Covid Mortgage Forbearance Justifies Plan Modification

Posted by NCBRC - August 2, 2022

The court granted the trustee’s motion to modify the debtor’s chapter 13 plan, finding that the debtor’s mortgage deferral due to Covid was an “unanticipated and substantial” change in his financial status which he had a duty to disclose and which increased his income for 18 months during the plan. In re Ilyev, No. 17-12987 (Bankr. E.D. Va. July 26, 2022).

The below-median debtor, a Systems Administrator with a law firm, filed for bankruptcy relief in September, 2017. His confirmed plan required him to pay an initial $6,950.00, then $420 per month for the remaining 43 months for a 4% return to unsecured creditors. Under the terms of the plan, the debtor maintained his monthly $1,625.00 mortgage payments directly to the mortgagee. In April, 2022, the debtor filed a motion with the bankruptcy court to approve a covid forbearance on his mortgage payments. At that time, the debtor’s forbearance had already ended and he had not made any mortgage payments for 18 months. The debtor spent $17,000 of the money he saved on IT training for his wife, child care, and acting classes for his step-daughter. He stated that the remaining $11,000 was largely earmarked for paying outstanding medical bills.

With four months left in the debtor’s plan, the trustee moved for modification to capture the savings.

The court found that, under section 1329, modification of a chapter 13 plan is appropriate when there is an unanticipated and substantial change in the debtor’s income. In circular reasoning, the court further found that while the Code does not impose on the debtor an ongoing duty of disclosure, section 521(a)(3) and Rule 4002(a)(4) require a debtor to cooperate with the trustee and that duty of cooperation includes an obligation to inform the trustee of changes in the debtor’s financial circumstances which, like the changes supporting a modification, are substantial and unanticipated. In other words, the debtor has an obligation to disclose substantial and unanticipated changes in his financial condition in order to allow the court to determine whether the changes are substantial and unanticipated.

The court found the debtor’s savings due to the Covid deferral to meet both criteria. The Covid pandemic was an unanticipated event resulting in an eighteen-month deferral of the debtor’s largest single expense.

The debtor argued that the court could not impose a retroactive modification to capture the savings. The court was unpersuaded stating, “It is difficult for the Court to accept that the Debtor, who failed to disclose the forbearance to the Trustee for the entire eighteen-month forbearance period, can now be heard to say that a plan modification is infeasible because he has only three or four months left in his Plan.” Finding that $11,000 was likely still available for distribution and that at least some of the remaining $17,000 might also be capturable, the court ordered the debtor to submit a modified plan which it would review for feasibility and good faith.

Ilyev Bankr ED Va July 2022


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