Memorandum Decision on Trustee’s Motion to Modify Plan
The issue in this case is whether the Chapter 13 Trustee should be permitted to modify the Debtors’ Chapter 13 plan pursuant to 11 U.S.C. § 1329(a) to increase payments to creditors and extend the life of the plan. The Court must decide whether the Trustee’s Motion is timely, whether the post-confirmation earnings and inheritance are property of the estate and whether the Trustee is entitled to modify the plan in light of the increase in inheritance and income.
*250 Facts
The Debtors filed a voluntary petition on September 20, 2004, and this case is accordingly not governed by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. 1 The Court confirmed the Debtors’ original Chapter 13 plan on November 15, 2004. In their Statement of Financial Affairs, the Debtors listed combined income of $36,350 for 2004. According to the Trustee, when the Debtors submitted their required post-confirmation tax returns, their gross income had grown to $99,644 in 2005 and $136,705 in 2006. Additionally, the Trustee notes that the Debtors claimed $13,800 gambling winnings on one of the tax returns. The Trustee investigated, learned that the Debtors received an inheritance and some business income, and filed a Motion to modify the plan from 36 to 60 months and to increase the confirmed plan percentage from a 33% to a 100% payout. The modification proposes to increase the monthly payments from $1,000 to $2,700 effective October 2007, which the Trustee believes the Debtors can manage based on the calculations from the 2006 tax returns.
The Debtors replied to the Trustee’s Motion with amended Schedules I & J. The Debtors agree that they have experienced good fortune, but contend that the Trustee’s Motion is untimely and would have been appropriate in 2005. A portion of the extra money came from a business that Mr. Wetzel started with his adult children post-confirmation. Mr. Wetzel receives gross weekly pay of $800 and $516 after taxes from the business. Mrs. Wet-zel inherited an investment account of $100,000 in September 2005. That account produces dividends and interest that supplements the business income. However, the Debtors contend their finances are reverting to their pre-confirmation state, as Mrs. Wetzel is out of the workforce as indicated in amended Schedule I. Mrs. Wetzel is not in good health and was hoping she would not have to return to work. The Debtors have offered to modify their plan to provide a 61 % dividend which they contend takes into account their current disposable income.
Analysis
Section 1329 of the Bankruptcy Code governs modification of a plan after confirmation. Section 1329(a) provides that “at any time after confirmation but prior to completion of plan payments, the plan can be modified upon the request of the ‘debtor, the trustee or the holder of an allowed unsecured claim.’ ” Plan modification is appropriate in the following three situations: to increase or reduce the amount of payments, to increase or decrease the time of payments, or to alter the amount of payment to a creditor under the plan to account for a payment made outside of the plan. The Seventh Circuit Court of Appeals considered post-confirmation modification in
In re Witkowski,
The policy underlying § 1329 is to “to allow upward or downward adjustment of plan payments in response to changes in a debtor’s circumstances which substantially affect the ability to make future payments.”
In re Nott,
The Debtors contend that the Trustee’s Motion is untimely, specifically 18 months late, because the increase in income was reflected in the 2005 tax return. While it is unfortunate that the Trustee’s Motion to Modify the Plan was filed almost two years after the inheritance, nothing in the record suggests that the Debtors brought the inheritance to the Trustee’s attention. They apparently submitted tax returns which showed business and investment income, and expected the Trustee to ferret out the information that they had started a business and received an inheritance. If the Debtors had reported the inheritance to the Trustee, and indicated that the Debtors did not believe that the inheritance was cause for the modification of the plan due to Mrs. Wet-zel’s corresponding loss of income, and the Trustee did nothing with the information for two years, it may be a different story. However, the Debtors, as far as the Court knows, did nothing to alert the Trustee, and therefore, cannot be heard to complain when the Trustee gleaned the situation from the tax returns. Moreover, this is not a situation where the Trustee waited until the Debtors completed the plan to seek the modification.
See, e.g., In re Jacobs,
While the Trustee’s Motion is couched in the terms of the Debtors’ receipt of new sources of disposable income, the disposable income test technically does not apply in this case. “At the very least, courts should agree that the disposable income test does not apply when the proponent of the modification is the trustee or the holder of an allowed unsecured claim and the objecting party is the debtor.” Lundin,
Chapter 13 Bankruptcy, 3d Edition
at § 255-1. Furthermore, in
In re Brown,
the court agreed with the debtor’s contention that “the Code does not require that plans be modified if a debtor’s disposable income increases ... as such monitoring of all chapter 13 debtor’s post-petition income would place an enormous burden on the system.”
Although the disposable income test does not explicitly apply, courts have recognized that the “debtor’s changed income and expenses are factored into the bankruptcy court’s good judgment and discretion.”
See In re Sounakhene,
Since confirmation of their plan, the Debtors have encountered two new sources of wealth. The Debtors inherited an investment account of about $100,000 that provides dividends and income. Mr. Wetzel also owns a percentage of a business, which he started with his sons after the plan was underway, and the business generates steady monthly income. An important consideration is whether the Debtors’ inheritance and business earnings are property of the bankruptcy estate. Many courts have held that a Chapter 13 estate can include gifts, inheritances and causes of action that are acquired by a debtor post-confirmation.
