§ 127.6 — To Sell or Refinance Property of the Estate
Revised: June 9, 2004
Modification under § 1329 may be required if the debtor sells property after confirmation.1 Section 1329(a) was not drafted with the sale of property in mind; but property provided for in some other way (payments, for example) in the confirmed plan probably can be sold by modification under § 1329(a)(1) or (a)(2). For example, if the confirmed plan provided for payment in full of a secured claim holder by monthly payments with interest, a modified plan that sells the collateral and pays the allowed secured claim in full could be described as reducing the time for the making of payments to a claim holder that is provided for by the plan. This is not a perfect fit into § 1329(a)(2),2 but it is a fit.
Section 1327(b) may eliminate the need for court permission to sell property that vested in the debtor at confirmation. If neither the plan nor the order of confirmation provides otherwise, at confirmation property of the estate vests in the debtor free and clear of the claims or interests of creditors provided for by the plan.3 It is arguable that the property vesting in the debtor is no longer subject to the ordinary restrictions on the disposition of property of the estate and can be sold by the debtor after confirmation without modifying the plan and without complying with § 363.4 If the plan overcomes the vesting effect in § 1327(b),5 and if the plan is silent with respect to the sale of property, then the debtor will need to modify the plan under § 1329 to sell property that remained in the estate after confirmation. The statutory authority to provide for the sale of estate property by modification is probably found in §§ 1322(b)(8)6 and 1322(b)(10)7—the same sections implicated at confirmation as the source of a debtor’s power to sell property to satisfy claims.8
Creditors should consider objecting to modification of a plan to sell nonexempt property if the sale puts cash in the debtor’s hands that might be dissipated before the completion of payments under the plan.9 When modification does not commit the nonexempt proceeds from a sale to funding the plan, conversion or dismissal after the sale could leave creditors with less than they were entitled to in the Chapter 13 case.10 On the other hand, it has been held that a Chapter 13 debtor can modify the plan after confirmation to sell property that would be exempt and use the proceeds to pay off the plan.11
Modification to sell property of the estate becomes more interesting when the motion comes from a creditor or the trustee and property to be sold did not exist at confirmation. Imagine that the debtor acquires property after confirmation by inheritance, or perhaps just by appreciation. Under § 1306, property of the Chapter 13 estate includes all property that the debtor acquires during the case.12 Depending on whether the plan contained a provision overcoming the effect of § 1327(b),13 property acquired after confirmation may be property of the estate or property of the debtor. In either case, § 1322(b)(8) permits the plan to “provide for the payment of all or part of a claim against the debtor from property of the estate or property of the debtor.” Section 1322(b)(8) is applicable at modification under § 1329(b)(1).14
These Code sections combine to empower the trustee, or the holder of an allowed unsecured claim, to use modification to require the sale of property acquired after confirmation and apply the proceeds to increase payments under the plan. At modification, the best-interests-of-creditors test in § 1325(a)(4)15 or the disposable income test in § 1325(b)16 may require exactly what the unsecured claim holders want: an increased dividend because liquidation of the estate at the effective date of the modified plan includes additional value (or income) that must be paid to creditors.17 In this way, appreciation of property after confirmation may be captured for the benefit of creditors by modification under § 1329.
In re Barbosa18 comes close to the possibility just described. At confirmation in 1996, the debtors owned investment property worth $64,000. The confirmed plan paid 10 percent to unsecured claim holders. In 1999, the debtors sold the investment property for $137,500. The trustee moved to modify to increase payments to unsecured creditors to 100 percent. The bankruptcy court found that in a hypothetical liquidation under Chapter 7, the estate would include the increased value of the investment property, thus at modification under § 1329, creditors in the Chapter 13 case were entitled to the accumulated appreciation.19
This analysis raises the specter of serial motions to modify to require the sale or other disposition of appreciating property after confirmation. The changed-circumstances precondition to postconfirmation modification imposed by some courts20 is in part a reaction to this concern. The same bankruptcy court that decided Barbosa held in In re Trumbas21 that an unsecured claim holder cannot use modification under § 1329 to force the debtor to sell or refinance a home four years after confirmation to pay appreciation to creditors. The court found that an increase in value of the debtor’s home was “foreseeable when the Court confirmed the Debtor’s plan” and “nothing in the Bankruptcy Code requires the Debtor . . . to incur new debt or to sell her home as a condition precedent to obtaining her discharge.”22
Barbosa signals a risk for Chapter 13 debtors inherent in any plan modification to sell property of the Chapter 13 estate. If the best-interests-of-creditors test under § 1325(a)(4) is recalculated at modification23 and if the property to be sold has appreciated or equity has been generated by payments during the Chapter 13 case, the best-interests-of-creditors test may capture the appreciation or equity for the benefit of unsecured claim holders. Because a postconfirmation sale produces cash that could fund an increase in payments, you have an explosive situation in which the trustee and allowed unsecured claim holders have much incentive to demand a share of the goodies.
