National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

Plan modification

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Trustee May Modify Plan to Capture Proceeds from Sale of Employee Stock Options

The bankruptcy court did not abuse its discretion in permitting the chapter 13 trustee to modify the debtor’s plan to capture proceeds from the sale of stock options that the debtor received as part of his employment compensation. Berkley v. Burchard (In re Berkley), No. 19-1197 (B.A.P. 9th Cir. April 17, 2020).

Mr. Berkley’s chapter 13 plan was confirmed in April, 2015. In 2016, he became CEO of Antares Audio Technologies. Part of his compensation was receipt of stock options in the company. After he had completed 57 months of payments on his chapter 13 plan, Mr. Berkley notified the trustee that Antares was being sold and that his stock options would be bought out for $3.8 million. The trustee moved to modify the plan to incorporate a portion of the sale proceeds to pay off Mr. Berkley’s creditors at 100%. The bankruptcy court granted the motion to modify and Mr. Berkley appealed. [Read more…] about Trustee May Modify Plan to Capture Proceeds from Sale of Employee Stock Options

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Plan May Be Modified to Incorporate HAVEN Act Veteran’s Benefits Exclusions

The Bankruptcy Court for the Eastern District of Michigan found that the debtor may modify her chapter 13 plan to reduce her plan payments based on the post-confirmation enactment of the HAVEN Act, which provides for exclusion of veteran’s disability benefits from CMI. In re Gresham, No. 18-56289 (Bankr. E.D. Mich. March 10, 2020).

In August, 2019, Congress enacted the Honoring American Veterans in Extreme Need Act (HAVEN), which articulates an “express exclusion to CMI for certain compensation, pension, pay, annuity, or allowance paid ‘in connection with a disability, combat-related injury or disability, or death of a member of the uniformed services.’” The stated purpose of the amendment was to correct an “obvious inequity” in section 101(10A) which excludes social security benefits from CMI but not similar veteran’s benefits. As a result of the new legislation, the chapter 13 debtor here sought to modify her 100% chapter 13 plan to exclude those benefits from her CMI and reduce her monthly plan payments. The trustee objected, seeking the court’s direction as to the appropriate application of the HAVEN Act in light of the fact that it was enacted after the debtor’s plan was confirmed without objection. [Read more…] about Plan May Be Modified to Incorporate HAVEN Act Veteran’s Benefits Exclusions

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Debtor May Not Modify to Surrender Residence after 60 Month Plan Complete

Debtors were precluded from modifying their plan to surrender their residence where the surrender was a “payment” under the plan and was beyond the sixty-month plan period. Derham-Burk v. Mrdutt (In re Mrdutt), No. 17-1256 (B.A.P. 9th Cir. May 6, 2019).

When chapter 13 debtors, Christina and David Mrdutt, filed their bankruptcy petition, Wells Fargo held two liens on their residence. The first lien was under-secured and the second was wholly unsecured. The Mrdutts were also almost $65,000 in arrears on their mortgage. They proposed a plan providing for curing their mortgage arrearage either after loan modification or as proposed in a later plan modification. In the meantime, the Mrdutts agreed to maintain direct mortgage payments to Wells Fargo outside the plan.

The bankruptcy court confirmed their plan while their request to modify the primary mortgage was still pending with Wells Fargo. The Mrdutts made all 60 of their plan payments but failed to maintain necessary direct payments to Wells Fargo. Ms. Mrdutt died of cancer during the bankruptcy, and Wells Fargo, being Wells Fargo, refused to discuss loan modification with Mr. Mrdutt because only Ms Mrdutt’s name was on the loan. Wells Fargo never approved a loan modification, and the mortgage arrears were not cured either through the plan or outside it. [Read more…] about Debtor May Not Modify to Surrender Residence after 60 Month Plan Complete

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District Court Certifies Appeal of 100% Plan Language Restricting Right to Modify

In Brown v. Viegelahn, No.18-282  the District Court for the Western District of Texas, on its motion, certified an appeal to the Fifth Circuit to resolve a dispute among lower courts concerning the so-called Molina language in which a Chapter 13 debtor paying less than his entire disposable income to his 100% plan, is required to agree that he will not later modify the plan to pay less than 100% to unsecured creditors. (appeal certified, Jan. 22, 2019).  [Read more…] about District Court Certifies Appeal of 100% Plan Language Restricting Right to Modify

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Court Takes a Hard Line on Curing Direct Mortgage Payment Default

A loan modification to cure a post-confirmation default on direct mortgage payments must be approved by the court prior to expiration of the chapter 13 plan. In re Hanley, 2017 WL 3575847, No. 11-76700 (Bankr. E.D. N.Y. Aug. 14, 2017).

Brian and Anahi Hanley’s confirmed chapter 13 plan provided for cure of their mortgage default through the plan and for regular mortgage payments to be made directly to the mortgagee, Nationstar Mortgage, LLC. They fell behind on their direct mortgage payments and, several months before completion of their plan, they entered into a trial loan modification which would cure the post-confirmation default. Though the Hanleys made all payments under the loan modification, they failed to sign and return the Loan Modification Approval Letter within the time required by Nationstar.

At the expiration of their plan, Nationstar filed a Rule 3002.1 Response notifying the court of the default based on the loan as it stood prior to the trial loan modification. The trustee moved to dismiss their bankruptcy without discharge. The Hanley’s moved to strike Nationstar’s Response and sought to modify their plan to allow them to cure the default in accordance with the terms of the loan modification.

