CHAPTER 13 PRIMER

OUTLINE

I. BRIEF OVERVIEW OF CHAPTER 13

II. ELIGIBILITY FOR CHAPTER 13

III. CHAPTER 13 PLAN
(A) Designation of classes and discriminatory treatment ( §1322(b)(1))
(B) Modify rights of creditors ( §1322(b)(2))
(C) Cure and maintain payments of debts maturing beyond life of plan ( §1322(b)(5))
(D) Provide for payment of filed and allowed postpetition claims under plan ( §1322(b)(6))

IV. PLAN CONFIRMATION
(A) Good faith requirement
(B) Confirmation over the objection of a secured creditor (§1325(a)(5)(B) and (C))
(C) Confirmation over the objection of an unsecured creditor or Chapter 13 Trustee (§1325(b))

TEXT

I. BRIEF OVERVIEW OF CHAPTER 13

Chapter 13 of the Bankruptcy Code (11 U.S.C. §§ 1301 - 1330) provides a set of tools for an individual with regular annual income to adjust his debts. In contrast to Chapter 7 which involves a liquidation of all nonexempt assets in return for a limited discharge, Chapter 13 allows the debtor to retain his assets and enjoy a broader discharge in return for agreeing to use future income to fund a plan. Outside of Chapter 13, postpetition earnings of an individual debtor are excluded from the Bankruptcy Estate. See 11 U.S.C. §541(a)(6). In contrast to the business reorganization provisions of Chapter 11 which are structured to handle a case of any size or complexity, Chapter 13 is geared to achieve the expedited submission and confirmation of a payment plan.

Upon the initiation of a Chapter 13 case the debtor is immediately protected by the automatic stay from any further collection efforts by his creditors. 11 U.S.C. §362(a). In addition, any individual that is liable with the debtor on any part of a consumer debt of the debtor is also protected by a stay. 11 U.S.C. §1301; In re Dye, 190 B.R. 566 (Bankr. N.D. Ill. 1995) (federal tax liability is not a consumer debt and is therefore not subject to co-debtor stay). Note that the co-debtor stay will arguably apply whether the debtor is the primary or secondary obligor as long as the debtor received the benefit. See, e.g., In re Zersen, 189 B.R. 732, 740-42 (Bankr. W.D. Wis. 1995). But see In re Kelley, 22 B.R. 150 (Bankr. M.D. Ala. 1982) (holding that co-debtor stay not applicable if co-debtor was primary obligor). Zersen further held that the debtors who were also individually liable to the creditor on a separate debt could allocate their plan payments to the co-signed debt over the creditor's objection. 189 B.R. at 741-44.

Like other Chapters of the Bankruptcy Code, the initiation of the case creates a bankruptcy estate. The Chapter 13 estate is comprised of everything which is included in the typical Chapter 7 or 11 bankruptcy estate (defined at 11 U.S.C. §541), plus all property and earnings acquired by the debtor after the commencement of the case. 11 U.S.C.§1306. In an effort to make Chapter 13 more attractive to individuals, the Bankruptcy Reform Act of 1994 (generally effective for cases filed after 10/22/95) added 11 U.S.C. §348(f) which provides that unless a Chapter 13 debtor converts to another chapter in bad faith, he gets the benefit of property acquired since the date of the filing of the petition and of postpetition payments made on secured claims. This encourages debtors to attempt Chapter 13 since even if they fail, they are no worse off then they would have been (financially speaking) had they initially filed a Chapter 7.

Under 11 U.S.C. §1307(a), the debtor may convert a Chapter 13 case to a Chapter 7 at any time. Under 11 U.S.C. §1307(b), the debtor has the right, if the Chapter 13 case had not been converted from another Chapter under §§ 706, 1112, or 1208, to the dismissal of the case at any time. There is, however, some dispute as to a debtor's right to dismiss when faced with a motion to convert. Some courts have held that a Chapter 13 debtor's right to voluntary dismissal under §1307(b) is absolute. See discussion in Molitor v. Eidson (In re Molitor), 76 F.3d 218, 220 (8th Cir. 1996). Other courts have held that §1307(c) (authorizing conversion for cause) curtails a right to voluntary dismissal. Id. Molitor followed the latter school and held that a court could convert a Chapter 13 to 7, notwithstanding a prior request for dismissal, if the case was filed in bad faith. The court held that multiple Chapter 13 petitions to stay foreclosure sales constituted bad faith justifying the conversion.

Chapter 13 makes no provision for the formation of any sort of creditors' committees or the election of a trustee. Instead, a trustee is appointed by the office of the United States Trustee. Typically, the United States Trustee appoints one or more individuals as "standing trustees" to administer all the Chapter 13 (and Chapter 12) cases initiated in a particular region. 28 U.S.C. §586(b). If no standing trustee exists, the United States Trustee will simply appoint somebody to act as trustee for the single case. 11 U.S.C. §1302(a). In many respects, the Chapter 13 Trustee performs the functions that would have been performed by a creditors' committee including objecting to plans that do not meet all the requirements for confirmation. See 11 U.S.C. §§ 1302(b) and (c) and 1325(b). The Chapter 13 Trustee is compensated by a percentage (set by the Attorney General) of the total disbursements made by him under the plan. 28 U.S.C. §586(e).

Where a plan proposes to pay unsecured creditors less than 100%, the Trustee's commission essentially comes out of the pockets of the unsecured creditors. Where, however, the debtor is paying unsecured creditors in full, the commission comes out of the debtor's pockets. This leads to litigation over whether Chapter 13 plan payments can be made directly by the debtor to avoid the commission. The weight of authority appears to be that there is no statutory prohibition against a debtor acting as his own disbursing agent, although whether he may do so in any specific case is left to the discretion of the court. See, e.g., First Bank and Trust v. Gross (In re Reid), 179 B.R. 504 (E.D. Tex. 1995). Many courts draw a distinction between regular mortgage payments (which they permit the debtor to pay directly) and plan payments on account of the cure of arrearages or other impaired claims. See Matter of Aberegg, 961 F.2d 1307, 1310 n.3 (7th Cir. 1992). See also In re Slaughter, 188 B.R. 29 (Bankr. D.N.D. 1995) (holding that criteria to consider in determining whether Chapter 13 debtor may make direct payments include (1) whether the creditor receiving direct payments has economic incentive and the ability to monitor future direct payments, (2) whether the creditor receiving direct payments is capable of taking the requisite action of protecting its interests in the event of default, and (3) the impact of direct payments on plan feasibility (and in the case of a business whether meaningful reorganization is dependent upon direct payment)).

Chapter 13 provides a broad discharge if the confirmed plan is fully consummated. See 11 U.S.C. §1328(a). This "superdischarge," along with the opportunity to cure mortgage defaults and save one's home and other property, provides the allure of Chapter 13. A Chapter 13 superdischarge relieves the debtor of all obligations provided for in the plan except long term debts cured under §1322(b)(5), support obligations (§523(a)(5)), nondischargeable student loans (§523(a)(8)), restitution or other penalties arising out of a criminal conviction, or liability arising out of an automobile accident where drugs or alcohol were involved (§523(a)(9)). Also rendered nondischargeable is a debt based on a postpetition consumer debt if prior approval by the trustee of the debtor's incurring the debt was practicable but not obtained. Note that interest on nondischargeable debt is also nondischargeable even if the debt is itself paid under the the Chapter 13 plan. See, e.g., Leeper v. PHEAA, 49 F.3d 98 (3d Cir. 1995); Wagner v. Ohio Student Loan Commission (In re Wagner), 200 B.R. 160 (Bankr. N.D. Ohio 1996); In re Sullivan, 195 B.R. 649 (Bankr. W.D. Tex. 1996).

