Shortening Plan Duration without Decreasing Payment Amount Constitutes Modification

Posted by NCBRC - May 9, 2014

A proposed change to a confirmed chapter 13 plan that would pay creditors the same amount owed through the confirmed plan over a shorter period of time constitutes a “modification” to which section 1329 applies. In re Refosco, No. 13-cv-01219 (W.D. Pa. April 9, 2014). In Refosco, the debtors confirmed a plan for sixty months with monthly payments of $4,976.2. Three weeks after their plan was confirmed, the debtors’ parents agreed to lend them the money necessary to pay off the plan. The debtors filed a “Motion for Early Payoff of Chapter 13 Plan” seeking to amend the term of the Confirmed Plan from sixty (60) months to twelve (12) months, pay the pre-petition mortgage arrears claims, pay their third mortgage in full, pay the priority claims of the Pennsylvania Department of Revenue and the United States Internal Revenue Service, and pay their attorneys’ fees. They proposed to pay their unsecured creditors roughly 10% of their claims.

The trustee opposed the motion arguing that it was a ‘Modification” under section 1329 and required that the plan extend for the applicable commitment period of three years. The trustee also argued that the proposal must fail because it did not satisfy the liquidation alternative test as required by  section 1325(a)(4) and the good faith requirement under section 1325(a)(3).

The bankruptcy court granted the debtors’ motion. In re Refosco, No. 11-27174, 2013 WL 3489923, at *1 (Bankr. W.D. Pa. July 9, 2013). Relying on In re Miller, 325 B.R. 539, 541 (Bankr. W.D. Pa. 2005), court found that, while shortening the plan length would have the literal effect of a modification, it was not one. The court reasoned that “because unsecured creditors would be paid their 10% distribution within a shorter time period than that under the Confirmed Plan, unsecured creditors are actually benefited by the Motion after considering the time value of money.”

The District Court reversed finding that the bankruptcy court erred when it injected a “prejudicial effect” element to consideration of whether a change to a chapter 13 plan constituted a modification. The court found that an alteration to the duration of a plan fell within the plain language of the modification statute. The court noted that courts have disagreed as to whether the a plan modification under section 1329 must comply with section 1325(b), which requires a commitment period of five years, three years, or less if all unsecured claims are paid in full over a shorter period. The issue was not dispositive, however, as the Bankruptcy Court never reached the question of whether the plan could be modified under section 1329.

Finally, the court disagreed with the bankruptcy court’s finding that the proposal would necessarily benefit the unsecured creditors. In this case, those creditors were to receive only 10% of what was owed them. By ending the plan early, the creditors would be deprived of the possibility of an increase in debtors’ income within the applicable commitment period.

Refosco opinion


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