 B.R. 160, 173 n.8 (Bankr. N.D. Ill. 2000) (Overrules trustee’s objection to plan provision that the debtor “shall have the option at any time after confirmation to prepay the monthly installments due . . . using exempt assets or funds borrowed from friends or relatives. Upon receipt of such funds by the Office of the Chapter 13 Trustee . . . the ‘completion of payments’ under this plan shall be deemed to have occurred for purposes of 11 U.S.C. § 1329.” Citing In re Casper, 154 B.R. 243 (N.D. Ill. 1993), and In re Phelps, 149 B.R. 534 (Bankr. N.D. Ill. 1993), this provision is not inconsistent with § 1329 and does not impermissibly restrict the trustee’s rights.); In re Smith, 237 B.R. 621 (Bankr. E.D. Tex. 1999) (In 27th month of a 56-month plan, debtor can complete payments using a gift from family members without triggering modification under § 1329.), aff’d, 252 B.R. 107 (E.D. Tex. 2000).

 

7  232 B.R. 29 (Bankr. D. Mass. 1999).

 

8  233 B.R. 191 (Bankr. D. Mass. 1999).

 

9  Accord In re Euler, 251 B.R. 740 (Bankr. M.D. Fla. 2000) (Debtor can modify the plan approximately three years after confirmation to sell appreciated real property and pay the 42% dividend in a lump sum. Because appreciation in real property is not unanticipated, trustee cannot modify the plan to increase payments.); In re Sounakhene, 249 B.R. 801 (Bankr. S.D. Cal. 2000) (A year after confirmation, debtors can pay off Chapter 13 plan in a lump sum from the refinancing of their home; trustee’s motion to increase the dividend to unsecured claim holders from 12% to 45% is untimely and would unfairly penalize the debtors by requiring them to use a capital asset as disposable income.); In re Evora, 242 B.R. 560, 561–62 (Bankr. D. Mass. 1999) (Assuming that the debtors’ motion to refinance the mortgage on their home is a motion to modify the plan to reduce the time for payments to the mortgage holder, allowed amount of mortgage holder’s secured claim is not recalculated and debtors can pay off their plan from the refinancing. Plan confirmed on August 11, 1998, treated the Massachusetts Housing Finance Agency as a secured claim holder to the extent of $80,000. On September 3, 1999, debtors filed a motion to refinance their mortgage and make a lump-sum payment in full satisfaction of the plan. In the motion, the debtors stated that the current appraised value of the property was $156,000. MHFA objected. “[A]ssuming arguendo that the Debtors are in effect modifying their Chapter 13 plan to reduce the time for payments to MHFA, MHFA has cited no authority for the proposition that this Court must, as a consequence, redetermine the amount of its secured claim . . . [I]n analogous circumstances courts have refused to permit debtors to shift the burden of depreciation in collateral to secured creditors by surrendering the collateral and reclassifying any deficiency as an unsecured claim, see In re Meeks, 237 B.R. 856 (Bankr. M.D. Fla. 1999); In re Coleman, 231 B.R. 397 (Bankr. S.D. Ga. 1999); In re Banks, 161 B.R. 375 (Bankr. S.D. Miss. 1993); see also Chrysler Fin. Corp. v. Nolan (In re Nolan), 234 B.R. 390 (M.D. Tenn. 1999); . . . in In re Meeks, the court observed the following: ‘The better and more consistent interpretation of § 1329(a)(1) permits debtors to alter the amount of their payment on a claim to accelerate or reduce the rate at which a claim is paid. . . . However, the modification of payment amounts cannot alter the allowed amount of the secured claim or eliminate the requirement in § 1325(a)(5) that the claim be paid in full.’ . . . MHFA has failed to establish . . . grounds for altering the allowed amount of its secured claim.”).

 

10  See §§ 238.1 [ Loss, Destruction or Surrender of Property after Confirmation ] § 122.3  Loss, Destruction or Surrender of Property after Confirmation, 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 and 267.1 [ To Account for Payments Other Than under the Plan ] § 127.10  To Account for Payments Other Than under the Plan. See, e.g., In re Gibson, 218 B.R. 900, 905 (Bankr. E.D. Ark. 1997) (Upon postconfirmation destruction of debtor’s truck, debtor can modify the plan to surrender the remnants of the truck and pay to the lender the portion of insurance proceeds equal to the balance of the lender’s allowed secured claim under the confirmed plan less credits for payments made since confirmation. Lender’s interest in insurance proceeds is limited by the confirmation order to the value of its allowed secured claim. Abandonment of the wrecked truck does not constitute abandonment of all of the insurance proceeds. Debtor can use the balance of insurance proceeds above the remaining balance of the allowed secured claim to repair another vehicle and to distribute to other creditors under the confirmed plan. Debtor also requested a reduction of his plan payment by $485 a month to reflect elimination of payment on the truck claim. Truck lender objected to confirmation of modified plan on ground that failure to commit $485 a month to unsecured claim holders through the modified plan violated the disposable income test in § 1325(b). Court rejected this argument, finding that the lender “has not established that the Debtor is not making his best effort.”).