Although Chapter 13 requires that all priority taxes be paid during the life of the plan, it discharges all unfiled priority tax claims and other nonpriority tax claims that are otherwise nondischargeable in a Chapter 7. See 11 U.S.C. §523(a)(1). Note further that unlike Chapter 11, the debtor in Chapter 13 may pay the priority creditors in deferred cash payments without interest. See §1322(a)(2), In re Smith, 196 B.R. 565 (Bankr. M.D. Fla. 1996).

While 11 U.S.C. §523(a)(3) (pertaining to nondischargeability of unscheduled claims) is not rendered applicable to Chapter 13 cases, it is still necessary for the creditor to be given timely notice of the case in order to be discharged. See, e.g., Dilg v. Greenburgh (In re Greenburgh), 151 B.R. 709, 713 (Bankr. E.D. Pa. 1993).

Under §1328(b), a debtor may be granted a "hardship discharge" if he has not completed payments under the plan if: (1) the failure to complete the plan payments is due to circumstances for which the debtor should not justly be held accountable; (2) the creditors received at least as much, in present value dollars, as they would have received in a Chapter 7; and (3) modification of the plan under 11 U.S.C. §1329 is not practicable. While a hardship discharge allows the debtor to retain those assets which would otherwise have been liquidated in a Chapter 7, it denies the debtor the superdischarge granted under §1328(a). Instead, the debtor gets the same limited discharge he would have received in a Chapter 7.

There is some question about the extent of the court's jurisdiction over the debtor's assets and affairs subsequent to the confirmation of the plan. Issues such as whether postpetition creditors need relief from stay and the interplay between res judicata and plan modification are discussed below. Also unclear is the debtors' right to make "major" acquisitions postconfirmation. With respect to the latter question, the better course may be to obtain prior court approval of all major purchases outside the ordinary course of the debtor's prepetition lifestyle. See, e.g., In re Edwards, 190 B.R. 91 (Bankr. M.D. Tenn. 1995) (addressing request for authorization to purchase a home prior to completion of Chapter 13 plan).

II. ELIGIBILITY FOR CHAPTER 13

Chapter 13 is limited to individuals with: (1) regular income; (2) total noncontingent, liquidated, unsecured debts of less than $250,000; and (3) total noncontingent, liquidated, secured debts of less than $750,000. See 11 U.S.C. §109(e).

(A) Defining Regular Income

The phrase "individual with regular income" in §109(e) is defined as an individual whose income is sufficiently stable and regular to enable such individual to make payments under a plan. In re Sigfrid, 161 B.R. 220, 221 (Bankr. D. Minn. 1993). The test for regular income is not the type or source of income, but rather its regularity and stability. Id. Nontraditional income sources can qualify as sufficiently regular and stable to support a plan. Id. (citing as examples cases where support payments found to be sufficient, income from odd jobs found to be sufficient, contributions from family members found to be sufficient; and contrasting gratuitous payments from family members which are generally not considered sufficient). Accordingly, a debtor may rely on outside sources of funding, including contributions from other family members to fund a plan, provided that the family members become obligated to make the payments and themselves have a source of income that is regular and stable. Id., 222-23.

Although a debtor must have regular income in order to be eligible, that need not be the sole source of plan funding. The proceeds of the sale of assets could provide additional funding. See, e.g., In re Erickson, 176 B.R. 753 (Bankr. E.D. Pa. 1995). There is, however, a split of authority over whether a plan which relies primarily on the sale of the debtor's residence for funding is confirmable. Id., at 756 (discussing cases going both ways on the issue). The conflict arises out of the question of whether the delay in payment of the mortgage pending the sale is an impermissible modification of the mortgagee's rights. Erickson, following one school of thought, held that simply holding off a mortgagee pending a sale of a debtor's residence does not, alone, constitute an impermissible modification. Id., at 757. See also Far West Federal Bank v. Vanasen (In re Vanasen), 18 CBC 2d 530 (D. Oregon 1987). However, the plan must still be feasible, which is, in turn, established by a showing that there is a likelihood of the sale occurring in a reasonable amount of time. Id., at 756-58.

(B) Defining Noncontingent/Unliquidated Debt

Section 109(e) sets dollar limits for eligibility. The dollar limits are with respect to noncontingent unliquidated debts. Accordingly, the definitions of noncontingent unliquidated debts potentially becomes important.

A debt is noncontingent if all events giving rise to liability occurred prior to the filing of the bankruptcy petition. Loya v. Rapp (In re Loya), 123 B.R. 338, 340 (9th Cir. BAP 1991). The fact that the claim has not yet been reduced to judgment, or is otherwise disputed, does not render the debt contingent. Id. (holding that a disputed tort claim which is currently actionable is not contingent).

The concept of unliquidated is less clear, although like the phrase noncontingent, a debt is not unliquidated simply because it is disputed. Id., at 340-41. The determination of whether a debt is unliquidated appears to turn on whether the amount of the liability is subject to ready determination and precision in computation. Accordingly, whether a debt is liquidated for purposes of §109(e) does not depend on whether the claim sounds in tort or contract, but rather whether it is capable of ready computation. Id. Of course, where the amount due is capable of computation by reference to an agreement (as often arises in the contact situation), the claim is liquidated. See also In re Ekeke, 198 B.R. 315 (Bankr. E.D. Mo. 1996) (holding that disputed tax obligation calculated directly from debtors' tax return was not contingent or unliquidated for purposes of determining eligibility for Chapter 13). On the other hand, probably more often than not, a tort claim involves an amount not readily determinable with precision, and is therefore unliquidated if not yet reduced to judgment.

III. CHAPTER 13 PLAN

Only a debtor may file a plan in Chapter 13. 11 U.S.C. §1321. The plan may be filed with the petition, or within 15 days thereafter, although the 15 day period may be extended for cause. Rule 3015(b) of the Federal Rules of Bankruptcy Procedure.

Pursuant to 11 U.S.C. §1326(a), unless the court orders otherwise, the debtor is to commence making the payments proposed by the plan (to the trustee) within 30 days after the plan is filed. In the event the plan is not confirmed, any undistributed payments, less the administrative costs of the case, are to be returned to the debtor. See §1326(b). Outside of adequate protection payments to secured creditors and administrative expenses, there should be no distributions to creditors prior to plan confirmation.

Under 11 U.S.C. §1322(d), a plan may last no longer than 3 years unless the court, for cause, approves a longer period. In no event, however, may the plan last beyond 5 years. Note that length of the plan dates from when payments begin, not from when the plan is confirmed. See Baxter v. Evans (In re Evans), 183 B.R. 331 (Bankr. S.D. Ga. 1995); but see United California Savings Bank v. Martin (In re Martin), 156 B.R. 47 (9th Cir. BAP 1993) (holding that plan repayment period, for purposes of the limit on plan duration set forth in §1322(d) commences at confirmation). Under 11 U.S.C. 1326(a), payments under the plan must begin within 30 days after the plan is filed, unless the court orders otherwise.

