Opinion
Case No. 96-10613-SSM
February 24, 1997
Robert R. Weed, Esquire, Falls Church, Virginia, of Counsel for the debtors
MEMORANDUM OPINION
This matter is before the court on the debtors' motion to amend their confirmed plan and for a hardship discharge. The chapter 13 trustee objects to confirmation of the modified plan on the ground that the plan violates the good faith requirement of § 1325(a)(3), Bankruptcy Code. A hearing was held on February 11, 1997 after which the court took the matter under advisement to determine whether the debtors may modify their confirmed plan under § 1329, Bankruptcy Code, to include postconfirmation mortgage arrearages at the expense of unsecured creditors and, if not, whether the debtors are entitled to a hardship discharge under § 1328(b), Bankruptcy Code.
The debtors, who are husband and wife, filed their petition for relief under Chapter 13 of the Bankruptcy Code on February 16, 1995. On April 15, 1996, this court confirmed an amended plan that had been filed on May 26, 1995. At the hearing on February 11, 1997, Mr. Awua testified that he works as a taxi cab driver. Ms. Awua did not appear at this hearing; but, the debtors' schedules indicate that she is employed as a licensed practical nurse. The debtors' original schedules reflected a net monthly income of $4,872.48 and expenses of $4,299. The amended statement of income and expenses attached to the plan confirmed by this court, however, projected net monthly income of $5,022.48 and expenses of $3,445.00. This increase in projected disposable income allowed the debtors to pay prepetition arrearages on secured claims held by Signet Bank and Chrysler Credit and a priority claim held by the Internal Revenue Service, while also providing for a 100% dividend to unsecured creditors. To do so, the debtors were to fund the plan as follows: $560 for one month; $800 for 23 months; and $945 for 36 months, for a total of $53,780 to be paid into the plan. This plan, as noted above, was confirmed by order entered on April 15, 1996.
Part of the delay in confirmation was caused by the need to resolve a pending objection to a secured creditor's claim.
At the hearing on February 11, 1997, Mr. Awua testified that due to increased competition among taxi drivers, his income has not been what he had projected. Additionally, Mr. Awua incurred greater than anticipated expenses because he chose to buy his own taxi cab, rather than lease, and the vehicle required excessive maintenance. Because of these circumstances, the debtors have fallen approximately six months in arrears, postconfirmation, on their mortgage to Signet Bank. Additionally, Mr. Awua testified that he is currently earning an average of approximately $70 per day, as opposed to a projected $110 per day.
Mr. Awua testified that he worked six days a week. Assuming that he worked fifty weeks in the year, at $110 per day, this amounts to $33,000 per year. Similarly, $70 per day would amount to $21,000 per year, for a reduction in projected income of $12,000. On cross-examination by the chapter 13 trustee, however, Mr. Awua testified that his income has gone down from $30,000 to $24,000, a reduction of $6,000. Finally, the court notes that in the statement of current income attached to the plan filed May 26, 1995, the debtor's listed Mr. Awua's monthly income as $2,730, or $32,760 per year, while on the plan filed January 9, 1997, his income is listed as $1,820, or $21,840 per year. The court does not find these minor discrepancies significant.
Signet Bank filed a motion for relief from the automatic stay on November 4, 1996. On December 3, 1996, the debtors filed the motion that is currently before the court. Signet Bank filed a response on December 13, 1996, objecting to the proposed modification. Sometime between December 13, 1996, and the date of the preliminary hearing on the relief from stay hearing, December 18, 1996, Signet and the debtors apparently settled their dispute. Pursuant to Local Rule 9022-1(F), the order resolving the relief from stay motion was to be submitted within ten days. To date, no order has been presented, and accordingly, the court does not know the exact terms of the settlement. At the hearing on February 11, 1997 on the present motion, however, debtors' counsel represented that Signet had given the debtors six months to cure the postconfirmation arrearages and had withdrawn its objection to modification of the plan. Signet was not at the hearing, and for the purpose of this motion, the court assumes that Signet Bank no longer objects to cure of the postconfirmation arrearages under a modified plan.
