Saturday, August 20, 2016

7th Circuit Holds Section 1329 Permits Post-Confirmation Plan Modification



Randall Woolley
Askounis & Darcy, PC
Chicago, Illinois

Section 1329 of the Bankruptcy Code permits modification of a confirmed plan to increase or reduce the amount of plan payments.  However, trustees and creditors are seemingly reluctant to disturb a confirmed plan, in part because Section 1329 does not specifically set forth when modification is appropriate.  The Seventh Circuit recently held in Germeraad v. Powers, No. 15-3237 (7th Cir. June 23, 2016) that an increase in the debtor’s income after plan confirmation may serve as a basis for modifying the Chapter 13 plan in order to increase the amount paid to unsecured creditors.    


What Happened? 

The debtors jointly filed a petition under Chapter 13 of the Bankruptcy Code on May 24, 2010.  The debtors’ Chapter 13 plan was confirmed on March 1, 2011.   Pursuant to the Chapter 13 plan, the debtors were to make plan payments of $758.00 per month.

The debtors made the plan payments as required.  In 2013, the Chapter 13 trustee received the debtors’ 2012 federal tax return reflecting a $50,000.00 increase in income between 2011 and 2012. The trustee determined that, based on the additional income, the debtors could afford payments of $1,416.00 per month over the remaining 23 month term, and filed a Motion to Increase Plan Payments (the “Motion”).  The Motion sought to increase the total distribution to unsecured creditors by $15,000.00. 

The bankruptcy court held that the Bankruptcy Code did not contain a provision that would allow modification of a plan because of an increase in income. On appeal, the district court concluded that the bankruptcy court did not err as a matter of law when it found that it lacked authority to grant the Motion.  The trustee then appealed to the Seventh Circuit. 

Seventh Circuit’s Ruling

On appeal, the debtors argued that the Seventh Circuit lacked jurisdiction to decide the appeal because the bankruptcy court’s order denying the Motion was not a final order for purposes of 28 U.S.C. § 158.  The Seventh Circuit held that an order denying a motion to modify plan payments is analogous to an order granting a motion to dismiss under Federal Rule 12(b)(6), because if the court grants the motion to dismiss based on a defect than can be cured, then it is not final.  However, if the defect cannot be cured, then it is a final order.  The Seventh Circuit further made a comparison to Federal Rule 60(b), determining that even though it is possible a party could file more than one Rule 60(b) motion, the district court’s denial of any one motion is considered final and appealable. 

The debtors also argued that the Motion was moot, because the debtors made all plan payments due under the original plan while the Motion and appeal were pending.  The debtors argued that under Section 1329(c) plan payments may not extend beyond 5 years.  The Seventh Circuit held that, if the bankruptcy court’s order denying the Motion was vacated, by operation of Section 1329(b)(2), the trustee’s proposed plan (if allowed) would become effective as of the date the Motion was filed.  Therefore, even though the original 60 month term had ended, the debtors could be deemed in default for failing to make the payments required by the modified plan.  The Seventh Circuit also noted that Section 1329 does not prohibit cure payments made outside the express term.  The Seventh Circuit acknowledged that it may be inequitable to modify the plan or deny the debtors a discharge after all payments are made as required under the original plan, but this determination was not relevant to mootness, the argument advanced by the debtors. 

The Seventh Circuit also determined that Section 1329(a) of the Bankruptcy Code does not place any temporal limits on the bankruptcy court’s power to approve a requested modification, further demonstrating that modification is possible even after the original plan’s 60 month term has ended.  Therefore, the Seventh Circuit held that the trustee’s appeal was not moot. 

 The Seventh Circuit then determined that Section 1329 of the Bankruptcy Code allows post-confirmation modification of a confirmed plan based on an increase in debtor’s income provided the other requirements of Section 1329 are met.  Various courts have recognized that the bankruptcy court has discretion to allow modification of a Chapter 13 plan because of a change in the debtor’s financial circumstances.  See Barbosa v. Solomon, 16 F.3d 739, 746 (1st Cir. 2000); In re Arnold, 869 F.2d 240, 241 (4th Cir. 1989); and In re Powers, 202 B.R. 618, 622 (B.A.P. 9th Cir. 1996).  The Seventh Circuit held that although no provision of the Bankruptcy Code expressly permits modification when a change in debtor’s financial circumstances makes an increase in payments affordable, it does not follow that modification for this reason is forbidden.  The Seventh Circuit further determined that because Congress did not provide express standards in the Bankruptcy Code, it necessarily left the development of those standards to the courts, consistent with the holdings in Barbosa, Arnold and Powers.  The Seventh Circuit remanded the case to the district court for review of the bankruptcy court’s decision that the increase in income did not support the trustee’s request.  

What it means?

Section 1329 expressly permits the debtor, trustee or holder of an allowed unsecured claim to request post-confirmation modification of a Chapter 13 plan.  The Seventh Circuit’s ruling confirms that trustees and creditors may seek better treatment in Chapter 13 cases when the debtor’s financial condition improves post-confirmation.  Therefore, trustees should continue to monitor the debtor’s income throughout the term of the plan.  Additionally, trustees should expeditiously request modification, because even if allowed an increase in plan payments will only be effective from the date the request is made.  

The Seventh Circuit’s ruling is also helpful to bankruptcy practitioners determining whether a bankruptcy court order is final and appealable. The Seventh Circuit effectively drew comparisons between the trustee’s request and motions brought under Federal Rules of Civil Procedure 12(b)(6) and 60(b). 

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