What constitutes cause for extending a plan beyond 3 years must be decided by the court on a case by case basis. United Companies Lending Corp. v. Witt (In re Witt), 199 B.R. 890, 892 (W.D. Va. 1996). Cause has been found by some courts when a debtor has shown an inability to cure arrearages in any shorter time or by showing that the debtors are contributing all disposable income. Id. n.3.

The plan must:

(1) provide for the submission of all or such portion of future earnings or other future income of the debtor to the supervision and control of the trustee as is necessary for the execution of the plan;

(2) provide for the full payment, in deferred cash payments, of all priority claims set forth in 11 U.S.C. §507, unless otherwise agreed by the creditor; and

(3) provide the same treatment for each claim within a particular class if the plan classifies claims.

The plan may also contain a number of permissive provisions, as set forth in 11 U.S.C. §1322(b), including the following:

(A) Designation of classes and discriminatory treatment
(B) Modify rights of creditors
(C) Cure and maintain payments of debts maturing beyond life of plan
(D) Provide for payment of filed and allowed postpetition claims under plan

(A) Designation of classes and discriminatory treatment (§1322(b)(1))

The plan may designate classes, but may not discriminate unfairly against any class. Furthermore, the plan may treat claims for consumer debt of the debtor, if an individual is liable on such consumer debt with the debtor, differently than other unsecured claims. These provisions raise two issues. The first is the extent of allowable discrimination in the treatment of co-signed consumer debt. The second is the extent of allowable discrimination generally.

(i) Allowable discrimination in favor of co-signed consumer debt

In re Thompson, 191 B.R. 967 (Bankr. S.D. Ga. 1996), took the analysis of the fairness of discrimination beyond the commonly applied four-factor test (see below). Thompson involved a case where the debtor proposed a plan which paid the co-signed claim in full, but paid nothing to the other, unrelated, unsecured creditors. The problem the court had with the four-factor test was that it seemed to turn on the reasonableness of the discriminatory treatment which, in turn, seems to be clearly permitted by statute. Accordingly, the test seemed to provide little help in determining whether disparate treatment was unfair. Instead, the Thompson court adopted a test which it believed more faithfully reflected the analysis being undertaken by the courts, that being to ask: (1) does the obligation fall under the plain language of §1322(b)(1) (which separate treatment of co-signed consumer debt does); (2) was the debtor the beneficiary of the obligation which was co-signed (which was the situation with which Congress was concerned); and (3) whether the plan satisfies the other confirmation standards in §1325, including the good faith requirement. While the first two factors were satisfied in Thompson, the third was not. The court found that payment of the debt would not have been a burden for the codebtor, and that the debtor's plan was essentially a device to pay the cosigned debt and take advantage of Chapter 13, without making a good faith effort to pay the balance of the debts (and was therefore no different from a Chapter 7 and reaffirmation of the co-signed debt). Accordingly, under the Thompson analysis, the question is not just whether disparate treatment of co-signed debt is permitted, but rather whether its application, under the facts and circumstances of the case, evidences a lack of good faith.

(ii) Allowable discrimination in favor of debts other than co-signed consumer debts

Not surprisingly, the four factors are seldom satisfied outside of the co-signed consumer debt situation. See, e.g., In re Sullivan, 195 B.R. 649 (Bankr. W.D. Tex. 1996) (concluding that treating nondischargeable student loan debt more favorably then other unsecured creditors was improper discrimination after an extensive analysis of the law and issues); Limbaugh, supra (holding that plan could not discriminate in favor of restitution obligation even though failure to pay the obligation could lead to a revocation of probation and a complete loss of income); McDonald v. Sperna (In re Sperna), 173 B.R. 654 (9th Cir. BAP 1994) (holding that nondischargeability of a student loan in Chapter 13 is not, by itself, a basis for preferential treatment). But see Michelson v. Leser (In re Leser), 939 F.2d 669 (8th Cir. 1991) (indicating public policy behind full payment of support obligations dictate that a lesser payout to other unsecured creditors should be tolerated); In re Davis, 209 B.R. 893 (Bankr. N.D. Ill. 1997) (allowing debtor to pay rent arrearages in full so residential lease could be assumed; without retention of lease plan was unfeasible which would have meant no distribution to other unsecured creditors).

One strategy that has been successfully used as a means to prefer student loans is to treat those obligations as long term debt, which the debtor then continues to pay during the course of the Chapter 13 pursuant to §1322(b)(5). See, e.g., In re Chandler, 210 B.R. 898 (Bankr. D.N.H. 1997). While the preferential treatment under such a strategy would be limited to the regular monthly payments plus the cure of any arrearages, those amounts would still likely come at the expense of other unsecured creditors. At least one court, however, has even found that treatment to be unfairly discriminatory. In re Coonce, 213 B.R. 344 (Bankr. S.D.Ill. 1997).

Note that there is authority that it is not permissible to discriminate in favor of a particular unsecured creditor simply because none of the other unsecured creditors would have received any distribution in a Chapter 7. In re Alicea, 199 B.R. 862 (Bankr. D.N.J. 1996) (holding that plan could not discriminate in favor of parking tickets where only basis for doing so was the fact that the unsecured creditors would have received no distribution in Chapter 7).

(B) Modify rights of creditors ( §1322(b)(2))

The plan may modify the rights of any secured and unsecured creditors (subject to the limitations set forth in 11 U.S.C. §§1325(a)(5) and (b)), other than the claim of a creditor secured only by a consensual lien in the debtor's principal residence. The exception to the right to modify is strictly construed. Accordingly, modification is only precluded if, in fact, the mortgage holder has no other security other than the principal residence real estate. See, e.g., Johns v. Rousseau Mortgage Corporation (In re Johns), 37 F.3d 1021 (3d Cir. 1994); Sapos v. Provident Institution of Savings, 967 F.2d 918 (3d Cir. 1992).

In most cases it is fairly clear whether the lender has other security. It gets complicated, however, when the additional security is related to the residence. Where the lender has a mortgage on an income producing multi-family unit, one of the units of which is used by the debtor as its principal residence, it has been held that it has other security. See Lomas Mortgage, Inc., v. Louis, 82 F.3d 1 (1st Cir. 1996). Where the lender has been granted a security interest in some item of personal property which is later attached to the residence, it has been held it has other security. See Matter of Cotton, 199 B.R. 967 (Bankr. D. Neb. 1996) (holding that claim secured by by debtor's home and by doors which the creditor built and installed for debtor was modifiable). Where the mortgaged property is a single family residence the courts have reached conflicting results. Compare: PNC Mortgage Company v. Dicks, 199 B.R. 674 (N.D. Ind. 1996) (holding that the test is whether the items of collateral set forth in the mortgage/security agreement are merely enhancements that can be made component parts of the real estate and are of little or no independent value; thus a mortgage granting a security interest in rents, issues, profits, all plumbing, heating and lighting fixtures and equipment attached to or used in connection with the residence did not take the mortgage out of the anti-modification protection of the statute); Lutz v. Miami Valley Bank, 192 B.R. 107 (W.D. Pa. 1994) (security interest in "improvements and fixtures," "additions or improvements," and "rents, issues, and profits" has the effect of extending the mortgagee's lien beyond the principal residence and, therefore, debtor was not subject to limitation in §1322(b)(2)); In re Pinto, 191 B.R. 610 (Bankr. D.N.J. 1996) (the grant of a security interest in "easements, rights, appurtenances, rents, royalties, mineral, oil and gas rights and profits, water rights and stock and all fixtures" along with the escrow, took creditor out of the antimodification provision even though the creditor did nothing to separately perfect the security interest and none of these items had any separate existence or value apart from the residence); and Heckman v. Meridian Bank (In re Heckman), 165 B.R. 16 (Bankr. E.D. Pa. 1994) (security interest in "rents of the premises" expanded lien beyond principal residence); with Wilkinson v. Fleet Mortgage Corporation (In re Wilkinson), 189 B.R. 327 (Bankr. E.D. Pa. 1995) (holding that security interest in rents, issues and profits does not take mortgage out of §1322(b)(2)), Brown v. Citicorp Mortgage, Inc. (In re Brown), 189 B.R. 3 (Bankr. E.D. Pa. 1995) (holding that security interest in unaccrued rents was reversionary real property and, therefore, did not take the creditor out of §1322(b)(2)).

