Recently, a bankruptcy judge in the United States Bankruptcy Court for the Eastern District of North Carolina issued a ruling that should help lenders dealing with borrowers in Chapter 13. In a case entitled In re Royal, the court reiterated that a debtor seeking modification of a confirmed Chapter 13 plan must demonstrate a “substantial” and “unanticipated” post-confirmation change in their financial condition. Otherwise, they are bound by the terms of the plan. In re Royal provides lenders with protection from (and leverage over) borrowers who file Chapter 13, confirm a plan, and then try to change the plan mid-stream. Lenders who expend the effort to negotiate or litigate the terms of a Chapter 13 plan can proceed with the confidence that, absent limited circumstances, the plan will be the final expression of their borrowers’ obligations going forward.
Chapter 13 vs. Chapter 7 Bankruptcy Proceedings
In a Chapter 13 bankruptcy proceeding, the debtor files a repayment plan with the bankruptcy court that requires the debtor to pay back all or a portion of the debtor's debts. The amount to be repaid depends on how much the debtor earns, the amount and types of debt owed, and how much property the debtor owns. The typical Chapter 13 plan runs for five years. This is in contrast to a Chapter 7 bankruptcy proceeding, in which the debtor asks the bankruptcy court to discharge most of the debtor's debts. In exchange for a Chapter 7 discharge, the bankruptcy trustee can take any of the debtor's property that is not exempt from collection, sell it, and distribute the proceeds to the debtor's creditors.
A Request to Re-litigate
In the In re Royal case, in 2004 the Royals financed the purchase of a 2001 Mitsubishi Eclipse with Home Credit Corporation. The Royals filed for bankruptcy protection in December 2014 and the court confirmed their Chapter 13 Plan in April 2015. The plan required the Royals to make monthly payments to the Trustee of $568.00 for 57 months. The plan granted Home Credit a secured claim of $4,263.80, with interest accruing at 5.25%, to be paid through the plan by the Trustee.
Six months after the plan was approved (and 20,000 miles later), the Royals moved to modify the plan. The Royals contended that due to numerous mechanical problems, the vehicle was no longer reliable transportation, and the estimated repair costs were not practical due to the age and condition of the vehicle. The Royals sought to surrender the vehicle to Home Credit in full satisfaction of Home Credit’s secured claim with any balance to be treated as a general unsecured claim. The Royals also sought to reduce their monthly payments to the Trustee from $568.00 to $465.00.
Section 1329 of the United States Bankruptcy Code allows a debtor to modify a confirmed Chapter 13 plan in limited circumstances. To do so, the debtor must demonstrate that the debtor has experienced a “substantial” and “unanticipated” post-confirmation change in financial condition. This policy ensures that confirmation orders are treated as final and prevents multiple modifications based on minor changes or changes that could be anticipated or foreseen and dealt with in the original plan.
The Royals offered no evidence of a change in their financial condition. They showed evidence of potential future repair expenses for the car, but the court held that mechanical problems on a 14-year old vehicle were foreseeable and should have been anticipated during plan confirmation. The court denied the motion to modify the plan.
Conclusion
This is a good decision for lenders who would prefer not to re-litigate Chapter 13 plan terms over and over again. By promoting the finality of Chapter 13 plans, the decision gives lenders ammunition against debtors seeking to improve their plan mid-stream. Using the reasoning in this decision, lenders can force debtors to prove the existence of a substantial and unanticipated financial change if they try to modify their plans. Otherwise, debtors will be stuck with their original plan.
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