Reported decisions since Barbosa bear out this analysis. For example, in In re Morgan,24 six months after confirmation the debtor moved to sell real property that the confirmed plan retained in the Chapter 13 estate. The modification proposed to use the proceeds to pay mortgage arrearages that would otherwise be paid from distributions by the trustee. Citing Barbosa, the bankruptcy court recalculated the best-interests-of-creditors test at modification and concluded that the difference between the scheduled value of the property and the sale price was captured for unsecured creditors. The confirmed plan valued the property at $135,990. The sale was for $193,000. Attributing the difference to either “under-evaluation at the time of the original confirmation, or appreciation of the value during the pendency of this case,”25 the bankruptcy court refused the debtor’s motion to sell the property because § 1325(a)(4) required an increase in payments to unsecured creditors.
In In re Stinson,26 the debtors sold a residence two years after confirmation at a sale price 21 percent higher than the value used at confirmation. On the trustee’s motion, the bankruptcy court held that the confirmed plan must be modified to increase the base,27 “to provide the unsecured creditors with a fund that is equivalent to the amount that would be available if the estate were liquidated under Chapter 7.”28
Morgan and Stinson illustrate a potentially powerful tool for trustees and unsecured creditors when a debtor modifies the plan after confirmation to sell an asset and the best-interests-of-creditors test generates a minimum dividend greater than that required at confirmation of the original plan. This use of the logic of Barbosa is just developing in the case law. The issue is most acute when the debtor moves to sell an asset after confirmation because then the trustee or creditor does not need an exotic mechanism to fund the responsive motion to increase payments to creditors.29
1 See also § 74.5 Surrender or Sale of Collateral before BAPCPA and § 74.6 Surrender, Sale, Vesting in Lienholder and Payment with Property after BAPCPA for discussion of sale of property as a method of dealing with secured claims; § 12.11 Income from Leasing, Selling or Liquidating Assets for discussion of selling assets as a source of regular income for eligibility purposes.
2 See § 268.1 [ To Extend or Reduce the Time for Payments ] § 127.11 To Extend or Reduce the Time for Payments.
3 11 U.S.C. § 1327(b), (c). See § 120.3 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate, § 120.4 11 U.S.C. § 1327(c): Free and Clear Effect on Liens and § 120.5 Effects of Confirmation after BAPCPA.
4 See, e.g., In re Rangel, 233 B.R. 191, 198 (Bankr. D. Mass. 1999) (Debtor does not need a bankruptcy court order to hire a real estate broker to sell homestead after confirmation because homestead vested in the debtor under § 1327(b); however, debtor must submit an amended plan because the debtor intends to “use the proceeds of the sale to make a lump sum payment to satisfy his plan.”); In re Walker, 20 B.R. 372 (Bankr. E.D. Va. 1982) (Debtors have unrestricted right to dispose of their house because § 1327(c) vests title in the debtors upon confirmation.).
6 11 U.S.C. § 1322(b)(8) states that a Chapter 13 plan can “provide for the payment of all or part of a claim against the debtor from property of the estate or property of the debtor.” 11 U.S.C. § 1329(b)(1) incorporates § 1322(b) at modification of a confirmed plan.
7 11 U.S.C. § 1322(b)(10) allows a Chapter 13 plan to “include any other appropriate provision not inconsistent with this title.” Section 1322(b)(10) applies at modification of a plan after confirmation. 11 U.S.C. § 1329(b)(1).
9 Lien avoidance under § 522(f) can produce similar problems for creditors. See § 51.2 [ Protecting Lienholder after Lien Avoidance ] § 49.5 Protecting Lienholder after Lien Avoidance.