Pinto also held that the ability to modify as the result of the additional "collateral" was not affected by the fact that the creditor had foreclosed and, therefore, the mortgage had been merged into the judgment. Based on the court's interpretation of Third Circuit precedent, notwithstanding the merger, the security interest in the residence and additional collateral survived the judgment. 191 B.R. 614-15.

The prohibition against modification includes a bifurcation under 11 U.S.C. §506(a). Nobelman v. American Sav. Bank, ___ U.S. ___, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993). However, the Bankruptcy Reform Act of 1994 added that the prohibition against modification in §1322(b)(2) does not:

(1) prevent a debtor from curing a mortgage in default up through the foreclosure sale even if a judgment in mortgage foreclosure had been obtained; and

(2) prevent a debtor from modifying a fully matured mortgage provided that the secured claim is paid off during the life of the plan, or modifying a mortgage on which the last payment under the original payment schedule is due before the date on which the final payment under the plan is due.

Section 1322(c)(1) has been strictly construed to cut off the debtor's right to cure after the foreclosure sale, notwithstanding the existence of a post-foreclosure sale right of redemption. See, e.g., Commercial Federal Mortgage Corporation v. Smith (In re Smith), 85 F.3d 1555, 1558 n.3 (11th Cir. 1996) (citing, with approval, In re Sims, 185 B.R. 853 (Bankr. N.D. Ala. 1995)). But see In re Rambo, 199 B.R. 747 (Bankr. W.D. Okl. 1996) (disagreeing with Sims, and, instead, finding that until the foreclosure sale has become completely irreversible, the default may be cured).

Section 1322(c)(2) allows a debtor to modify a home mortgage claim if the remaining term of the mortgage is less than 5 years. This includes short term mortgages as well as long term mortgages that are within 5 years of maturity. See, e.g., In re Young, 199 B.R. 643, 653-54 (Bankr. E.D. Tenn. 1996). Thus, a debtor can amortize any balloon payment which may have become due before or during the life of his plan over the life of his plan. In addition, it appears that to the extent that the remaining balance due is greater than the amount of the creditor's secured claim, the debtor may bifurcate it into secured and unsecured portions. Id. But see United Companies Lending Corp. v. Witt (In re Witt), 199 B.R. 890 (W.D. Va. 1996) (holding that while matured mortgage could be extended for life of plan under §1322(c)(2), it could not be stripped down).

Note that some courts have held that the prohibition against modification and bifurcation set forth in Nobelman does not apply if the mortgagee is completely unsecured . See, e.g., In re Hornes, 160 B.R. 709 (Bankr. D. Conn. 1993). That view is not, however, universal. See, In re Neverla, 194 B.R. 547 (Bankr. W.D.N.Y. 1996) (holding that under Nobleman the modification of the claim of any mortgagee secured only by the debtor's principal residence was precluded, even if the mortgagee was completely unsecured); In re Barnes, 199 B.R. 256 (Bankr. W.D.N.Y. 1996) (following Neverla).

(C) Cure and maintain payments of debts maturing beyond life of plan (§1322(b)(5))

In the event of an oversecured claim to which there is to be no modification, or a claim secured only by a mortgage in the debtor's principal residence which cannot be modified pursuant to §1322(b)(2), the debtor may, under §1322(b)(5), cure any defaults which exist during the life of the plan along with the maintenance of the regular payments. The regular payments which come due after the completion of the plan would then just continue. But see PNC Mortgage Company v. Dicks, 199 B.R. 674 (N.D. Ind. 1996) (holding that arrearages could be cured over the remaining life of the mortgage).

On the question of the terms and conditions of the cure of the default, including the question of whether interest must be paid on the arrearages during the life of the plan, the Bankruptcy Reform Act of 1994 added 11 U.S.C. §1322(e) which provides that the amount necessary to cure the default shall be determined in accordance with underlying agreement and applicable nonbankruptcy law. This addition overruled Rake v. Wade, ___ U.S. ___, 113 S.Ct. 2187, 124 L.Ed.2d 424 (1993), which imposed an "interest on interest" requirement on the cure of mortgage arrearages regardless of whether required under applicable state law or the agreement of the parties. Note, however, that this statutory amendment will be applicable only to contracts, including transactions that refinance existing contracts, entered into after the October 22, 1994, effective date of the Reform Act.

On the question of cure of pre-October 1994 agreements, there is some dispute as to whether Rake was intended to apply to undersecured mortgages. See, e.g., In re Hardware, 189 B.R. 273, 276-77 (Bankr. E.D.N.Y. 1995) (acknowledging different views on issue and concluding that Rake cure requirement applied whether or not the mortgagee was oversecured). As for the determination of the proper interest rate, the courts seem to be in agreement that the market rate applies although differing in their analysis of how to determine that rate. Id., at 278-79 (deciding upon New York judgment rate of 9% as it creates uniformity and is administratively convenient).

In the case of a permitted §506(a) bifurcation of an undersecured claim with a maturity beyond the end of the plan, the debtor may continue payments beyond the life of the plan if the plan provides for both the cure of the arrearages during the life of the plan and maintains the regular payments as provided for in the loan documents during the life of the plan and thereafter until the secured claim has been fully paid. See, e.g., Brown v. Shorewood Financial (In re Brown), 175 B.R. 129 (Bankr. D. Mass. 1994). For example, assume a case where the creditor's total claim is $50,000, comprised of arrearages as of the date of the bankruptcy of $5,000, plus a principal balance remaining of $45,000 (i.e., had the debtor not defaulted and instead had continued regular payments the balance which would have been due on the date of the filing would have been $45,000). The value of the collateral, and therefore the amount of the secured claim is $30,000. Further assume that the regular monthly payments are $400. As discussed above, the debtor must cure the $5,000 default and continue to make the regular monthly payments over the life of the plan in order to be permitted to continue to pay the secured claim (at the contractual rate of $400 per month) after the end of the plan.

Still an issue, however, is how the cure payments during the life of the plan are to be allocated between the secured and unsecured claims. To the extent that both the cure payments and the regular payments are applied against the secured portion of the claim, the secured claim will be paid that much faster. One view is to apply the principle amounts of both the cure payments and the regular payments against the secured claim. Brown, 175 B.R. at 133-34. Under this view, the $5,000 needed to cure the default plus the principal amount of each of the regular $400/month payments would be applied against the $30,000 secured claim in the above example. The second view, which seems to be the holding of the Third Circuit in Sapos, 967 F.2d at 928, is to only apply the regular payments against the secured claim. Under this view, the debtor would need to pay $5,000 (the cure amount) plus $30,000 in principal amount in regular monthly payments.

