Good Faith in the Plan Modification Context

Posted by NCBRC - December 16, 2013

Two recent cases deal with the determination good faith in the context of a chapter 13 plan modification. In re Martin, No. 10-64790 (Bankr. N.D. Ohio November 27, 2013) and In re Maxwell, No. 11-17873 (Bankr. E.D. Cal. Nov. 8, 2013).

Section 1329(b)(1), which allows for modification of a chapter 13 plan, specifically incorporates the good faith requirement of section 1325(a)(3). It does not incorporate the means test calculation for disposable income in section 1325(b)(1)(B). The courts in Martin and Maxwell each concluded that because of this omission, the “means test” of section 1325(b) is inapplicable to plan modifications under section 1329(b). Notwithstanding this conclusion, however, when addressing the trustees’ arguments that the debtor’s monthly expenses were excessive, both courts used the IRS Expense Standards referenced in the means test as an objective point of reference when scrutinizing the reasonableness of the debtors’ current expenses for the purpose of determining whether the proposed modification was in good faith.

In Martin, the court concluded that for modification purposes, “a debtor’s income and expenses are not calculated under the formulaic approach set out in § 1325(b), but instead are based on the debtor’s actual income and expenses at the time of the proposed modification.” Under a “totality of the circumstances” analysis, the court noted that the sixth circuit evaluates the debtor’s actual income, expenses and any special circumstances such as medical expenses, and construes the facts “liberally in favor of the debtor.

The debtors in Martin presented extensive evidence that even though their utilities costs were almost double the IRS Standard, they reflected the costs of the debtors’ actual use of basic utilities such as gas, water, and trash removal. Therefore, they were not found to be excessive. The court also rejected the trustee’s argument that the debtors should not be allowed transportation expenses in excess of the IRS standard. The evidence showed that the debtors’ travel tended to be between work and medical appointments. The court found that, “[e]xcept in rare circumstances, a debtor should not be forced to change their place of residence in order to reduce their transportation expenses associated with employment and doctor’s visits in order to be within the IRS Standards.” The debtors’ medical expenses exceeding the IRS standards were not challenged by the trustee and the court found that they were adequately documented. The only area in which the court demanded “belt tightening” was in the expense for internet and communication expenses. There, the court found debtors’ cell phone expense to be excessive.

Martin opinion

The debtors did not fare as well in Maxwell. In that case, the trustee objected to the debtors’ motion to modify their plan where, during the course of the plan, the debtors renegotiated their residential mortgage curing the arrearage and reducing their monthly mortgage payments by approximately $1,700.

The debtors proposed a modification to their plan under which they would pay both mortgages outside the plan and reduce the monthly payment to the trustee from approximately $4,700 to $500.00 which amount was supported by their new schedules I and J. The debtors justified the new plan payments by explaining that while their mortgage payments had been reduced by approximately $1,700, their monthly household expenses had risen by almost $2,000.

The trustee argued that the debtors’ failure to commit any of their increased monthly income caused by the mortgage reduction constituted bad faith and the court agreed.

The court found that even though the Means Test’s “projected disposable income” analysis is not applicable under section 1329, the debtor’s disposable income is a factor in determining whether a modification is proposed in good faith. Quoting Sunahara v. Burchard (In re Sunahara), 326 B.R. 768, 781 (B.A.P. 9th Cir. 2005), the court said: “[O]nce a chapter 13 plan is confirmed, the question of ‘disposable income’ merges into the ‘good faith’ analysis which ‘necessarily requires an assessment of a debtor’s overall financial condition including, without limitation, the debtor’s current disposable income. . . .’” On that basis, the court, like the court in Martin, turned to the IRS standards as a reference point. It found that the debtors could not justify their food expenses which were three times the IRS standard for a family of three and which were blamed on the fact that one of the three members of the debtors’ family was a 19 year old son. The court would not allow the son to eat up the mortgage savings.

Maxwell opinion

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