Chapter 13 Plan Modifications The Next BAPCPA Battleground
Plan Modifications Pre-BAPCPA
Under §1329(a), the debtor, the trustee or the holder of an unsecured claim has always had the authority to modify the plan to (1) increase or reduce the amount or payments on claims of a particular class provided for by the plan, and (2) extend or reduce the time for such payments. What was not clear was whether the debtor could pay the amount of plan payments in less than 36 months and obtain a discharge without paying 100 percent to unsecured claims, and whether this early payoff of plan payments could be done without a motion to modify.2
These issues were front and center in two pre-BAPCPA cases decided in 2005. In the first, In re Sunahara,3 the Ninth Circuit Bankruptcy Appellate Panel (BAP) held that a debtor could seek to modify a plan under §1329 to pay off the plan in less than 36 months without paying the unsecured claims in full. Moreover, the court held that the requirement of §1325(b)(1) that a debtor commit payment of the debtor's projected disposable income for 36 months (the so-called "best efforts" test) did not apply in a motion to modify under §1329, citing the fact that unlike other requirements for confirmation of the plan specifically mentioned in §1329(b)(1), §1325(b) is not explicitly incorporated into §1329. In referring the matter back to the trial court, the court directed that in determining if the modification was filed in good faith, the trial court should consider the (1) current disposable income of the debtor, (2) likelihood that the debtor's disposable income will increase over the remaining term of the plan, (3) proximity of time between confirmation of the original plan and the filing of the modification motion and (4) risk of default over the remaining term of the plan versus the certainty of immediate payment to creditors.4
Sunahara was followed in short order by In re Keller,5 another case where a debtor sought to pay off a plan prior to 36 months through a refinance, without paying unsecured claims in full and without having to file a motion to modify the plan. The court in Keller held that the debtor could pay off the plan early at less than 100 percent to unsecured creditors, but that it had to be done by means of a motion to modify the plan unless the original plan provided for early payoff.6 The court went on to take issue with the Sunahara court's holding that §1325 (b)(1) does not apply to motions to modify under §1329, holding instead that the §1325(b)(1) test is incorporated into §1325(a), which is specifically made applicable to §1329 motions by §1329(b)(1). The Keller holding that §1325(b) is included by reference in §1325(a), and thereby §1329, was based on the general requirement of §1325(a)(1) that the court shall confirm a plan if "the plan complies with the provisions of this chapter and with the other applicable provisions of this title...."
While Keller never reached the question of what the debtors had to pay into the plan to get a pre-36 month discharge, it appears that the debtors would at least have had to pay the amount of their projected disposable income, as determined at the time of the modification motion, for the period from modification to the end of the plan.
Modifications after BAPCPA: Applicable Commitment Periods
The new language that is the focus of the applicable commitment period issue is found in §1325(b)(4), which provides that to determine whether the debtor's projected disposable income "to be received in the applicable commitment period"7 is committed to unsecured creditors, (1) the applicable commitment period is either three years, or "not less than five years" if the "current monthly income" (CMI) is above the median family income, and (2) the applicable commitment period "may be less than three or five years, whichever is applicable under subparagraph (A), but only if the plan provides for payment in full of all allowed unsecured claims over a shorter period."
In the pre-BAPCPA Code, §1325 (b)(1)(B) provided that the debtor must commit the debtor's projected disposable income "to be received in the three-year period beginning on the date that the first payment is due under the plan" to make payments under the plan. The predominant view was that plans had to go at least 36 months, unless the debtor paid 100 percent of the debtor's unsecured claims.8 But there was no specific prohibition against modifying the plan to shorten the three-year plan duration through early payoff with less than 100 percent payment to unsecured claims, and a number of courts, including Sunahara and Keller, held that such a modification was permissible.
If the courts determine that "applicable commitment period" means a commitment to stay in a plan for a period of time, we can expect an above-median debtor who does not want to stay in a case for five years and cannot or does not want to pay 100 percent of the unsecured claims to test this issue in a motion to modify under §1329. That section was left relatively unchanged by the BAPCPA amendments. Section 1329(c), dealing with the maximum length of modified plans, was amended to specifically provide that a plan modified under this section may not provide for extending payments over a period that expires after the applicable commitment period of §1325(b)(1)(B). But the bigger issue was not addressed: how to reconcile a debtor's right to reduce the time of payments under §1329(a)(1) with the language of §1325(b) restricting plans from paying off early absent 100 percent payment to unsecured claims.
A court taking the Sunahara approach to §1325(b)—i.e., that it is not incorporated into §1329—would not have to reach the question. In fact, as discussed below, Sunahara would also effectively write out the projected disposable-income requirements of §1325(b) in the context of a modification motion for debtors, substituting its generalized "good faith" approach to disposable income and length of plans. While no doubt appealing in terms of the problems it skirts, the limited guidance offered to the parties and the courts in Sunahara holds out the prospect of considerable subjectivity and arbitrariness.9 Chapter 13 trustees will attest that the process of developing and applying guidelines for when to object to a debtor's motion to modify to pay off a plan early is a difficult task, made more so if there is no §1325(b) best-efforts test.
A court taking the Keller approach will have to reconcile §1329(a)'s permit to reduce the time for payments with §1325(b)(4)(B)'s prohibition against shortening applicable commitment periods absent payment of unsecured claims in full. Section 1329(a)(2) allows modification to reduce the time for "such payments," which refers to "payments on claims of a particular class provided for by the plan" in §1329(a)(1)." While under §1329(b)(4)(B) an initial plan may not propose payments for less than the applicable commitment period, the specific grant of that power in §1329 arguably trumps this.