A final scenario is a modification of the secured claim which results in a change in the amount of the regular payments. This would result from a bifurcation of an undersecured claim and/or the reamortization of the secured portion. As there is no authority to continue plan payments beyond the life of the plan outside of a cure and resumption of regular contractual payments in §1322(b)(5), the secured portion must be fully paid (in accordance with 11 U.S.C. §1325(a)(5)) during the life of the plan. See, e.g., In re Murphy, 175 B.R. 134 (Bankr. D. Mass. 1994). But see In re Kheng, 202 B.R. 538 (Bankr. D.R.I. 1996) (holding that debtor could bifurcate secured claim and continue payments beyond life of plan, provided, however, payments and interest rate would need to remain the same as provided under the original agreement).

(D) Provide for payment of filed and allowed postpetition claims under plan (§1322(b)(6))

Section 1322(b)(6) authorizes a plan to provide for payment of all or any part of any claim allowed under §1305. Section 1305, in turn, provides that a postpetition tax creditor, or a postpetition creditor for a consumer debt that is for property or services necessary for the debtor's performance under the plan, may file a claim. If the claim is filed and allowed it will be treated as an unsecured claim in the debtor's plan (if the debtor's plan so provides). As a claim treated in the plan, the allowed postpetition claim will be discharged (under most circumstances) just like all other prepetition claims.

The purpose of §§1305 and 1322(b)(6) is to facilitate the debtor's performance under its plan. It has been observed that the debtor often encounters unforseen circumstances which strain a marginal budget to the breaking point during the pendency of the Chapter 13 plan. The only alternative to breaching the plan may be to obtain additional credit, for such things as automobile repairs, medical expenses, etc. Section 1305 permits holders of such postpetition claims to share with pre-petition creditors under the plan. See In re Roseboro, 77 B.R. 38, 40 (Bankr. W.D.N.C. 1987).

There are, however, some important limitations to §1305. First, it applies only to consumer debt that is for property or services necessary for the debtor's plan performance. Second, the filing of a claim is permissive. The postpetition creditor may, but is not obligated to, file a claim. Based on the fact that it is the creditor's decision as to whether to participate, a number of courts have held that a debtor may not seek to modify its plan under 11 U.S.C. §1329 to bring postpetition creditors into the plan involuntarily. See, e.g., In re Smith, 192 B.R. 712 (Bankr. E.D. Tenn. 1996); In re Trentham, 145 B.R. 564 (Bankr. E.D. Tenn. 1992); In re Goodman, 136 B.R. 167 (Bankr. W.D.Tenn. 1992). The unwillingness of courts to allow a plan modification to bring in postpetition creditors is contrasted with the modification of a plan to cure postpetition arrearages in plan payments. It appears that a majority of the courts permit a debtor to cure post-petition arrearages in a modified plan. See, e.g., Mendoza v. Temple-Inland Mortgage Corp. (In re Mendoza), 111 F.3d 1264 (5th Cir. 1997); In re Bellinger, 179 B.R. 220 (Bankr. D. Idaho 1995).

Third, even if filed, the §1305 claim will be disallowed if the creditor knew or should have known that prior approval by the trustee of the debtor's incurring the obligation was practicable and was not obtained. 11 U.S.C. §1305(c). Lastly, even if filed and allowed, the obligation will still not be discharged by the plan if prior approval by the trustee of the debtor's incurring such debt was practicable and was not obtained. 11 U.S.C. §1328(d).

If the postpetition claimant elects not to file a claim or has its claim disallowed, the claim will not be discharged by the plan. However, the creditor's ability to enforce its claim outside of a plan, and whether it needs relief from stay to do so pending plan completion, are unclear. While some courts may permit the creditor to enforce the postpetition claim against the debtor during the pendency of the Chapter 13 plan, they may limit the enforcement to certain property. See, e.g., Rents v. Benson (In re Benson), 116 B.R. 606 (Bankr. S.D. Ohio 1990) (permitting postpetition creditor to pursue collection against its collateral); In re Petruccelli, 113 B.R. 5 (Bankr. S.C. Cal. 1990) (allowing enforcement against postpetition earnings). Other courts may force the creditor to wait until the end of the plan to pursue collection. See Roseboro, supra.

The reason for the uncertainty of a postpetition creditor's rights is the interplay of various sections in Chapter 13. The language of §1306 expands the definition of what becomes part of the bankruptcy estate to include postpetition assets and earnings. Under 11 U.S.C. §1328 a discharge does not occur until the completion of the plan. Under 11 U.S.C. §362(c)(2), the automatic stay does not terminate until the discharge is granted. On the other hand, 11 U.S.C. §1327(b) states that except as otherwise provided in the plan or order of court confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor. The effect of these apparently conflicting provisions is to render it unclear whether a postpetition creditor can execute against the debtor's assets prior to the completion of the plan without first obtaining relief from stay.

Most courts harmonize the apparently conflicting provisions by concluding that the intent of §1306 is to make postpetition assets property of the estate up through plan confirmation and, thereafter for purposes of funding a plan if so provided for in the plan or the order of court confirming the plan. See, e.g., Security Bank of Marshalltown, Iowa v. Neiman, 1 F.3d 687 (8th Cir. 1993) (holding that Chapter 13 estate continues to exist postconfirmation up through discharge whether it has any assets); In re Leavell, 190 B.R. 536 (Bankr. E.D. Va. 1995) (observing the existence of three different lines of cases as to how to reconcile the seemingly conflicting provisions of §§1306(a) and 1327(b), and adopting the line holding that upon confirmation of the plan, property that is necessary to implement the plan remains property of the estate upon which the stay operates to protect); In re O'Brien, 181 B.R. 71, 74-76 (Bankr. D. Ariz. 1995) (holding that assets dedicated to plan remain property of estate); In re Markowicz, 150 B.R. 461 (Bankr. D. Nev. 1993) (holding IRS did not violate stay by levying on postconfirmation wages for postconfirmation taxes because the wages levied upon had not been committed to funding the plan). But see Oliver v. Toth (In re Toth), 193 B.R. 992 (Bankr. N.D. Ga. 1996) (adopting the Petruccelli view); Petruccelli, supra (holding the confirmation revested all debtor's assets in debtor (absent a provision in plan delaying revestment) and that postpetition levy by postpetition creditor does not violate automatic stay without regard to whether assets were committed to plan).

Note that the issue in Toth was whether property acquired postconfirmation is protected by the automatic stay. The court began its analysis by observing that since the claim of the creditor providing the purchase money to acquired the property arose after the commencement of the case, only §§362(a)(3) and (4) could be applicable, and then only if the property was property of the estate. The Court observed the existence of three different lines of cases as to how to reconcile the seemingly conflicting provisions of §§1306(a) and 1327(b), the three lines being: (a) that property committed to the plan remains property of the estate protected by the stay as to all postpetition creditors, but all other property becomes property of the debtor; (b) all property of the estate becomes property of the debtor and is therefore not subject to the stay as against postpetition creditors unless the plan prevents the revesting in accordance with §1327(b); and (c) all property of the estate remains property of estate protected by the automatic stay, and finally adopted the Petruccelli view. Since the property in question was acquired after the plan was confirmed it was clearly property of the debtor and not the Chapter 13 "estate." As an exercise of caution, however, a postpetition creditor should seek relief from stay before proceeding to execute on the debtor's property while a Chapter 13 case is pending.

