Changing the Plan Payment in Chapter 13 Bankruptcy: What to Know

It's possible to change a Chapter 13 plan payment

Changing the Plan Payment in Chapter 13 Bankruptcy by Motion to Modify: What to Know

A Motion to Modify can drop the Chapter 13 plan payment

You can change your payment amount in Chapter 13 bankruptcy, and this is done by a Motion to Modify. It can lower your payment. But beware, someone can also raise it. Here is everything you need to know.

So I can change my monthly payment for a Chapter 13?

Yes. Of course, there has to be a reason (and I want more money for movies and travel isn’t good enough). Let’s look and see what the law says.

Bankruptcy Code for Modifications of Plan: 11 USC 1329

Section 1329 of the Bankruptcy Code is the statute or law that discusses when you can modify or change your Chapter 13 plan.  Section 1329(a) is the common one that comes up. It says:

At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to increase or reduce the amount of payments on claims of a particular class provided for by the plan modification

Let’s unpack this a little bit.

At any time after confirmation

This is saying that the plan can be modified after the case is confirmed. Confirmation is the stage of a Chapter 13 case where the proposal that we put together — the Chapter 13 Plan — is accepted and approved by the court. So, Section 1329 kicks in once the case is confirmed. Prior to that, it’s just a new proposal, which is what we can an amended plan. Amended, modified… they mean the same thing, but the rules and process can vary depending on the stage and if the plan has been confirmed.

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Before the completion of payments

It’s very important that you can’t modify a Chapter 13 plan once all the payments have been made. Now, you might ask, “why would I want to modify the plan if I’m basically finished?” The answer is sometimes there are surprise claims or other things that spring up at the last minute. The trustee then demands a balloon payment to finish the case, which more often than not the debtor doesn’t have. Normally, you’d want to modify the plan, but if the last payment has been made, it’s too late.

Plan can be modified upon request of debtor, trustee, or claims

Quite often, one of my clients will ask to have their plan modified if their income has dropped during the plan term. Usually, Section 1329 and a Motion to Modify (or MOMOD) is the solution. We can typically lower the monthly plan payment to something that is affordable after the income change. (however, there sometimes are other factors in Chapter 13 like liquidation value, etc that require the payment to stay higher; your mileage may vary). So, debtor would want to file a MoMod, or a Motion To Convert to Chapter 7, as a solution to change in circumstances.

While Section 1329 is helpful so that the debtor can try to lower the payment, this can go both ways. Trustee or a creditor can also file a motion to modify.  Why would she want to do that you ask? Stay tuned:

Increase or reduce the amount of payments

There it is: the trustee (or a claim/creditor) may want to file a Motion to Modify to increase the payment. Why? Because there is more income available due to a new job or a pay raise. This typically would happen after the trustee sees the annual tax returns or pay stubs during the Chapter 13, and discovers the debtor can afford to pay more.

The Standard: Section 1325, Good Faith, Substantial, Unanticipated

Section 1329 Points to Section 1325: Good Faith

What is the standard for the court to allow a modification? It’s spelled out in Section 1329(b)(1), which says, “Sections 1322(a), 1322(b), and 1323(c) of this title and the requirements of section 1325(a) of this title apply to any modification under subsection (a) of this section.”

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Section 1325(a)(3) says in pertinent part, “the plan has been proposed in good faith.”

Substantial and Unanticipated?

The Fourth Circuit Court of Appeals has held that “[a] debtor’s proposal of an early payoff [of a bankruptcy plan] through the refinancing of a mortgage simply does not alter the financial condition of the debtor and, therefore, cannot provide a basis for the modification of a confirmed plan.” In re Murphy, 474 F. 3d 143, 150-151 (4th Cir, 2007). It then went on to rule, “a debtor must experience a substantial and unanticipated change in his post-confirmation financial condition before his confirmed plan can be modified pursuant to §§ 1329(a)(1) or (a)(2).”  Id. at 151.

The Ninth Circuit instead interprets Good Faith

9th Circuit BAP: substantial and unanticipated isn’t in the Bankruptcy Code

However, closer to home here in the Ninth Circuit, the standard is different from that in the Fourth Circuit. “Notably missing from § 1329 is any express requirement that a substantial and unanticipated change in the debtor’s financial circumstances is a threshold requirement to overcome the res judicata effect of a confirmed plan under § 1327(a).”  In re Mattson, 468 B.R. 361, 367-368 (9th Cir BAP, 2012). “The First, Fifth and Seventh Circuits have rejected this approach and do not impose on parties seeking to modify a confirmed plan the threshold requirement of the substantial unanticipated change test.”  Id. at 368.

Stick to Good Faith

The Ninth Circuit Court of Appeals has ruled on this, providing a ‘good faith’ standard: “whether the debtor has misrepresented facts in his plan, unfairly manipulated the Bankruptcy Code, or otherwise proposed his Chapter 13 plan in an inequitable manner.” In re Goeb, 675 F. 2d 1386, 1390 (9th Cir, 1982).  At footnote 9, the 9th Circuit in Goeb stated, “We emphasize that the scope of the good-faith inquiry should be quite broad.”

And here’s what Good Faith is

Now, back to Mattson, interpreting what good faith is. The 9th Circuit Bankruptcy Appellate Panel continued: [N]o single factor is determinative of the lack of good faith….. [D]eterminations of good faith are made on a case-by-case basis after considering the totality of the circumstances.” Id. at 371-372. “We continue to accept that a good faith analysis under § 1325(a)(3), although not an exact science, adequately guides the exercise of the court’s discretion for deciding plan modification issues.” Id. at 371. Summing up, it wrote: “At bottom, determinations of good faith are made on a case-by-case basis, after considering the totality of the circumstances.” Id. at 372.

So, in the Ninth Circuit, the guidance is given that to modify a Chapter 13 plan payment, bankruptcy courts look at good faith, using their discretion, while reviewing the totality of the circumstances.