On January 9, 1997, the debtors filed the modified plan they are now seeking to have confirmed. This plan would be funded as follows: $560 per month for one month (which has already occurred under the confirmed plan), $800 per month for 59 months, and a one time payment of $1,400 on April 15, 1997. This plan significantly modifies the plan that is presently confirmed in several respects. First, the debtors are seeking to cure six months of postconfirmation arrearages on their mortgage owed to Signet Bank. To free up the funds to do so, the debtors are seeking to suspend payments to unsecured creditors and to Chrysler Credit for six months until the postconfirmation arrearages are satisfied under the modified plan. Second, the proposed modified plan no longer contains an escalation of payments from $800 per month to $945 per month after the 24th month; instead, it provides for the payment of $560 for one month (which has already occurred) and equal payments of $800 per month for the remaining 59 months under the plan. Because of these two changes, the projected dividend to unsecured creditors has fallen from 100% to 44%. The chapter 13 trustee has objected to the proposed modification on the basis that it has not been proposed in good faith under § 1325(a)(3), Bankruptcy Code.
Chrysler Credit is secured by the debtors' 1994 Dodge Caravan. Payments would be suspended to this creditor, but brought current, once funds become available. Chrysler Credit has not filed an objection to the modified plan.
The court notes that in the motion presently before the court, which was filed on December 3, 1996, the debtors propose to pay $800 per month until June 1997, at which time payments would decrease to $675 per month for the balance of the plan. The payments called for under the modified plan filed on January 9, 1997, are clearly at odds with the payments proposed in the motion. Since the plan was filed later in time, the court assumes it represents the debtors' actual intent.
Conclusions of Law and Discussion
This court has jurisdiction of this matter under 28 U.S.C. § 1334 and 157(a) and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(L).
I.
The court first addresses whether the debtors may modify their confirmed plan to include postconfirmation arrearages to their mortgage lender, and if so whether such modification satisfies the good faith requirement of § 1325(a)(3), Bankruptcy Code, if it thereby results in a large reduction in the dividend to unsecured creditors.
A.
Under § 1329, Bankruptcy Code, a debtor may modify a confirmed chapter 13 plan to remedy problems that arise after confirmation, but the plan, as modified, must still comply with the requirements for confirmation set forth in §§ 1322 and 1325(a), Bankruptcy Code. See § 1329(b)(1), Bankruptcy Code; In re Davis, 34 B.R. 319, 320 (Bankr. E.D. Va. 1983) (Bostetter, C.J.). Perhaps the most common reason for modifying a confirmed plan is that the debtor has been too optimistic in forecasting projected income, or has underestimated expenses, thereby causing the debtor to fall behind in plan payments or to default on postconfirmation obligations. In such a case, a debtor would naturally want to modify the plan to account for the missed payments. It is this situation that is presently before the court — the debtors were apparently overly optimistic with Mr. Awua's projected income, and after incurring unexpected expenses in repairing his taxicab, found themselves falling behind on their mortgage payments. The debtors therefore seek to modify their confirmed plan to pay six months of postconfirmation mortgage arrearages, at the expense of reducing the dividend that will be going to unsecured creditors.
Section 1329 provides in relevant part:
(a) At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to —
(1) increase or reduce the amount of payments on claims of a particular class provided for by the plan;
(2) extend or reduce the time for such payments; or
(3) alter the amount of the distribution to a creditor whose claim is provided for by the plan to the extent necessary to take account of any payment of such claim other than under the plan.
(b)(1) Sections 1322(a), 1322(b), and 1323(c) of this title and the requirements of section 1325(a) of this title apply to any modification under subsection (a) of this section.
(2) The plan as modified becomes the plan unless, after notice and a hearing, such modification is disapproved.
Courts have divided as to whether a plan may be modified under § 1329, Bankruptcy Code, to include postconfirmation arrearages on a claim secured by the debtor's principal residence. The divergent views arise because of differing interpretations of the interplay among §§ 1322(b)(2) and (b)(5), and § 1329. The majority position among courts that have considered this issue is that a plan may be modified to account for postconfirmation defaults on a claim secured by the debtor's principal residence. See, e.g. In re Haggle, 12 F.3d 1008, 1010-11 (11th Cir. 1994) ("[Section] 1322(b)(5) would permit cure of postconfirmation defaults"); In re Stafford, 123 B.R. 415, 419-421 (N.D. Ala. 1991), aff'g 121 B.R. 109 (Bankr. N.D. Ala. 1990); In re Bellinger, 179 B.R. 220, 223-25 (Bankr. D. Idaho 1995); In re Galden, 110 B.R. 341, 344-45 (Bankr. W.D. Tenn. 1990); In re Davis, 110 B.R. 834, 836 (Bankr. W.D. Tenn. 1989); In re Ford, 84 B.R. 40, 44-45 (Bankr. E.D. Pa. 1988); In re McCollum, 76 B.R. 797, 800-01 (Bankr. D. Or. 1987); see also 5 COLLIER ON BANKRUPTCY ¶ 1322-09, p. 1322-29 (Lawrence P. King Ed., 15th Ed. 1996) ("[Section 1322(b)(5)] may be utilized to cure postpetition defaults as well as prepetition defaults. Thus, where a debtor falls behind in postpetition mortgage payments provided for in a plan, the debtor may propose a modified plan to include a cure of those postpetition arrears over the remaining term of the plan.") (footnote omitted).