In re Nott,
Three sections of the Bankruptcy Code must be consulted to determine whether the inheritance and post-confirmation business income are property of the estate. Section 541(a) defines property of the estate as “all legal or equitable interests of the debtor in property as of the commencement of the case.” In Chapter 13 cases, § 1306 expands the estate to include the property specified in § 541 as well as “all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under Chapter 7, 11, or 12.” Section 1327(b) complicates matters by providing that “[e]xcept as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.”
In this case, the plan states, rather cryptically: “Title to the debtor’s property shall revest in the debtor on confirmation of a plan.” The Order confirming the plan states that unless provided otherwise in the plan, all property of the estate as
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defined under § 1306(a) shall remain under the exclusive jurisdiction of the Court. The Court interprets the plan to mean that property of the estate revested in the Debtors at confirmation. But what of post-confirmation property? Section 1306(a) contemplates that the property of the debtor will continue to accumulate in the estate until the case is dismissed or converted. Does the language of the Debtors’ plan mean that the post-confirmation property of the estate also revests in the Debtors? This Court is not the first to grapple with this issue.
See Murphy v. O’Donnell (In re Murphy),
There are three basic interpretations of the tension between §§ 1306(a)(1) and 1327(b).
United States v. Marchar,
More courts have begun to adopt the second approach treating all post-confirmation earnings and post-confirmation property as property of the estate.
See United States v. Harchar,
The Chapter 13 Trustee, as the proponent of the plan modification, bears the burden of satisfying the standards for confirming the plan modification.
In re Brown,
The good faith test under § 1325(a)(3) simply requires that the “plan has been proposed in good faith.” Courts have held that “confirming a modified plan that reflects a significant increase in income and a commensurately increased payout to unsecured creditors comports with that good faith requirement.”
In re Brown,
The best interest of creditors test requires that as of the effective date of the plan, the property to be distributed under the plan to unsecured creditors is not less than the amount that would be paid if the estate were liquidated under Chapter 7 on such date. 11 U.S.C. § 1325(a)(4). It is fairly well settled that in a modification situation, the “effective date” is the date of modification.
See In re Brown,
Information about the feasibility test is also lacking. The feasibility test in § 1325(a)(6) examines whether the “debtor will be able to make all payments under the plan and comply with the plan.” If confirmed, the Trustee’s modified plan would require the Debtors to increase payments from $1,000 to $2,700 per month over the next 24 months. The modified plan assumes that the Debtors will continue to receive income from Mr. Wetzel’s business venture with his sons, as well as reap benefits in the form of dividends and interest income from the inheritance. The Debtors experienced significant financial improvements in 2005 and 2006 but counter that with Mrs. Wetzel’s declining health and loss of income, they cannot afford to make payments of $2,700 per month. They have offered to increase their payments but not to the extent required by the Trustee’s proposed modification. The Court cannot determine whether the Trustee’s plan is feasible without examining a clearer and more detailed picture of the Debtors’ current financial situation. The Debtors may be experiencing a temporary loss of income with the decline in the stock market or they may be gambling away a windfall that should otherwise be dedicated to their creditors. The Court simply does not have enough of a record to make a determination.
The Court notes concern with the Debtors’ decision to gamble with their post-confirmation income. According to Judge Lundin, “cases support the proposition that a [trustee] can force the debtor with improved financial condition to a choice: accept an increase in payments to creditors or get out of Chapter 13.”
Chapter IS Bankruptcy, 3d Edition
§ 266.1. One court surmised that “Congress ... intended that the debtor repay his creditors to the extent of his capability during the Chapter 13 period. Certainly, Congress did not intend for debtors who experience a substantially improved financial condition after confirmation to avoid paying more to their creditors.”
In re Sounakhene,
*256 Conclusion
The Motion of the Chapter 13 Trustee to modify the plan is timely, as it was filed prior to completion of all the payments under the plan. The Debtors’ post-confirmation inheritance and post-confirmation business income are property of the estate, and are the proper subject of the Trustee’s modified plan. However, the Court does not have enough information to determine whether a 100% payment plan is required by the Debtors’ current financial situation. Assuming that it is so, the Court cannot determine whether the Trustee’s proposal is feasible. The Debtors claim it is not, but have only given bare bones information in support of their assertion. If the 100% plan is required by the best interests test, but is not feasible due to the Debtors’ financial situation, it is possible that this case should be dismissed.
See, In re Richardson,
Notes
. The Court notes that the applicable provisions have not changed under BAPCPA.
. According to the Trustee, the Debtors’ income from gambling winnings in one year was $13,800. Perhaps the Debtors can explain that this was a result of one or two jackpots won on smaller bets. If in fact, significant funds were expended to net $13,800 while unsecured creditors were paid far less under the plan, the Debtors' luck may have run out.