For purposes of its decision, the court adopted the Hanleys’ factual assertion that the parties had agreed to the loan modification but had not submitted it to the court for approval. It thus framed the issue as “whether a chapter 13 debtor may cure an acknowledged default in post-petition direct mortgage payments, to be made pursuant to a confirmed chapter 13 plan, through a loan modification approved after the expiration of the 60th month.”

In answer to this question, the court found that the debtors had two choices for dealing with the post-petition default: modify the loan or modify the plan. It explained that a loan modification entered into by the parties outside the plan may cure a default even though the new loan terms are not memorialized in a plan modification. Alternatively, the cure of a post-confirmation default may be accomplished through a plan modification without an agreement between the parties to modify the loan. However, both options, the court emphasized, required approval by the court prior to expiration of the plan.

Acknowledging the “draconian” nature of denying discharge after the Hanleys had made all plan payments for five years, the court reasoned that its equitable powers were constrained by the Code and the terms of the Hanleys’ plan. Section 1328(a) makes discharge contingent upon completion of all plan payments, and relevant case law establishes that where a plan provides for mortgage payments outside the plan, those payments must be current as well.

The court noted that there is a line of cases in which courts have held that post-confirmation plan modifications to cure post-petition mortgage defaults are not permitted at all under section 1329. The court disagreed with or distinguished those cases, finding that, where, as here, the secured creditor’s rights under the loan agreement would not be altered by the modification, section 1329(a)(2) permits a modification extending the time for repayment. The court reiterated, however, that any such plan modification must take place prior to the expiration of the plan.

The court also recognized that some courts permit chapter 13 debtors to cure defaults post- plan completion either on equitable principles or on the theory that “the debtors are not seeking to extend the plan, rather they are only curing a default on already scheduled payments.” The court declined to adopt their reasoning finding instead that the Code does not allow for leeway in curing a default on plan payments. Citing sections 1322(a)(4), (d)(1), (d)(2), 1325(b)(1)(B) and 1329(c), and calling it a “drop dead jurisdictional deadline,” the court concluded that the right to discharge requires all plan payments be complete at the expiration of the plan.

Nor would the court permit a retroactive loan modification to cure the default in light of Nationstar’s position that it had not ultimately agreed to the modification.

The court granted the trustee’s motion to dismiss under section 1307(c)(6) due to a “material default.”

Hanley Bankr ED NY opinion Aug 2017

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Plan Modification to Surrender 910 Vehicle Permissible

So long as the modification is proposed in good faith a debtor may modify a plan which originally provided for a “910 Claim” to be paid off in its entirety, to one in which she surrenders the vehicle and treats any deficiency as unsecured. In re Fayson, No. 16-10013 (Bankr. D. Del. July 13, 2017).

After experiencing maintenance problems and a dispute relating to an undelivered warranty on her 910 vehicle, Tabitha Fayson sought to modify her Chapter 13 plan to surrender the vehicle and treat the deficiency as unsecured. Citing In re Nolan. 232 F.3d 528 (6th Cir. 2000), the creditor argued that the modification she sought was prohibited under the Code. The court disagreed and joined the majority of bankruptcy courts finding that treatment of 910 claims may be modified in the manner sought by Ms. Fayson. [Read more…] about Plan Modification to Surrender 910 Vehicle Permissible

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Direct Payments to Mortgagee are “Payments under the Plan”

“A Chapter 13 debtor’s direct payments to a secured creditor under a ‘cure and maintain’ plan are ‘payments under the plan’ for purposes of § 1328(a), and a debtor who fails to make such payments is not entitled to a discharge under 11 U.S.C. § 1328(a).” In re Coughlin, No. 11-76202 and In re Sangamaya, No. 12-71109 (Bankr. E.D. N.Y. June 15, 2017). [Read more…] about Direct Payments to Mortgagee are “Payments under the Plan”

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Modification Based on Increased Ability to Pay

The trustee may modify a chapter 13 plan based on the debtor’s post-confirmation increase in ability to pay. Germeraad v. Powers (In re Powers), No. 15-3237 (7th Cir. June 23, 2016). Elvie Owens-Powers and Myrick Powers had a confirmed plan under which they would pay off their secured creditors and pay $22,000 toward their unsecured debts. Upon receiving their tax return during the plan, the trustee noticed a $50,000 increase in Mr. Powers’ income and sought an order requiring them to modify their plan under section 1329 to increase their monthly plan contributions. The bankruptcy court denied the motion to modify on the basis that it was not supported by any provision of the Code, and, alternatively, that the facts did not support modification. In re Powers, 507 B.R. 262 (Bankr. C.D. Ill. 2014). The district court affirmed on the basis that the Code did not permit the modification. It did not address the alternative factual basis for the bankruptcy court’s decision. In re Powers, __ B.R. __, 2015 WL 5725701, at *2 (C.D. Ill. Sep. 30, 2015). [Read more…] about Modification Based on Increased Ability to Pay

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Trustee’s Valuation of Unresolved Pre-Petition Cause of Action Rejected

A bankruptcy court rejected a Chapter 13 trustee’s valuation of the debtor’s pre-petition cause of action and found that an estimated value of the state court case should not be included in the plan distributions but that the plan may be modified if the debtor obtains a money judgment during the commitment period. In re Morales, No. 12-7296 (Bankr. P.R. July 2, 2015). [Read more…] about Trustee’s Valuation of Unresolved Pre-Petition Cause of Action Rejected