Ruby Taylor filed a Chapter 13 bankruptcy on May 24, 2019, with a plan confirmed that paid both the mortgage for her home and the payment on her car directly and estimated no dividend to general unsecured creditors, of which the U.S. Department of Education had a claim for $355774.02 or 92% of such claims.
Approximately 16 months later, Ms. Taylor sought to sell her home for $160,000, which was 33% more than the initially scheduled value for the property. That sale generated net proceeds of $45,826.85, which the bankruptcy court allowed her to retain her available homestead exemption of $30,000, ordering the remaining $15,826.85 be paid to the Chapter 13 Trustee. Ms. Taylor consummated the sale, tendering those funds to the Trustee, who filed a Motion to Modify the plan to pay those to general unsecured creditors. Ms. Taylor contending that the funds should be release to her. The bankruptcy court granted the Trustee motion, explicitly finding that the increase in equity was "substantial and unanticipated", modifying the her plan to both pay the excess funds to general unsecured creditors and requiring continued payment by Ms. Taylor of $300.00 a month for the remaining applicable commitment period of the plan. Ms. Taylor appealed.
The district court began with the standard of review for a motion to modify a Chapter 13 plan being abuse of discretion. In re Murphy, 474 F.3d 143, 149 (4th Cir. 2007) and that "it is well-settled that a substantial change in the debtor's financial condition after confirmation may warrant a change in the level of payments." In re Arnold, 869 F.2d 240, 241 (4th Cir. 1989). Despite Ms. Taylor's argument to the contrary, the district court held that the bankruptcy court had not abused its discretion in finding that the appreciation was neither substantial or unanticipated.
Ms. Taylor further argued that the bankruptcy court's order directing the Trustee to disburse the excess, nonexempt funds immediately was inappropriate, as she should have been allowed to decide when, how, and whether she would make that plan payment. The district court rejected this holding that "the bankruptcy court may ... exercise oversight of non-exempt property, whether termed estate property or property of the Debtor, after confirmation of the Chapter 13 plan."
Ms. Taylor sought the release to her of the excess $15,826.85 by means of a Motion for Turnover, which both following Rule 7001 and City of Chicago v. Fulton, would seem to require an Adversary Proceeding.
Further, Ms. Taylor did not, in either the Motion for Turnover and the Opposition to the Trustee's Motion to Modify, seem to make an attempt to either show a good faith basis for why the excess funds (in addition to the exempt $30,000) were necessary nor how, if she retained those funds, she would be able to repay that amount over the remaining course of her plan. While there is an argument (rejected here by both the bankruptcy and district courts) that such is not required by the Bankruptcy Code, the more pragmatic approach is often to "tell this story", first to the Trustee, who has enormous discretion in whether to seek a modification, and then to the bankruptcy court. The more doctrinaire approach often does a disservice to creditors.
Additionally, Ms. Taylor may also have been better served by converting this case to Ch. 7 prior to the sale of the house. While that might not have avoided the Ch. 7 Trustee seeking to retain the $15,826.85, this could often more easily be negotiated. Especially as Ms. Taylor could have, following conversion, consolidated her student loans (even if there was only a single student loan) without court authorization, turning it into a postpetition debt that would not have been paid from the Chapter 7 estate. As these funds barely put a dent in Ms. Taylor's student loans, she is presumably relying on an eventual forgiveness following an Income Driven Repayment plan (possibly in as few as 10 years under a Public Servicer Loan Forgiveness) which does not look towards assets whatsoever.
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