Notwithstanding the uncertainty of a postpetition creditor's rights against the debtor's assets pending the Chapter 13 discharge, the question remains why would any postpetition creditor file a claim and face potential discharge. Secondly, given the creditor's likely reluctance to accept anything less than 100%, how can a debtor use these provisions to his advantage. With respect to the first question, it seems that a postpetition creditor has no incentive to file a claim and participate in the plan unless: (i) the distribution in the plan is to be 100%; or (ii) the distribution under the plan, although less than 100%, is better than what the creditor is likely to otherwise realize. From the debtor's perspective, these provisions provide an opportunity for getting the postpetition creditor(s) paid, if not at less than 100%, then at least out of the pockets of the prepetition unsecured creditors. This could be accomplished by including in the Chapter 13 plan a provision, in accordance with §1322(b)(6), which provides that allowed §1305 claims will be paid 100% before distributions to prepetition unsecured creditors. Such preferential payment would seem to satisfy the four factor test for allowable discriminatory treatment discussed above and is arguably permissible. Assuming such a provision in the plan was allowed, it would then be up to the debtor to obtain prior trustee approval before incurring the debt (so as to satisfy §1305(c)), and to then encourage the postpetition creditor to file a claim in the case.

IV. PLAN CONFIRMATION

11 U.S.C. §1325(a) sets forth the requirements for plan confirmation. The requirements are that the plan complies with the provisions of the bankruptcy law, that all cost and fees related to the filing of the case have been paid, that the plan has been proposed in good faith, that the creditors receive at least as much under the plan as they would have received in a Chapter 7 (best interests of creditors test), that the plan is feasible, and that there has been no opposition to the plan by a secured or unsecured creditor or the Chapter 13 trustee. The section also sets forth certain rules for confirming a plan over the opposition of a secured or unsecured creditor ("cramdown").

(A) Good faith requirement

There is no definition of "good faith" in the Code. By and large, most courts have used a totality of the circumstances approach meaning that the court must evaluate each case independently using all relevant factors. In re Lilley, 91 F.3d 491 (3d Cir. 1996) (following the 7th, 9th, and 10th Circuits in holding that the good faith of Chapter 13 filings must be assessed on a case-by-case basis in light of the totality of the circumstances; In re Clements, 185 B.R. 903, 906 (Bankr. M.D. Fla. 1995) (providing a list of 11 factors utilized by courts when determining good faith under §1325).

The fact that debt that would be nondischargeable in another Chapter does not, alone, constitute bad faith or grounds for dismissal. See, e.g., Lilley, supra (holding that the fact that the Chapter 13 (unlike Chapter 7) discharges tax fraud debts does not constitute grounds to dismiss the case).

The size of the distribution to unsecured creditors was, at one time, an important consideration in the determination of good faith. With the enactment in 1984 of the disposable income test in §1325(b), this factor is no longer as significant as it once was. The reason for the adoption of the disposable income test in Chapter 13 was to resolve the controversy which existed over whether confirmation of a Chapter 13 plan required some set percentage dividend to unsecured creditors. The disposable income test, as adopted, sets forth a standard which simply requires the debtor to pay as much as he could, i.e., make his "best effort." This, in turn, led to the conclusion that as long as the debtor was making his best effort he was acting in good faith and a plan could still be confirmed even if it proposed no distribution to the unsecured creditors. See, e.g., In re Fields, 190 B.R. 16 (Bankr. D.N.H. 1995). Note that if a debtor has the capacity to earn more money and choses not to do so, the plan may be found to fail the best effort's test. See In re Jobe, 197 B.R. 823 (Bankr. W.D. Tex. 1996) (denying confirmation where one of the debtors was young and capable of working but chose not to do so).

On the other hand, because the question of good faith is separate and distinct from the best effort requirement, In re Girdaukas, 92 B.R. 373, 377 (Bankr. E.D. Wis. 1988), even if the debtor satisfies the best effort test confirmation may still be denied. As set forth in Girdaukas, the good faith requirement is one of the central, perhaps the most important, confirmation findings. Id. The totality of the circumstances test merges factors such as a debtor's motive for seeking Chapter 13, how the debts were incurred, whether such debts would be nondischargeable in a Chapter 7, etc. Id. The totality of the circumstances test focuses upon whether a plan abuses the provisions, purpose or spirt of the bankruptcy chapter under which relief is sought. Id. Accordingly, while the fact that the debts might be nondischargeable will not alone justify the denial of confirmation of a plan that proposes to pay 1/2000 of the debt, that fact, together with the microscopic dividend, together with other facts and circumstances, was relied upon by the Girdaukas Court to deny confirmation of the Chapter 13 plan. The bottom line is that an argument that a plan does not satisfy the good faith requirement for confirmation represents a powerful last line of defense for creditors opposing a plan that otherwise complies with the "bare bones" statutory requirements.

(B) Confirmation over the objection of a secured creditor (§1325(a)(5)(B) and (C))

Subject to the requirements (and limitations) of 11 U.S.C. §§1322(b)(2) and (5), a debtor may obtain confirmation of its plan by either paying the secured claim in full, with interest, over the life of the plan, or surrendering the collateral. 11 U.S.C. §1325(a)(5). The issues, when the debtor seeks to retain the collateral and modify the payment scheme, include the valuation of the secured claim, the adequacy of the interest rate, and the retention of the lien pending full payment.

(1) Valuation of the secured claim

(2) Adequacy of the interest rate

(3) Retention of the lien pending full payment

Note, however, Nicewonger relied, in part, on what it interpreted as Congressional intent evidenced by the 1994 amendment to §348(f)(1)(B). Under that section, partial payment of the secured portion of an undersecured claim operates as an immediate partial satisfaction of the secured portion of the claim. However, §348(1)(B) does not address lien stripping and, in Chapter 7, pursuant to the Supreme Court decision in Dewsnup, a lien may not be stripped. The effective date of the bifurcation and the application of payments are two different things. This does not mean that Nicewonger is wrong, only that its reliance on §348 may not have been justified.

(C) Confirmation over the objection of an unsecured creditor or Chapter 13 Trustee (§1325(b))

A debtor may confirm a plan over the objection of an unsecured creditor if the plan either provides for the unsecured claim to be paid in full over the life of the plan, or provides that all of the debtor's projected disposable income to be received in the three-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan. 11 U.S.C. §1325(b)(1). Interestingly, 11 U.S.C. §1325(b)(1)(A) which sets forth payment in full as one of the debtor's cramdown options does not include the same present value requirement as appears in 11 U.S.C. §1129(b)(2)(B)(i) (one cramdown option against unsecured creditors in Chapter 11). Unsecured creditors in Chapter 11 are entitled to interest postconfirmation in order to be considered paid in full. Everett v. Perez (In re Perez), 30 F.3d 1209 (9th Cir. 1994). On the other hand, payment of the face amount of the unsecured claims, without interest, would satisfy §1325(b)(1)(A), as written. In re Eaton, 130 B.R. 74 (Bankr. S.D. Iowa 1991).

