3% Change In Debtor’s Income Not Enough for Modification

Posted by NCBRC - October 7, 2022

The bankruptcy court abused its discretion when it granted the trustee’s motion to modify the debtor’s chapter 13 plan to capture the $300.00/month the debtor saved when he refinanced his home loan where the change in the debtor’s financial circumstances was not “substantial” as a matter of law. Martinez v. Gorman (In re Martinez), No. 21-1077 (E.D. Va. June 16, 2022).

The debtor confirmed a plan under which he agreed to surrender his one-half interest in property he owned jointly with his ex-wife. The plan also provided that he would continue to make monthly mortgage payments of $3,710 outside the plan which payments were designated in the plan as “alimony.” Notwithstanding these provisions, the debtor did not surrender his half-interest and the bankruptcy court permitted him to refinance the mortgage for a savings of $300/month. The trustee did not oppose the refinancing agreement, but the day after it was executed, the trustee filed a motion with the court to modify the debtor’s plan under section 1329, to capture the savings for the benefit of unsecured creditors. The bankruptcy court granted the motion and the debtor appealed to the district court.

The district court reviewed for abuse of discretion, which it found results when the bankruptcy court’s “conclusion is ‘guided by erroneous legal principles’ or ‘rests upon a clearly erroneous factual finding.’” The court noted that, in the absence of compelling circumstance, the doctrine of res judicata protects a confirmed plan against modification in the event of modest or inconsequential changes to the debtor’s finances. Modification is warranted only when the change to the debtor’s financial condition is “unanticipated and substantial.”

Because the plan contemplated that the debtor would surrender his interest in the property, the bankruptcy court correctly found the change in the debtor’s financial circumstances, based on refinancing, could not have been reasonably anticipated at the time his plan was confirmed.

The court turned to the issue of substantiality. There, the bankruptcy court concluded that the addition of $300 to the debtor’s funds was significant without applying any reasoning other than the bare statement that “300 dollars is 300 dollars. 300 dollars over the next four years times, what — four years times 3,600, that’s 12,000 dollars plus. I think that’s substantial. That’s substantial in my book.”

The district court disagreed. The court relied on In re Murphy, 474 F.3d 143 (4th Cir. 2007), which held that “[a] debtor’s proposal of an early payoff [of a bankruptcy plan] through the refinancing of a mortgage simply does not alter the financial condition of the debtor and, therefore, cannot provide a basis for the modification of a confirmed plan.” The court also surveyed other cases where changes of 50% or more to the debtor’s income were deemed substantial. In this case, the debtor’s savings by reason of refinancing his mortgage was less than 3% of his total income. The court found as a matter of law that this change was not enough to overcome the res judicata effect of the confirmed plan.

The inquiry did not end there. Although the bankruptcy court addressed only the $300 increase in the debtor’s income, the district court noted that the fact that the debtor retained his interest in the property despite the provision in the plan requiring him to surrender it, amounted to a second unanticipated change in his financial circumstances.

Because the bankruptcy court did not address the issue, the record did not reveal how this change affected the debtor’s financial condition. As the court said, “For example, now that Debtor has been permitted to retain his interest in the Gulliver Road property, Debtor may have access to additional equity in that property. It is also unclear whether Debtor is obligated to pay any additional alimony to his ex-wife, as the mortgage payments, which were lowered by $300 as a result of the refinancing, were classified as alimony-type payments to Debtor’s ex-wife under the Confirmed Plan. The record does not explain, and it is therefore unknown, whether Debtor’s $3,700 monthly mortgage payments, which were classified as alimony-type payments, were reduced to $3,400 monthly payments as a result of the refinancing.”

The court found that, even though the $300 reduction in mortgage payments was not “substantial” as a matter of law, these unresolved issues were relevant to whether the trustee’s motion to modify should have been granted. It therefore vacated and remanded with instructions to address the issue.

Martinez ED Va June 2022


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