Bankr. W.D.Va.: In re Sorrells- Modification of Chapter 13 plan following Inhertitance

Summary:

Steven and Christina Sorrells were near the end of their 50-month Chapter 13 plan, having made regular payments totaling a 39% dividend to unsecured creditors. After Steven Sorrells received a net $26,236 from an inherited IRA—funds he intended to use to pay off the plan early—the Chapter 13 trustee instead moved to modify the plan to require a 100% dividend to unsecured creditors, citing a substantial and unanticipated improvement in the debtors’ financial condition.

The Bankruptcy Court, applying In re Murphy, 474 F.3d 143 (4th Cir. 2007), partially granted the trustee’s motion. The court found that receipt of the IRA funds was indeed a substantial and unanticipated change in financial condition, piercing the res judicata effect of the confirmed plan. However, the court rejected the trustee’s argument that the debtors’ unliquidated claim to a future inheritance also justified modification.

Notably, the court did not rubber-stamp the trustee’s request for the full $30,000 lump sum. Recognizing the debtors’ modest lifestyle, deferred home maintenance, and legitimate household needs, the court limited the required modification to $14,986—deducting $11,250 for necessary repairs (truck inspection, furnace replacement, driveway repair) from the IRA funds.

Commentary:
In a decision that balances fidelity to the Bankruptcy Code with practical realism, Judge Connelly provides a nuanced roadmap for post-confirmation plan modifications under § 1329. While reaffirming Murphy’s substantial-and-unanticipated-change test, the court carefully distinguishes between liquid and illiquid post-confirmation assets—declining to modify the plan based on a mere inchoate expectancy in a probate estate.

Of particular note is the court’s insistence that feasibility under §1325(a)(6) cannot be met through hypothetical access to assets. For example, the court noted that if the Sorrells "had the IRA remained in an illiquid form, it would not render the same effect on his financial condition". (Virginia,  unlike North Carolina,  does not appear to allow the   exemption of inherited IRAs.  See  In re Hall, 559 B.R. 679 (Bankr. W.D. Va. 2016) versus N.C.G.S. § 1C-1601(a)(9) and In re Brooks.)  By crediting the debtors' actual household needs—car repairs, heat in winter, and safe ingress/egress—the court offers a reminder that bankruptcy is meant to rehabilitate, not punish.

The opinion does also include a caution for Chapter 13 trustees,  as Judge Connelly (herself having served as a Chapter 13 Trustee before taking the bench)  describes the tenor of the Chapter 13 trustee's argument as "disproportionate to the facts".  While in this case that rhetoric did not cross the line,  it was still evaluated for whether it violated the obligation under  §1325(a)(3)  that a motion to modify be brought in good faith.  That expectation of good faith  applies to Trustees, not just debtors.

Consumer bankruptcy practitioners should also take heed of this footnote-worthy clarification: § 1327 vests property in the debtor free and clear of claims, meaning postconfirmation asset acquisition does not ipso facto trigger modification. In rejecting the trustee’s overreach, the court reaffirms the Chapter 13 bargain—creditors get their due, but debtors retain some hope of financial stability.

This case offers an excellent example of how careful recordkeeping, transparency, and updated schedules (even mid-plan) can inoculate debtors from trustee accusations of bad faith or nondisclosure. Debtor’s counsel did well to preserve credibility, enabling the court to adopt a measured approach rather than imposing the draconian remedy sought by the trustee.  It follows the logic from In re Adams,  where the debtors were, in addition to their exemptions,  entitled to keep the portion of the proceeds from the sale of their home resulting from the pay-down of the mortgage during their Chapter 13 case.

It also offers a persuasive counterweight to Carroll v. Logan, 735 F.3d 147 (4th Cir. 2013), distinguishing between property-of-the-estate status and feasibility or necessity of modification.

This is a valuable decision for Chapter 13 attorneys navigating the increasingly common terrain of post-confirmation inheritances and other windfalls. The court's refusal to apply a blanket rule in favor of 100% plan funding from such assets will resonate with consumer practitioners throughout the Fourth Circuit.

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