Should Post-Confirmation Review of the Debtors Disposable Income Analysis Be a Basis for an Upward Modification

By:  Steven Ching

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Joining the majority of courts, in In re Salpietro, the United States Bankruptcy Court for the Eastern District of New York held that a post-petition review of the debtor’s net disposable income was not required under the Bankruptcy Code and did not provide the basis for an upward modification under section 1329(a).[1]  There, the debtors confirmed joint chapter 13 plan that provided that the “future earnings of the debtor [were to be] submitted to the supervision and control of the trustee.”[2]  After making timely payments for five years, the debtors moved to approve a loan modification that would essentially reduce their monthly mortgage expenses by approximately $970.[3]In response, the chapter 13 trustee cross-moved to increase the debtors' payments under their plan on the grounds that the decrease in the debtors’ expenses constituted “future earnings,” and therefore, under the plan, were to be “submitted to the supervision and control of the trustee.”[4]  However, the court disagreed and denied the trustee’s motion for upward modification, holding that: (1) section 1325(b)’s projected disposable income test does not apply to modifications under section 1329, and (2) section 1322(a)(1) did not provide a basis for upward modification because the reduction of the debtor’s mortgage expenses did not constitute additional income or earnings.[5]

Bankruptcy courts have split when determining whether the court must perform the projected disposable income test under section 1325(b) against if a party in interest seeks a post-confirmation modification of the debtor’s chapter 13 plan under section 1329(a).[9]  The majority of courts agree with the court in In re Forbes, which held that section 1329(a) does not explicitly or implicitly require that the bankruptcy court apply the disposable income test under section 1325(b) at the time of the proposed upward modification.[10]  The Forbes court noted that while section 1329 specifically incorporates the confirmation requirements of section 1325(a), the statute does not reference section 1325(b).[11]  Therefore, the Forbes court reasoned that the exclusion of section 1325(b) signified that Congress did not intend for the projected disposable income test to apply to post-confirmation modifications.[12]  Other courts, however, have adopted the minority view, agreeing with the court in In re Hall, which held that the disposable income test must be applied when determining whether to grant a post-confirmation modification to a chapter 13 debtor’s plan because the court reasoned that “allowing debtors to accrue income, rather than to apply that income to their plan payments, would constitute a windfall,” which would be unfair to creditors.[13]

The Salpietro court reasoned that the section 1325(b) disposable income test submitted at the original chapter 13 plan confirmation “should be afforded some finality and should not be disturbed solely on the basis of fluctuations in a debtor’s expenses.”[14]Under Salpietro, and the majority approach, a chapter 13 debtor has the incentive to reduce his monthly expenses because he will be able to retain the savings from such a reduction since the savings will not constitute grounds for an upward modification.[15]  Yet, even under the minority approach, a chapter 13 debtor may still have the incentive to reduce his monthly expenses because he will receive the benefit of such savings after he completes his plan.  For example, in Salpietro, even if the debtors’ plan payments had been increased pursuant to an upward modification, they may still have wanted to modify their mortgage because they would only have to make the increased payments for three months and would ultimately save $970 per month for forty years after the plan was confirmed.[16]