 

11  See, e.g., In re Smith, 237 B.R. 621, 626 (Bankr. E.D. Tex. 1999) (In the 27th month of a 56-month plan, debtor can complete payments using a gift from family members without triggering modification under § 1329. By tendering the amount necessary to pay off the plan in full, the debtor “has not sought, nor does she need, a plan modification. . . . [T]his Debtor has completed all payments required by the confirmed Chapter 13 plan and is entitled to the entry of a discharge order under § 1328(a).”), aff’d, 252 B.R. 107, 110 (E.D. Tex. 2000) (“The reasoning applied by the bankruptcy court in this case encourages debtors to accelerate the completion of plan payments to creditors. In most cases due to the time value of money, creditors would prefer to have the plan payments accelerated. . . . This court likewise views this as a worthy goal.”); In re Bergolla, 232 B.R. 515, 517 (Bankr. S.D. Fla. 1999) (Debtors need not modify plan under § 1329 to pay off 60-month plan from the liquidation of exempt homestead. On February 6, debtors remitted $26,693.52 to the trustee, representing the balance under 60-month plan. The payment came from the sale of the debtors’ exempt homestead. On February 10, the debtors’ plan was confirmed. “Debtors chose to pay their debts by selling their family home, an exempt asset. . . . [T]heir homestead . . . would not be available for distribution to their unsecured creditors. . . . [T]he creditors not only receive more than they would have in a Chapter 7, but also receive the full amount to be paid to them under the confirmed plan in one lump sum payment rather than in individual payments spread out over the course of four and a half years. The present value of such payments is obviously an additional benefit to be reaped by the creditors. Although 11 U.S.C. § 1329 permits the postconfirmation modification of a Chapter 13 Plan, the Court finds that modification of the Debtors [sic] plan in this case is unwarranted. . . . The Debtors should be granted a discharge.”).

 

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

 

13  See discussion of projected disposable income test before BAPCPA beginning at § 91.1  In General and discussion of projected disposable income test after BAPCPA beginning at § 92.1  In General.

 

14  206 B.R. 958 (Bankr. W.D. Mo. 1997).

 

15  206 B.R. at 961.

 

16  206 B.R. at 961. Accord In re Flaming, No. 02-03680, 2003 WL 22848925, at *2–*3 (Bankr. D. Idaho Nov. 10, 2003) (unpublished) (Debtors’ proposal to pay off plan six months after confirmation from an inheritance “falls within the reach of § 1329(a)(2) as it seeks to ‘reduce the time for such payments [under the confirmed plan]’”; applying § 1325(b)(1), modification is denied because $22,000 inheritance from postconfirmation death of the debtor’s mother is income “in addition to the disposable income they projected from employment.”). See also § 126.3  Does Disposable Income Test Apply?, § 126.4  Duration of Modified Plan and § 126.6  Modification after Confirmation after BAPCPA.

 

17  261 B.R. 654 (Bankr. N.D. Tex. 2001).

 

18  261 B.R. at 659.

 

19  See § 126.1  Standing, Timing and Procedure, § 126.5  Changed-Circumstances Requirement?§ 126.6  Modification after Confirmation after BAPCPA and § 127.9  To Increase Payments to Creditors. See, e.g., In re Torres, 193 B.R. 319, 324 (Bankr. N.D. Cal. 1996) (Rejects creditor’s motion to require payments for nine more months where 35% plan was paid in full in 27 months. Original plan provided for 35% payment of unsecured claims but said nothing about minimum duration of plan. Res judicata and § 1327 prohibit modification to extend payments because § 1325(b) was not triggered by objection to confirmation of the original plan. “This plan, as the form was completed by Debtor and confirmed by the Court, unambiguously announced that payments to the Trustee were going to be made only as long as necessary to permit all allowed claims to be paid at the rate of 35%, and it imparted notice to all that a minimum term of three years was not being proposed. Anyone—Trustee and/or creditors—who disliked the absence of a three year minimum term could have objected to confirmation on that basis to invoke § 1325(b)(1)(B) . . . . Once the plan is confirmed, it is res judicata as to the § 1325(b)(1)(B) issue.”); In re McKinney, 191 B.R. 866 (Bankr. D. Or. 1996) (Grants trustee’s motion to require payments for 36 months to increase the dividend to unsecured creditors. Plan as confirmed provided 0% to unsecured claim holders. There were no secured claims, and it was projected that full payment of priority claims would require more than three years. Priority claims as finally allowed were substantially less than anticipated and were paid in 12 months. On trustee’s motion, court required payments to continue for three years.).

 

20  Arnold v. Weast (In re Arnold), 869 F.2d 240 (4th Cir. 1989).

 

21  172 B.R. 861 (Bankr. S.D. Tex. 1994).

 

22  In re Howell, 76 B.R. 793 (Bankr. D. Or. 1987) (Debtor was permitted to modify to correct postconfirmation defaults. Original Chapter 13 plan called for 70% payment of allowed unsecured claims over a period of 53 months. Debtor defaulted several times and then proposed amended plan to pay general unsecured claims 15% over a period ending 36 months after the first payment was due under the original plan. Apparently applying § 1325(b), test for confirmation of amended plan required the passage of three years and not a specific number of payments. Debtor was not required to make up defaults under the original plan but was permitted to modify the plan to overcome effect of the defaults.).

 

23  265 B.R. 10 (Bankr. D. Mass. 2001).

 

24  See § 170.1 [ Methods of Paying Unsecured Claims ] § 101.3  Methods of Paying Unsecured Claims.

 

25  265 B.R. at 13.

 

26  See § 265.1 [ To Decrease Payments to Creditors ] § 127.8  To Decrease Payments to Creditors.

 

27  263 B.R. 868 (Bankr. S.D. Ill. 2001).

 

28  263 B.R. at 872.

 

29  See § 101.3  Methods of Paying Unsecured Claims, § 113.7  Order of Payments to Creditors before BAPCPA and § 113.8  Order of Payments to Creditors after BAPCPA.

 

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

 

31  See § 253.1 [ Standing, Timing and Procedure ] § 126.1  Standing, Timing and Procedure.

 

32  See § 126.4  Duration of Modified Plan and § 126.6  Modification after Confirmation after BAPCPASee also § 112.4  Cause for Extension beyond Three Years and § 112.5  Payment of Claims beyond Length of Plan.