Section 1322(b)(2) provides that a plan may "modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims[.]"
Section 1322(b)(5) provides that a plan may "notwithstanding paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due[.]"
These courts reason that notwithstanding the prohibition on modifying the rights of holders of secured claims in the debtor's principal residence under § 1322(b)(2), the plain language of the statute permits "any" default to be cured within a reasonable time under § 1322(b)(5). See, e.g., Haggle, 12 F.3d at 1010; Bellinger, 179 B.R. at 223-24. Congress, the argument goes, could have clearly distinguished between pre- and postpetition, or pre- and postconfirmation defaults; by not doing so, it can fairly be inferred that Congress saw no need to treat them differently. See Stafford, 121 B.R. at 112 (stating that Congress could clearly have limited a debtor's ability to cure to prepetition defaults, and that since it did not so distinguish, the court would not read "any default" in § 1322(b)(5) to mean "any pre-petition default but not any post-petition default"). In response to arguments that this interpretation may unfairly disadvantage creditors, courts have found other safeguards in the Bankruptcy Code that would protect against inequitable results. These include: the requirement under § 1325(a)(3) that the plan be proposed in good faith; the availability of relief from the automatic stay under § 362; the requirement of § 1322(b)(5) that defaults be cured within a reasonable time under § 1322(b)(5); the court's power to revoke confirmation under § 1330(a) if it was procured by fraud; and finally, the broad equitable powers that the court possesses under § 105(a). See Hoggle, 12 F.3d at 1011-12; Bellinger, 179 B.R. at 225; Stafford, 123 B.R. at 421. Finally, not allowing a debtor to modify a confirmed plan to take into account postconfirmation defaults would simply encourage the debtor to dismiss his or her case and then immediately file a new case, effectively transforming what were postpetition, postconfirmation defaults into prepetition defaults. See In re Minick, 63 B.R. 440, 445 (Bankr. D.D.C. 1986).
The cited cases were all decided prior to the effective date of the Bankruptcy Reform Act of 1994, Pub.L. No. 103-394 (Oct. 22, 1994). That statute amended § 1322 to include the following subsection:
(c) Notwithstanding subsection (b)(2) and applicable nonbankruptcy law —
(1) a default with respect to, or that gave rise to, a lien on the principal residence may be cured under paragraph (3) or (5) of subsection (b) until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law[.]
(emphasis added). Again, there is no qualifying language limiting the applicability of the statute to a "foreclosure sale" conducted prepetition.
Under § 1307(b), Bankruptcy Code, a chapter 13 debtor has an absolute right to dismiss his or her case "at any time," provided the case had not previously been converted to chapter 13 from some other chapter. However, if a relief from stay motion were pending at the time the case was voluntarily dismissed, § 109(g)(2), Bankruptcy Code, would bar another filing for 180 days.
Conversely, other courts have held that §§ 1322(b)(2) and (b)(5) prohibit the modification of a claim for postconfirmation defaults of a creditor secured by the debtor's principal residence. See In re Sensabaugh, 88 B.R. 95, 96-97 (Bankr. E.D. Va. 1988) (Shelley, J.) (dicta); see also Southtrust Mobile Services, Inc. v. Englebert, 137 B.R. 975, 984-86 (N.D. Ala. 1992), overruled by In re Hoggle, 12 F.3d 1008 (11th Cir. 1994); In re Cotton, 102 B.R. 891, 892-93 (Bankr. M.D. Ga. 1989) (not permitting a modification of postconfirmation arrearages; however, the debtor in that case did not grant the mortgage until after confirmation). These courts reason that confirmation of the debtor's chapter 13 plan vests the property back in the debtor's possession with the result that creditor collection activities for a postconfirmation default are not subject to the automatic stay of § 362, Bankruptcy Code. In re Nicholson, 70 B.R. 398, 400-01 (Bankr. D. Colo. 1987). Additionally, since § 1322(b)(5) requires that any cure take place within a "reasonable time" and that the debtor maintain payments while the case is pending, permitting modification of a plan to include postconfirmation defaults would subvert the intention of the statute. Sensabaugh, 88 B.R. at 96. Allowing a debtor to modify a plan to include postconfirmation defaults could expose the secured creditor to repeated defaults, and repeated modifications, with the result that postpetition payments would continually be deferred. In an extreme case, it could be argued that no postconfirmation payments need be made during the pendency of the plan if the creditor were protected by a sufficient equity cushion. Nicholson, 70 B.R. at 401.
