CHAPTER 5, A. Post-Confirmation Plan Modification and Income Changes

• Jurisdiction: United States

A. Post-Confirmation Plan Modification and Income Changes

ABI Journal

May 2019

Maria Joyner

Nancy J. Whaley, Standing Chapter 13 Trustee

Atlanta

The nature of a chapter 13 case, as a long-term repayment plan, results in a high likelihood that chapter 13 debtors will experience changes in income and/or expenses, or will acquire additional assets after plan confirmation. The Bankruptcy Code deals with such post-petition acquired assets in § 541 (limiting property of the estate to was acquired within 180 days of filing) and in § 1306 (expanding property of the estate in for chapter 13 cases). While there is a large body of case law that addresses whether assets acquired post-petition are property of the estate in chapter 13 cases,¹ there is only one circuit decision on the specific interplay of §§ 541 and 1306.

In Carroll v. Logan,² the Fourth Circuit held that a $100,000 inheritance received three years after the filing of the chapter 13 petition was property of the estate. The court declined to limit the time period under § 541, even though an inheritance is one of the types of property of the estate enumerated in that section. The court held that even the asset types enumerated in § 541 were property of the estate past the 180-day limitation pursuant to a reading of that section in conjunction with a reading of § 1306. The majority of lower court holdings appear to be in line with the Fourth Circuit in Carroll, but the issue is far from settled. In fact, in the Northern District of Georgia, there are two recent opinions: In re Gilbert, which follows the majority, and In re McAllister, which aligns with the minority position.³

The incongruity of post-petition property and its impact as property of the estate is mentioned to show that this area of law is still developing. Increases in a debtor's post-petition income (the focus of this article) are more clearly property of the estate because § 1306(a)(2) specifically states that property of a chapter 13 estate includes "earnings from services performed by the debtor, after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 ... whichever occurs first." Despite clear identification as estate property, the Bankruptcy Code is less clear on how increases in employment income affect a debtor's confirmed plan. A hotly litigated topic is whether a change of circumstance after plan confirmation is necessary to modify the plan. For those courts that answer in the affirmative, the question then becomes: What type of change of circumstance is necessary to modify a plan due to increased income?

What Is Substantial and Unanticipated?

In In re Matusak, the U.S. Bankruptcy Court for the Eastern District of North Carolina reviewed an unsecured creditor's request to modify the confirmed plan when the creditor became aware of the debtor's increased annual income of approximately $35,000, and the debtor's subsequent objection to that modification request.⁴ In order to determine whether the modification was warranted, the court used a three-part test: (1) determine whether a substantial and unanticipated change in the debtor's financial condition has occurred; (2) if such a change is established, then ensure that the modification is for one of the purposes enumerated in § 1329(a); and (3) determine whether the modification complies with § 1329(b).⁵

Without much discussion, the court determined that the approximately $35,000 gross income increase was substantial. A more robust analysis was made for determining whether the change was "unanticipated." The debtor was a commission-based salesman, thus his income fluctuated throughout the year. The creditor was the debtor's former spouse and worked in the same field as he did. Based on the known variation of his income, the court found that a post-petition increase of income could have been anticipated by all parties, and thus found that the first prong of the test was not met. The court ultimately did rule that the plan would be modified, but on different grounds. However, the court found that the debtor was precluded from objecting to modification of his plan due to litigation that commenced pre-confirmation, whereby the ex-spouse withdrew her...