As discussed previously here, Chapter 13 Bankruptcy is referred to as a wage earner’s Plan.  It enables individuals with regular income to develop a repayment plan for all or part of their debts. Under this Chapter, debtors propose a plan to make installments to creditors over three or five years. If the debtor ’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for five years. The plan must be confirmed by the Bankruptcy Court.

In these uncertain economic times, it is not uncommon for a debtor to enter into a “wage earner’s plan” which seems reasonable in light of the debtor’s income at the time the Plan is confirmed, only to later have the Plan become unworkable due to a change in circumstances such as a job loss or reduction in business revenue. In such cases, the Plan can be modified or amended (although a conversion to Chapter 7 may also be warranted).  As I previously discussed here, the precise mechanism for amended or modifying the Plan, however, can vary as it is governed by local court rules.

Although modification of the plan post-confirmation is technically permissible,  it is not permitted as a matter of course.  Amending a Chapter 13 plan after it is confirmed can be difficult, even when there are no objections to the amended Plan – as can be seen in this recent opinion from a Michigan bankruptcy court, In re Deavila. In this case, the Debtors’ Chapter 13 plan was confirmed on August 22, 2007. After confirmation, the Debtors made payments in accordance with the plan for a time, but eventually had difficulty making the payments required to keep current on their mortgage obligations to creditor M&I Bank (“Creditor”). The Creditor sought and obtained relief from the automatic stay to pursue its state law remedies including, presumably, foreclosure.

Nine months later, the Debtors proposed to amend their plan to surrender the mortgaged premises to the Creditor, to reduce plan payments, and to reduce the dividend to unsecured creditors. The Debtors served their proposed amendment on the Creditor and other interested parties included on the matrix, and the proposed amendment drew no objection. The Debtors then presented a proposed order approving the amendment, but the bankruptcy court did not enter the order, and instead scheduled a hearing.

In explaining why a hearing was necessary even though no one objected to the amendment, the bankruptcy court cited In re Nolan, 232 F.3d 528 (6th Cir. 2000), where the United States Court of Appeals for the Sixth Circuit interpreted 11 U.S.C. § 1329 – the provision relied upon by the  Deavilas – as authorizing post-confirmation plan amendments only in limited circumstances.  A debtor cannot modify a plan under section 1329(a) by: (1) surrendering the collateral to a creditor; (2) having the creditor sell the collateral and apply the proceeds toward the claim; and (3) having any deficiency classified as an unsecured claim.   The court found that, under In re Nolan, Section 1329(a) only permits modification of the amount and timing of payments, not the total amount of the claim.

This principle holds true as to the portion of a claim that is secured, where the claim is partially instead of fully secured.  Because the amendment in this case proposed to surrender collateral, the court set the Debtors’ unopposed plan amendment for hearing.  At the hearing, Debtors’ counsel and Chapter 13 Trustee’s counsel (for an explanation of what the Trustee does in Chapter 13 cases, click here) reminded the court that no creditor had objected to the proposed amendment despite proper service under Rule 2002.

The court found the absence of objection “significant but not dispositive. “  As the court explained at the hearing, the recent Supreme Court opinion in United Student Aid Funds, Inc. v. Espinosa,  130 S.Ct. 1367 (2010) does not stand for the proposition that courts may confirm Chapter 13 plans (or approve amendments) in the absence of objection. Rather, Espinosa stands for the more limited proposition that a confirmed plan is binding on all parties-in-interest, provided the plan proponent afforded such parties adequate notice, consistent with the Due Process Clause of the United States Constitution – even if the plan violates the Bankruptcy Code in some particulars. Indeed, the Supreme Court admonished bankruptcy courts to scrutinize proposed plans for conformity with the Code even in the absence of objection.

In view of Espinosa and Nolan, the court was initially inclined to withhold its approval of the proposed amended plan. After the hearing, however, the court decided to approve the amendment.  The Debtors’ Chapter 13 plan as confirmed  simply called upon the Debtors to make payments directly to the Creditor, and consistent with 11 U.S.C. § 1322(b)(2), did not modify the Creditor’s rights in any way. Their proposed amendment, which provides for surrender of the collateral to the Creditor, does not modify the Creditor’s rights either, because the plan preserved the Creditor’s lien and the proposed surrender is completely consistent with the lien and the Creditor’s rights as mortgagee. Likewise, the proposed amendment did not seek to reclassify the Creditor’s claim from secured to unsecured; it was silent on that issue.

In re Deavila highlights the potential complexity of a Chapter 13 bankruptcy.  Many, if not most, Chapter 13 bankruptcies will require the assistance of an experienced bankruptcy attorney in your jurisdiction.

-Drew Broaddus