In the present case, however, the court need not resolve this difficult issue. At the hearing on February 11, 1997, debtors' counsel represented that the affected secured creditor Signet Mortgage Corporation, has consented to having postconfirmation arrearages due to it be included in a modified plan and brought current within six months and has withdrawn its objection to the debtors' modified plan. The statutory language relied on in Sensabaugh and similar cases is clearly intended to prevent the rights of residential mortgage holders from being unilaterally modified. Nothing in the statute, however, prohibits such rights from being modified with the mortgage holder's consent. Thus, regardless of whether postconfirmation arrearages may be folded into a modified plan over the secured creditor's objection, in the context of the present case the cure of postconfirmation arrearages within the plan is not, standing alone, a bar to confirmation.
B.
Having determined that the debtors may modify their confirmed plan to include postconfirmation arrearages on their mortgage, the court must consider whether the debtor's plan satisfies all other requirements for confirmation. See § 1329(b), Bankruptcy Code; In re Davis, 34 B.R. 319, 320 (Bankr. E.D. Va. 1983). Here, the only ground asserted for denying confirmation of the modified plan is the trustee's objection that, as modified, the plan fails to satisfy the good faith requirement of § 1325(a)(3), Bankruptcy Code. The court accordingly limits its discussion to that issue.
Confirmation of an individual debtor's chapter 13 plan of repayment is governed by § 1325 of the Bankruptcy Code, which requires that the court "shall" confirm a plan if certain enumerated requirements are met. Relevant to the present controversy is the requirement of § 1325(a)(3) that "the plan has been proposed in good faith and not by any means forbidden by law." In Deans v. O'Donnell, 692 F.2d 968, 972 (4th Cir. 1982), the Fourth Circuit held that "the totality of circumstance must be examined on a case by case basis" in determining whether a chapter 13 plan meets the general good faith standard of § 1325(a)(3). The Deans opinion set forth the following suggested and non-inclusive list of factors to be considered:
1. The percentage of proposed repayment.
2. The debtor's financial situation.
3. The period of time payment will be made.
4. The debtor's employment history and prospects.
5. The nature and amount of unsecured claims.
6. The debtor's past bankruptcy filings.
7. The debtor's honesty in representing facts.
8. Any unusual or exceptional problems facing the debtor.
In a subsequent opinion, Neufeld v. Freeman, 794 F.2d 149, 152-53 (4th Cir. 1986), the court expanded the inquiry to include a consideration of whether "a major portion of the claims sought to be discharges arises out of pre-petition fraud or other wrongful conduct and the debtor proposes only minimal repayment of these claims under the plan." There is no suggestion that any of the unsecured claims in the present case have their genesis in fraud or other wrongful conduct.
In the present case, the heart of the trustee's argument that the debtors have not proposed this modified plan in good faith — and the only factor from the list above that cuts against the debtors — is that, in order to cure the arrearages to Signet Bank, the debtors have had to reduce the dividend to unsecured creditors from 100% to 44%. The unsecured claims here generally arise from consumer transactions and total $14,070 on the debtor's schedules. Mr. Awua, whose testimony the court found credible, explained that, because of increased competition and unexpected repair expenses, he was not able to earn as much money as he originally expected, with the result that he was unable both to sustain payments under the plan and to make his monthly mortgage payment. Essentially, these circumstances are beyond the control of Mr. Awua. This testimony stands uncontradicted; additionally, no evidence was presented suggesting that the present situation is only temporary.