Plan Modifications under BAPCPA: Projected Disposable Income
Whether the courts interpret the requirement of §1325(b) regarding payment of "disposable income" (CMI) to unsecured creditors as a starting point that may be overridden if the debtor's actual projected income from Schedules I and J is higher or lower,10 or treat projected disposable income as a formula by multiplying the disposable income from the B22C by the months in the applicable commitment period,11 debtors, trustees and unsecured creditors will be asking to modify the plan payment because many debtors' incomes increase or decrease over time from the moment of the CMI calculation or from the effective date of the plan.
The court in Sunahara would not have to address the projected disposable-income issue head-on because under its holding, §1325(b) is not applicable to modification motions. A debtor seeking to lower a plan payment would only have to show that there was a substantial change in the debtor's ability to pay12 and that the motion was filed in good faith, assuming the other confirmation tests were met. A court using the Keller approach would have to apply the "projected disposable income" test of §1325(b) to a debtor's motion to modify if the trustee or the holder of an allowed unsecured claim objected. Here, the new language of §1325(b) is the least helpful. The reason for the motion is that the income has decreased, yet the definition of "disposable income" (the historical CMI) is even more outdated than at initial confirmation, and the notion of a projected disposable income even more internally inconsistent. The simplest answer is that the calculation of "disposable income" is just a starting point that may be rebutted by evidence of actual current disposable income.13
A court using the Keller approach would have to apply the "projected disposable income" test of §1325(b) to a debtor's motion to modify if the trustee or the holder of an allowed unsecured claim objected. The issue should not arise if the trustee or a creditor is moving to modify based on an increase in income, whether using the Sunahara or Keller approach. Although some courts have overlooked this point, the §1325(b) disposable-income requirement is only an issue "if the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan...." The leading treatise on chapter 13 states:
At the very least, the courts should agree that the disposable-income test does not apply when the proponent of the modification is the trustee or the holder of an allowed unsecured claim and the objecting party is the debtor. This would be true as a matter of statutory construction because §1325(b) applies only upon objection to confirmation by "the trustee or the holder of an allowed unsecured claim."14
If §1325(b) does not apply to a trustee or creditor motion to modify then regardless of the formula used to calculate projected disposable income at confirmation, a trustee or creditor who concludes that the debtor's ability to pay substantially exceeds the disposable income calculation at confirmation, but who may be barred from making that objection by the court's interpretation of projected disposable income, may have the option of moving to modify the plan to capture that added income. At the very least, if the debtor's projected disposable income increases from the point when it was determined for purposes of confirmation, the trustee can move to modify the plan to increase the plan payment.15 The debtor may in turn argue that the debtor's ability to pay has not changed substantially since confirmation.
Those parties troubled by court rulings that an "applicable commitment period" is a fixed temporal commitment to stay in chapter 13 for three or five years absent 100 percent payment to unsecured creditors, or that "projected disposable income" is an artificial number unrelated to the debtor's ability to pay creditors, may find relief in §1329. From a trustee perspective, a disposable-income test rooted in real current income and expenses provides the best guidance for motions to modify, whether the goal is to shorten the duration of a plan, or increase or decrease the plan payments.
1 In the Portland Division of the District of Oregon, between Oct.17, 2005, and June 30, 2006, almost 40 percent of the chapter 13 filings have involved debtors with above-median family income.
2 Lundin, Chapter 13 Bankruptcy, 3d Edition (2000 & Supp. 2004)) §268.1.
3 In re Sunahara, 326 B.R. 768 (9th Cir. B.A.P. 2005).
4 Id. at 781-82.
5 In re Keller, 329 B.R. 697 (Bankr. E.D. Cal. 2005).
6 Keller suggests that the debtor could propose early payoff of plan payments at less than 100 percent in the original plan, supra at 701, but for a contrary view, see In re Schiffman, 338 B.R. 422 (Bankr. D. Ore. 2006).
7 11 U.S.C. §1325(b)(1)(B).
8 Lundin, supra at §199.1.
9 See discussion in In re Keller, supra at 702-04.
10 In re Jass, 340 B.R. 411 (Bankr. D. Utah 2006).
11 In re Alexander, 344 B.R. 742 (Bankr. E.D.N.C. 2006).
12 Anderson v. Satterlee (In re Anderson), 21 F.3d 355, 358 (9th Cir. 1994).
13 In re Jass, supra at 415.
14 Lundin, supra at 255.1.
15 The absence of the §1325(b) disposable-income test in connection with a motion by a trustee or creditor to modify a plan creates the same problem alluded to when discussing Sunahara's limitations, i.e., the absence of objective criteria to determine what a debtor should have to contribute for the remainder of the modified plan. One option used by another court was to look to the requirement of §1322(a)(1) that debtors commit their future income as necessary for execution of the plan in deciding motions by trustees to increase plan payments. In re Profit, 269 B.R. 51 (Bankr. D. Nev. 2001), rev'd on other grounds, 283 B.R. 567 (B.A.P. 9th Cir. 2002). A simpler answer is that a disposable-income test based on actual income and expenses is implicit in the requirement that the modification proposed by a trustee or creditor be feasible under §1325(a)(6).