Notwithstanding the foregoing, a Chapter 13 debtor would need to pay unsecured creditors postpetition and postconfirmation interest (at presumably the creditor's contractual or statutory rate) if the debtor was solvent so that a liquidation of his assets would result in the creditors being paid in full. Hardy v. Cinco Federal Credit Union (In re Hardy), 755 F.2d 75 (6th Cir. 1985); In re Rivera, 116 B.R. 17 (Bankr. D. Puerto Rico 1990).

"Disposable income" is defined for a consumer debtor as income received by the debtor which is not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor. 11 U.S.C. §1325(b)(2)(A). If the debtor is engaged in business, disposable income is defined as that which is not reasonably necessary for the continuation, preservation, and operation of the business. 11 U.S.C. §1325(b)(2)(B). Not surprisingly, the interpretation of the "disposable income test" is a fertile ground for litigation.

Disposable income is different than "net income" calculated by an accountant, particularly in a situation where the debtor is operating a business. The court has the option of determining disposable income on a cash or accrual basis, Broken Bow Ranch, Inc. v. Farmers Home Administration (In re Broken Bow Ranch, Inc.), 33 F.3d 1005, 1009 (8th Cir. 1994). Noncash expenses like depreciation are generally excluded from the calculation. In re Linden, 174 B.R. 769, 771-72 (C.D. Ill. 1994). Furthermore, income is generally not limited to that defined as such by the Internal Revenue Code. See In re Moore, 188 B.R. 671, 675 (Bankr. D. Idaho 1995). Instead, income is generally cash flow without regard to its financial or tax accounting definition.

(1) Distinction between the "best interests of creditors test" and "disposable income test"

The disposable income test serves a different purpose. Without regard to what creditors would have received in a liquidation, if the Chapter 13 debtor has the ability because of current income generated during the plan to pay claims of unsecured creditors without jeopardizing his reorganization effort, he is required under the disposable income test to do so. In re Wood, 122 B.R. 107, 112 (Bankr. D. Idaho 1990).

From a bankruptcy planning perspective, short of a desire to take advantage of the superdischarge provided by Chapter 13, to cure obligations in default that cannot otherwise be consensually arranged through a reaffirmation in Chapter 7, or to preserve nonexempt assets, there is little to be accomplished in Chapter 13. Of course, a debtor with a large income may find itself denied the Chapter 7 alternative if the court or Office of the United States Trustee perceives the Chapter 7 filing as being a substantial abuse of that chapter. See 11 U.S.C. §707(b).

(2) Triggering determination of whether "disposable income test" is satisfied

The debtor has the ultimate burden of persuading the court that the plan meets all confirmation requirements, including the disposable income test if an objection is made. In re Clements, 185 B.R. 903 (Bankr. M.D. Fla. 1995). The quantum of proof would appear to be by a preponderance of the evidence. See, e.g., Heartland Federal Savings & Loan Assn. v. Briscoe Enterprises, Ltd., II (Matter of Briscoe Enterprises, Ltd., II), 994 F.2d 1160, 1165 (5th Cir. 1993), cert. denied, __ U.S. __, 114 S. Ct. 550, 126 L. Ed. 2d 451 (1993) (holding in Chapter 11 context that the burden of proof on a debtor to prove that the plan satisfied the conditions for confirmation was by a preponderance of the evidence). Some courts hold, however, that before the debtor has the burden to persuade that the disposable income test has been satisfied, the objecting creditor (or trustee) has the initial burden of producing satisfactory evidence to support the contention that the debtor is not applying all of his disposable income for three years to the plan. See, e.g., In re Fries, 68 B.R. 676, 685 (Bankr. E.D. Pa. 1986).

(3) Is the income to be contributed the "projected" or "actual"?

The genesis of the line of cases which culminated in the Eighth Circuit's decision in Yarnell appears to have been Matter of Schwarz, 85 B.R. 829 (Bankr. S.D. Iowa 1988). Schwarz, recognizing the difficulty in making cash flow projections and determining disposable income at the time of plan confirmation, set forth the following procedure:

. . . the debtor's plan must commit disposable income to plan payments for a period of three years. At the end of each year, the trustee will review the monthly disclosure statement that had been filed with her and recommend a specific amount to the debtor for distribution to the unsecured creditor. In the event [the unsecured creditor] would dispute the dollar figure upon which the trustee and the debtor agree, it could challenge the distribution as an unsecured claim holder under [the section pertaining to postconfirmation plan modification].

85 B.R. at 832. The practice of considering actual "after the fact" income and expenses pursuant to a disposable income clause inserted in the plan was adopted by a series of cases including the lower court in Yarnell. See Yarnell v. Rowley (In re Rowley), 143 B.R. 547 (Bankr. D.S.D. 1992).

The procedural significance of a disposable income clause like that utilized by Schwarz and subsequent cases is illustrated by In re Kuhlman, 118 B.R. 731 (Bankr. D.S.D. 1990). Kuhlman held in dictum that where there was a disposable income clause, the trustee or any other party, if they believed that there was actual disposable income that had not been contributed, could file a motion to compel compliance, or even object to discharge at the end of the plan term. There was no need to seek modification of the plan since the clause already obligated the debtor to contribute all disposable income. The burden was on the debtor to persuade the court that all of the actual disposable income realized during the three years of the plan had, in fact, been contributed to the plan. See also In re Roberts, 133 B.R. 1004 (Bankr. N.D. Ind. 1991) (citing with approval Kuhlman's conclusion regarding the availability of an objection to discharge).

The alternative to the Schwarz open ended type plan is one which limits the debtor's obligations under the plan to that which was originally "projected" in the plan. See, e.g., Anderson v. Satterlee (In re Anderson), 21 F.3d 355 (9th Cir. 1994). Anderson held that only requiring the debtor to commit to contribute that which had been projected as disposable income was more consistent with statutory language. If the actual disposable income turned out to be greater than what had been projected, the trustee or creditors could seek a modification of the plan to increase payments. However, the burden of proof would be on the party seeking the modification.

Anderson involved a Chapter 13 debtor while Yarnell involved a Chapter 12 farmer. Chapter 12 provides a set of tools for the adjustment of debts of a family farmer with regular annual income. The provisions of Chapters 12 and 13 are very similar and courts dealing with issues under either Chapter often looks to cases decided under the other. See, e.g., In re Snider Farms, Inc., 86 B.R. 1003, 1006 (Bankr. N.D. Ind. 1988) (noting that Chapter 12 is modeled on Chapter 13 and has similar language and, therefore, Chapter 13 case precedents provide a useful tool for the interpretation of Chapter 12). However, unlike a regular wage earner whose personal income and expenses is easily projected, a farmer's disposable income is not. Based on these different circumstances, the different approaches might have some rational basis. However, both Chapter 12 and 13 have the same "projected disposable income" language and, if Anderson's statutory construction is correct, the different circumstances would seem irrelevant.

If for no other reason than that it protects a debtor from being deprived of a discharge based on the court's ex post facto determination of what was a reasonable and necessary expenditure, the Anderson view is the better one. Cf., In re Moss, 91 B.R. 563 (Bankr. C.D. Cal. 1988) (holding that reference in §1325 (b)(1)(B) to "projected disposable income" indicated that actual income had no bearing on discharge; debtor is entitled to §1328(a) discharge if he has made all payments required under the plan). From the perspective of creditors, however, the fairness of the Anderson view depends on how difficult it is for them, or the trustee, to seek modification of the plan under 11 U.S.C. §1329 if the debtor's projections later turned out to have been overly conservative.