The other factors suggested by Deans generally favor the debtors. The debtors' modified plan payments extend for 60 months, the maximum period permitted under chapter 13 and results in creditors receiving significantly more than they would receive if the debtor merely satisfied the bare minimum standard of § 1325(b)(1)(B), which requires a debtor, if the trustee or an unsecured creditor objects to confirmation, either to pay 100% of the allowed unsecured claims or to pay into the plan all of the debtor's projected disposable income for three years. The debtor has no past bankruptcy filings. Additionally, the court has no reason to doubt the debtor's honesty in representing facts. None of the debts arrear to have resulted from prepetition fraud or other egregious pre-filing conduct. In short, there is nothing to suggest that the debtors are not making an honest effort to repay their creditors to the best of their ability.
Recognizing that each case must be decided on its own facts, this court concludes, after considering all the circumstances, that the modified plan before the court was proposed by the debtor in good faith. Here, the debtors are seeking to modify their confirmed plan due to unexpected financial difficulties. No evidence is before the court that the debtors engaged in any fraud or other wrongful conduct or that they have been reckless in managing their finances. The debtors, essentially, are doing what Congress has explicitly permitted them to do — modify a plan due to unexpected circumstances beyond their control. Both increased competition and the repair of the Mr. Awua's taxicab were unexpected and do not evidence bad faith on the part of the debtors. Due to these problems, the debtors fell behind on their mortgage payments. The debtors have worked out an agreement with Signet Bank to pay those arrearages under the modified plan.
While it is unfortunate that unsecured claims cannot, on the debtors' present income, be paid at 100 cents on the dollar, the proposed dividend of 44% is not insignificant and appears to be as much as the debtors can afford. Of course, just as a plan may be modified to reduce the payments to unsecured creditors based on an unexpected decrease in the debtors' net disposable income, the trustee has the right to seek a modification increasing the plan payment and dividend if the debtors' income unexpectedly rises. Weast v. Arnold (In re Arnold), 869 F.2d 240 (4th Cir. 1989). To permit the trustee to monitor the debtor's financial situation, the court will condition confirmation on the debtors' furnishing a copy of their Federal income tax return to the trustee each year during the term of the plan. Subject to that restriction, however, the court will confirm the modified plan filed on January 9, 1997.
II.
The court now turns to the debtors' other request, i.e., that they be granted a hardship discharge. The court need not dwell on this issue, however. As the court understands the debtors' position, the request for a hardship discharge is simply a backup, or alternative form of relief, to their primary request, which is to modify their confirmed plan to include the postconfirmation arrearages to Signet. Since this court has determined that the debtors may modify their plan, their alternative request is necessarily mooted.
However, were the court to reach the issue, the court would be inclined to find that the debtors have not shown circumstances of the kind and degree that would warrant a hardship discharge. Under § 1328(b), Bankruptcy Code, a debtor who has not completed payments under a chapter 13 plan may nevertheless be granted a discharge if the following conditions are met:
(1) the debtor's failure to complete such payments is due to circumstances for which the debtor should not justly be held accountable;
(2) the value, as of the effective date of the plan, of property actually distributed under the plan on account of each allowed unsecured claim is not less than the amount that would have been paid on such claim if the estate of the debtor had been liquidated under chapter 7 of this title on such date; and
(3) modification of the plan under section 1329 of this title is not practicable.
(emphasis added). Since the court has found that the debtors may modify their plan, the requirement of § 1328(b)(3) that modification of the plan not be practicable has clearly not been met. See 5 COLLIER ON BANKRUPTCY ¶ 1328.01(b)(iii), at 1328-21 (Lawrence P. King Ed., 15th Ed. 1996) (hardship discharge may not be granted when modification of a confirmed plan is practicable). Additionally, the granting of a hardship discharge is reserved for the most extreme and unusual of circumstances that prevent a debtor from completing payments under the plan, and not for purely economic reasons. See In re Nelson, 135 B.R. 304, 307-08 (Bankr. N.D. Ill. 1991) (requiring catastrophic, not economic reasons for a hardship discharge); In re Graham, 63 B.R. 95, 96 (Bankr. E.D. Pa. 1986) (death of the debtor considered grounds for granting of hardship discharge); In re Bond, 36 B.R. 49, 51-52 (Bankr. E.D.N.C. 1984) (death of the debtor). Accordingly, the court denies the debtors' request for a hardship discharge under § 1328(b), Bankruptcy Code.
III.
A separate order will be entered consistent with this opinion.