In today’s financial climate, the media has focused its attention on the modification of home loan mortgages to help distressed borrowers retain their homes. For those debtors who are already in a Chapter 13 bankruptcy case, however, modification of their Chapter 13 Plan may be the key to financial success, specifically receiving a discharge of liability for all their debts after completing all payments due under the Chapter 13 Plan.
Section 1329 of the Bankruptcy Code (11 U.S.C.) provides that, at any time after confirmation of the Chapter 13 plan, but before completion of the payments required by the confirmed plan (usually between 36 and 60 monthly payments), the confirmed plan may be modified upon request of the debtor, the Chapter 13 Trustee or the holder of an allowed unsecured claim. The permissible modifications under Section 1329 include: (1) an increase or reduction in the amount of payments on claims of a particular class provided for by the plan; (2) an extension or reduction of the time for such payments; or (3) an alteration in the amount of the distribution to a creditor to account for any payment received by that creditor outside the plan. In the Fourth Circuit, the “doctrine of res judicata bars an increase in the amount of the monthly payments” pursuant to a proposed modified plan “where there have been no unanticipated, substantial changes in the debtor’s financial condition.” In re Arnold, 869 F.2d 240, 243 (4th Cir. 1989). As explained by the Fourth Circuit in a more recent opinion, “This doctrine . . . ensures that confirmation orders will be accorded the necessary degree of finality, preventing parties from seeking to modify plans when minor and anticipated changes in the debtor’s financial condition take place.” As the Court explained further, “If the change in the debtor’s financial condition was either insubstantial or anticipated, or both, the doctrine of res judicata will prevent the modification of the confirmed plan.” In re Murphy, 474 F.3d 143, 150 (4th Cir. 2007).
In the Arnold case, the debtor’s annual income had increased by $120,000 (from $80,000 to $200,000) in the two years since his plan was confirmed. There appeared to be no dispute that such an increase was “substantial.” Additionally, the Fourth Circuit found that, “Although it was reasonable to expect Arnold’s income to fluctuate from year to year because it relied so heavily on sales commissions, Weast [the unsecured creditor filing the motion to modify] should not be expected to have anticipated a $120,000 jump in his income in only two years.” Arnold, 869 F.2d at 243.
Some other Circuit Courts expressly disagree with the Fourth Circuit, holding that “Congress did not intend the common law doctrine of res judicata to apply to Section 1329 modifications.” In re Witkowski, 16 F.3d 739, 745 (7th Cir. 1994). Accord, Barbosa v. Soloman, 235 F.3d 31, 41 (1st Cir. 2000), In re Meza, 467 F.3d 874, 878 (5th Cir. 2006), In re Brown, 219 B.R. 191 (BAP 6th Cir. 1998), and In re Than, 215 B.R. 430 (BAP 9th Cir. 1997). Presumably, in these Circuits, it will be easier for the debtor, the Chapter 13 Trustee or unsecured creditors to seek and obtain a plan modification.
Debtors who suffered a post-confirmation decrease in net monthly income of 18.6 percent were allowed to modify their plan to decrease the payout to unsecured creditors from 100 percent to 19 percent. In re Ireland, 366 B.R. 27 (Bankr. W.D. Ark. 2007). In so ruling, the court noted, “To avoid the preclusive effect of the principle of res judicata, the modification should be necessitated by an unanticipated substantial change in circumstances affecting the debtors’ ability to pay.” Id. at 33. Apparently, the court believed that a decrease in net income of less than 20 percent was substantial.
Chapter 13 debtors who both “retired from their jobs not long after their plan was confirmed” were permitted to modify their plan to reduce the plan term from 60 to 36 months, to reduce the amount of their monthly plan payments and to reduce the amount paid to general unsecured creditors. In re Ewers, 366 B.R. 139, 140 (Bankr. D. Nev. 2007).
On the other hand, Chapter 13 debtors who received an inheritance two years after the Chapter 13 case was filed could not pay the plan base balance and receive a discharge, but had to pay all allowed claims in full, pursuant to the Chapter 13 Trustee’s motion to modify. In re Gengenbach, 2008 Bankr. LEXIS 1246 (Bankr. D. Neb. 2008).
Gerard R. Vetter is a Standing Chapter 13 Trustee for the District of Maryland.