After the sale of her home, Ms. Smith sought a plan modification to discontinue disbursements on the mortgage, which had until that point been paid as a conduit. The Chapter 13 Trustee requested that Ms. Smith provided amended Schedules I and J or other evidence of current income and expenses. This request was refused and the Trustee objected to the modification.
Starting from In re Arnold, 869 F.2d 240 (4th Cir. 1989) the bankruptcy court held that a post-confirmation required the following:
1. A showing of a “substantial and unanticipated change in circumstances”;
2. That the modification was for one of the purposes allowed under 11 U.S.C. § 1329(a); and
3. That the modification complied with the requirements of 11 U.S.C. § 1329(b).
All parties agreed that the sale of the property was a substantial and unanticipated change in circumstances and that § 1329(a)(3) allowed the amount of distribution to be altered due to the satisfaction of its claim.
The dispute hinged on whether the fulcrum for the confirmed plan was the amount that Ms. Smith was required to pay, as the Trustee contended, or the dividend to unsecured creditors, as Ms. Smith sought to maintain. Finding that “the goal of chapter 13 is not for the debtor to pay the least amount the debtor can get away with, but instead to pay the greatest amount the debtor can afford.” As such, Ms. Smith was required to provide updated income and expense information in order to find that the modification was proposed in good faith and to meet her burden in seeking a reduction in plan payments.
Technically, a Debtor would provide supplemental or updated schedules, as she is not amending the originals, which indicates a correction.
Deferred in this opinion is the question, as mentioned in Footnote 7, of whether a mere change in a mortgage payment is sufficient require a re-evaluation of disposable income. The contention is that a conduit mortgage plan is asymmetrical, as the Trustee will may seek an increase in the monthly plan payment if the mortgage increases, but will not similarly seek a reduction if the monthly mortgage payment goes down. (An increased mortgage payment should first consume any dividend payable to unsecured creditors due to disposable income.) Instead, the debtor would have to seek her own modification, showing either decreased income or increased expenses, to lower the total monthly plan payment and prevent additional funds being paid to unsecured creditors.
This fear ignores, however, the same converse asymmetry where a debtor pays the mortgage direct- there the Trustee is (despite the applicability of Rule 3002.1(b) to all home mortgages, not just conduit payments) often not informed of those payment changes. If the mortgage increases substantially, that debtor will be motivated to seek a reduction in the plan, but will likely remain silent about the additional money on hand after the mortgage went down.
The solution is, of course, disclosure and good will in dealing with these. Trustees should recognize that if the mortgage decreases, the debtor that was previously living on a tight, subsistence budget, should be allowed have a bit more food or even joy in her life. Similarly, debtors should avoid extravagant expenses and pay what they can. And their attorneys not stand on stubborn principles.
Overwhelmingly, this is how both sides do behave.
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