Summary:
Adams initially filed a pro se Chapter 7 bankruptcy disclosing his residence on Schedule A of his petition, stating that its value was "Unknown", but, after the Chapter 7 Trustee took preliminary steps to sell the property, Adams hire an attorney, filed an amendment asserting a value of $260,000 and converted the case to Chapter 13. The Chapter 13 plan was confirmed with a requirement of $79,705.55 dividend under the Best Interests of the Creditors test. Six months after confirmation, Adams sought to sell his residence for $289,000, with the Trustee then seeking, through a subsequent Motion to Modify, to increase the liquidation requirement to $109,043.
The bankruptcy court, relying on In re Murphy, 474 F.3d 143 (4th Cir. 2007), rejected Adams' argument that the original $79,705 requirement was res judicata, finding that the sale constituted a "substantial change" in Adam's financial circumstances that was "unanticipated" at confirmation. As a result under 11 U.S.C. §1329(a), the modified or "amended" plan required a new analysis of the Best Interests of Creditors as of the “as of the effective date of [that] plan.”
The bankruptcy court did, nonetheless, allow Adams to retain not only his homestead exemption, but also “any amount of proceeds attributable to principal reduction resulting from Debtor’s post-petition payments and any portion of the liquidation value previously paid to creditors in this case.”
Commentary:
As again, this case points to the insufficiency of the homestead exemption in North Carolina, as the $35,000 that Adams was allowed to retain is certainly insufficient for a down payment on nearly any home. Hopefully exemption reform is something that the North Carolina Bar Association Bankruptcy Section will take up soon.
Additionally, with a mortgage owed, per the Proof of Claim, of $135,255.64, it would seem that at the time of confirmation, the Best Interests of the Creditors analysis may not have taken into account the hypothetical costs of the Chapter 7 Trustee, which would have been $6,437, reducing the required dividend to as little as approximately $57,308.00.
Similarly, even once the property was sold, the Best Interests of the Creditors test at 11 U.S.C. § 1325(a)(4) still only requires that unsecured claims receive "not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7." This would still reduce the amount paid to unsecured creditors by the hypothetical Chapter 7 Trustee's commission of approximately $7,742. As that amount would not be paid to unsecured creditors in a Chapter 7, it should instead have been retained by Adams. The point of the Best Interest of Creditors test is not to ensure that the debtor feels the same pain as in Chapter 7, but that creditors get the same benefit. This is another of the advantages that Congress included to encourage Chapter 13 over Chapter 7, but one that courts, overzealous Chapter 13 Trustees and even debtor's attorneys, when too fixated on other failed arguments, do not always seem to recognize.
This case, and others on the same issue, were discussed extensively during the ABI presentation Post-Petition Appreciation: When Things Go Up, Who Gets What?
For a copy of the opinion, please see:
Blog comments