Co-Debtor’s Death Drops Debtor to Below-Median Permitting Reduced ACP

Posted by NCBRC - March 31, 2015

When the major contributor to the debtors’ joint chapter 13 plan died, the surviving spouse fell to below median status and the applicable commitment period fell from 5 years to 3 years. In re Childers, No. 10-10405 (Bankr. N.D. Tex. Jan. 26, 2015).

Deborah and Scotty Childers entered into a chapter 13 plan with a projected payout to unsecured creditors of 9.25%. Just under four years into the plan, Scotty died. Although Deborah was entitled to exempt the proceeds from her husband’s life insurance policy, she moved to modify her plan to satisfy the remaining obligations in one lump sum using some of those funds. The trustee objected to the early payout arguing that because the plan did not pay 100% to unsecured creditors, Deborah was obligated to remain in the plan for the full applicable commitment period of five years.

Troubled by the trustee’s nonsensical opposition to the early payoff, the court speculated that if the debtor were required to complete the plan over five years she would likely withdraw the offer to use the insurance proceeds thereby eliminating the certainty of completion of the plan as confirmed. In light of the fact that her husband had provided the bulk of plan payment, she might also choose to convert her plan to chapter 7. Neither of these possibilities would benefit creditors. The court set off in search of an appropriate way to permit the debtor’s “generous gesture.”

The court first questioned whether the debtor’s offer of early payoff that did not otherwise change the terms of the plan constituted a modification at all, noting that In re McCollum, 348 B.R. 377, 389 (Bankr. E.D. La. 2006), held that it did not. The court found that this avenue did not provide the sought after answer. Section 1329 specifically provides that a modification may extend or reduce the time for payments.

The court next considered the possibility that modifications which specifically require compliance with subsection 1325(a), need not comply with the applicable commitment period set forth in subsection 1325(b). [For instance, the court in In re Gonzalez, No. 11-16677 (Bankr. S.D. Fla. Nov. 17, 2014), appeal dism’d for lack of juris., No. 15-10265 (11th Cir. Feb. 17, 2015) found that a modification is not subject to the applicable commitment period requirement.] Again this option, while open to debate, was not a satisfactory resolution of the case before it. The court noted that many courts have found that subsection 1325(b) applies to a modification under section 1329 and that that is a logical reading of the legislation.

Turning to application of subsection 1325(b) the court recognized that courts such as Whaley v. Tennyson (In re Tennyson), 611 F.3d 873 (11th Cir. 2010), have found that the applicable commitment period is a temporal requirement rather than a mere multiplier. But the court found that the facts in this case slipped around the five-year requirement argued by the trustee. While section 1325(b) provides for a five-year commitment period for above-median debtors, when Scotty died Deborah’s income plummeted, thereby rendering her a below-median debtor, with a three-year applicable commitment period. Because the plan was well passed the three year period the court found that she could pay off the plan in a shorter time.

The court held a hearing on the trustee’s motion for reconsideration on March 25, 2015.

Childers bky opinion

Contrast this case with In re Moglia, No. 11-35022 (Bankr. D. Ore. Dec. 30, 2014), where a creditor moved to modify the debtor’s chapter 13 plan, in part to increase the applicable commitment period from 36 months to 60 months based on an increase in the debtor’s income moving him from below-median to above-median post-confirmation. The court denied the motion finding that the applicable commitment period set forth in section 1325(b) does not apply to modifications (citing In re Sunahara, 326 B.R. 768, 781 (B.A.P. 9th Cir. 2005). “If § 1325(b)(4) does not apply to a modified plan, then the applicable commitment period cannot change merely because debtor’s income increased from below median to above median during the applicable commitment period.” (citing 8 Collier On Bankruptcy ¶ 1325.11[4][d] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2013)).

Moglia Bank Ore Dec 2014

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