10 See §§ 315.1 [ In Cases Filed before October 22, 1994 ] § 143.1 In Cases Filed before October 22, 1994 and 316.1 [ In Cases Filed after October 22, 1994 ] § 143.2 In Cases Filed after October 22, 1994. See, e.g., In re Deeble, 169 B.R. 240, 242–43 (Bankr. S.D. Ga. 1994) (Upon the sale of real property after confirmation, the debtor is entitled to an exemption in the proceeds, but the exempt portion should be held by the trustee until the debtor completes all payments under the plan and is entitled to a discharge. Section 522(c) provides that exempt property is not liable during or after a bankruptcy case for any debt that arose before commencement of the case “unless the case is dismissed.” “[P]ermitting a debtor to collect his or her exemption prior to the conclusion of the case may result in the debtor receiving substantial funds while remaining under bankruptcy protection for many months. At any time the debtor may elect to voluntarily dismiss the Chapter 13 case. Such a debtor would have benefitted fully from the exemption, without the quid pro quo anticipated in the Code of final payment in accordance with debtor’s confirmed plan. Upon dismissal, creditors could levy upon any funds remaining but that theoretical remedy may well be a hollow promise if the debtor has already spent the funds. . . . Accordingly, I hold that the funds remaining in the hands of the Chapter 13 Trustee which are subject to allowed claims of exemption . . . be retained by the Chapter 13 Trustee until the conclusion of all payments for the terms of the confirmed plan.”). But see Gamble v. Brown (In re Gamble), 168 F.3d 442 (11th Cir. 1999) (Debtor is entitled to possession and use of exempt portion of equity in real property that was sold after Chapter 13 petition. Exempt portion of proceeds is no longer property of the Chapter 13 estate, and the debtor “may use it as his own.”).
11 In re Duffy, 240 B.R. 60 (Bankr. D. Nev. 1999) (Overrules trustee’s objection to modification of plan to sell residence and pay balance of 44-month plan from exempt proceeds. Voluntary use of exempt proceeds to pay plan in full works to the benefit of unsecured creditors by accelerating payment.). See § 268.1 [ To Extend or Reduce the Time for Payments ] § 127.11 To Extend or Reduce the Time for Payments.
12 11 U.S.C. § 1306(a)(1). See discussion beginning at § 46.1 What Is Property of the Chapter 13 Estate?.
13 See § 113.11 Retention of Property of the Estate: Overcoming 11 U.S.C. § 1327(b), § 120.3 11 U.S.C. § 1327(b): Vesting Effect on Property of Estate and § 120.5 Effects of Confirmation after BAPCPA.
15 See discussion of best-interests-of-creditors test beginning at § 90.1 In General: Plan Payments vs. Hypothetical Liquidation.
18 236 B.R. 540 (Bankr. D. Mass. 1999), aff’d on other grounds, 243 B.R. 562 (D. Mass.), aff’d, 235 F.3d 31 (1st Cir. 2000).
19 See § 254.1 [ Application of Tests for Confirmation ] § 126.2 Application of Tests for Confirmation. But see McDonald v. Burgie (In re Burgie), 239 B.R. 406 (B.A.P. 9th Cir. 1999) (On trustee’s motion to modify after confirmation, nonexempt proceeds from postconfirmation sale of debtors’ homestead are not disposable income for purposes of § 1325(b).); In re Euler, 251 B.R. 740, 748 (Bankr. M.D. Fla. 2000) (Bankruptcy court grants debtor’s motion to sell appreciated property after confirmation and pay off the plan in a lump sum and denies trustee’s responsive motion to increase payments to unsecured claim holders. Appreciation in real property is not an unanticipated change in circumstance; thus, the predicate to the trustee’s motion is absent. Court cites McDonald v. Burgie (In re Burgie), 239 B.R. 406 (B.A.P. 9th Cir. 1999), for the proposition that “‘[t]he proceeds of the sale of a debtor’s real estate in a chapter 13 case never become disposable income for purposes of chapter 13.’ . . . Post-petition disposable income does not include pre-petition property or its proceeds. . . . Even if the Debtor had formed an intention to sell the Real Estate before confirmation of their Plan, they cannot be compelled to use the proceeds to pay creditors under their Plan pursuant to a plan modification.”).
21 245 B.R. 764 (Bankr. D. Mass. 2000).
22 245 B.R. at 767.
23 This possibility is discussed in § 126.2 Application of Tests for Confirmation. See also § 126.6 Modification after Confirmation after BAPCPA.
24 299 B.R. 118 (Bankr. D. Md. 2003).
25 299 B.R. at 122.
26 302 B.R. 828 (Bankr. D. Md. 2003).
27 See § 170.1 [ Methods of Paying Unsecured Claims ] § 101.3 Methods of Paying Unsecured Claims for discussion of “base” plans.
28 302 B.R. at 833.
29 Compare Profit v. Savage (In re Profit), 283 B.R. 567 (B.A.P. 9th Cir. 2002) (Bankruptcy court inappropriately granted trustee’s proposed modified plan that required the debtor to increase the dividend to unsecured claim holders to reflect postconfirmation forgiveness of indebtedness when trustee’s motion did not provide any mechanism for paying creditors the equity created by the forgiveness of indebtedness.).