There are two views on what showing is required in order to obtain a modification of a confirmed plan. One line of cases, in order to impose some degree of finality on a confirmation order, require a showing of changed circumstances which are both substantial and could not have been reasonably anticipated at the time of confirmation. See cases cited in In re Klus, 173 B.R. 51, 58 (Bankr. D. Conn. 1994). See also In re Nelson, 189 B.R. 748 (Bankr. D. Minn. 1995) (denying debtor's requested modification to reduce plan payments because the change in circumstances were the result of the debtor's own voluntary conduct and decisions); In re Guernsey, 189 B.R. 477 (Bankr. D. Minn. 1995) (denying debtors' requested modification to reduce plan payments to unsecured creditors on the basis of a larger than anticipated secured claim because of their failure to establish that the fault was not theirs). The other view is that the statute imposes no threshold requirement to modify the plan and, therefore, the courts should not judicially create one. Matter of Witkowski, 16 F.3d 739 (7th Cir. 1994). Under the second view, the only limitations on a modification is the good faith requirement imposed upon the movant, the fact that the plan as modified must still satisfy the confirmation requirements, and the discretion granted to the bankruptcy court by the statutory language which makes modification permissive, not mandatory. Witkowski, 16 F.3d at 746; Klus, 173 B.R. 58-60. See also In re Edwards, 190 B.R. 91 (Bankr. M.D. Tenn. 1995) (holding that notwithstanding lack of clarity in statute, Congress probably intended the disposable income test to apply to postconfirmation modifications as a matter of policy).

Notwithstanding the Witkowski view, it appears that most courts still require some showing of a change in circumstances where the proposed modification is disputed. Some courts seek to justify the conclusion by a particularly narrow reading of Witkowski. See, e.g., Guernsey, supra (concluding that Witkowski did not eliminate need to show unanticipated change in circumstances in order to be entitled to modification). Other courts simply disagree with the Witkowski holding. See, e.g., In re Richardson, 192 B.R. 224 (Bankr. S.D. Cal. 1996) (denying motion to modify plan after 60th month to reduce distribution from the 100% proposed in the plan to the 46% actually made, where debtor was unable to show any recent change in circumstances to justify the failure to fully perform; court concluded to allow such a modification after the fact would result in the debtor being granted a Chapter 13 superdischarge notwithstanding a failure to complete the plan payments). However, it is possible that the "substantiality" of the change in circumstances required by the courts pre-Witkowski to justify a modification has been reduced as a result of the Witkowski opinion.

The Anderson view as to what the statute requires in the way of the plan may be a good fit with the Witkowski view as to what kind of showing must be made in order to be entitled to a modification. See, e.g., In re O'Brien, 181 B.R. 71, 78-80 (Bankr. D. Ariz. 1995). While Anderson imposes upon the trustee or creditor the obligation to seek a modification if actual disposable income turns out to have been greater than what was projected, Witkowski avoids the necessity of showing that the changed circumstances were either substantial or not reasonably anticipated (even if some change in circumstances is still required). From the debtor's perspective, that result is probably preferable to an open ended "disposable income clause" like that approved in Yarnell.

Note that the ability to modify the plan without having to satisfy judicially created threshold requirements may also benefit the debtor. For example, in In re Steele, 182 B.R. 284 (Bankr. W.D. Okl. 1995), the court allowed the debtor to modify its plan to cure a postconfirmation default in payment to a secured creditor. See also In re Hoggle, 12 F.3d 1008 (11th Cir. 1994) (holding that a confirmed Chapter 13 plan could be modified to allow a debtor to cure a postconfirmation default pursuant to §1322(b)(5)).

Note that even under a liberal view of a right to amend, amendment may be denied on the basis of equitable estoppel. See, e.g., Taylor v. First Union Mortgage Company (In re Taylor), 208 B.R. 828 (Bankr. E.D. Pa. 1997) (holding that, under facts of case, debtor was equitably estopped from changing the treatment of a secured creditor from that set forth in the original plan).

(4) Determination of disposable income.

(i) Disposable income arguably includes all funds to which the debtor has access

The willingness of courts to consider exempt assets, exempt income, or income of a non-filing spouse does not mean that courts can compel debtors to distribute those specific sums to their creditors. It has been held that debtors cannot be forced to liquidate exempt assets to fund a plan. See, e.g., In re Stones, 157 B.R. 669 (Bankr. S.D. Cal. 1993). Furthermore, a debtor, arguably, cannot have attributed to him income which he is not actually receiving even though it is within his control as to whether he receives the income. See Solomon v. Cosby (In re Solomon), 67 F.3d 1128 (4th Cir. 1995). The creditor's remedy where the debtor elects not to receive the "discretionary" income is to attack the debtor's good faith. Id. On the other hand, some courts have held that once the exempt assets have been liquidated, the resulting proceeds will be considered in determining the amount of the debtor's disposable income. See, e.g., Freeman v. Schulman (In re Freeman), 86 F.3d 478 (6th Cir. 1996) (holding that an otherwise exempt tax refund should be included in disposable income); Gaertner v. Claude (In re Claude), 206 B.R. 374 (Bankr. W.D. Pa. 1997) (exempt personal injury award included in determination of disposable income); In re Minor, 177 B.R. 576 (Bankr. E.D. Tenn. 1995) (holding that lump sum award of workers' compensation benefits would be included in determination of disposable income); Watters v. McRoberts, 167 B.R. 146 (S.D. Ill. 1994) (holding that exempt personal injury recovery would be included in determination of disposable income); but see In re Baker, 194 B.R. 881 (Bankr. S.D. Cal. 1996) (distinguishing lump sum liquidation of an exempt asset from an exempt stream of payments (like social security) and holding that a lump sum payment of life insurance proceeds exempt under applicable law would not be considered in the determination of disposable income, although the interest earned on the investment of that sum would be included); Wheeler, Exempt Income in Chapter 13, ABI Journal, p. 16 (September 1996) (observing that Freeman turned not on a broad disposable income definition, but rather on the fact that the debtor's plan had provided from the outset that tax refunds would be included in the scheme of distribution).

Solomon involves an interesting analysis of the interplay between the exemptions and the calculation of disposable income. Solomon involved exempt IRAs which the debtor was eligible to begin to draw from without penalty. Under the applicable regulations, an IRA beneficiary may begin to draw regular payments from an IRA after age 59 ½ without penalty, but must begin to draw at age 70 ½. The debtor in Solomon was 61 years old and although eligible to begin to draw on the IRA indicated that he preferred to let the money continue to compound tax free.

The facts of Solomon were distinguishable from Schnabel. In Schnabel, the debtor was already receiving the pension and social security income that was exempt and so the amount of regular income was fixed. Notwithstanding the distinction, the lower courts in Solomon, utilizing the principles enunciated in Schnabel, concluded that it was appropriate to attribute to the debtor the income which he could have received from the IRA had he elected to begin to draw. See In re Solomon, 166 B.R. 832 (Bankr. D. Md.), aff'd, 173 B.R. 325 (D. Md. 1994). That still left the problem of how to determine the amount to attribute. The lower courts got over this hurdle by looking to the minimum distribution formulas established by the Internal Revenue Code and applicable regulations, recognizing however that the calculation would be based on a hypothetical, but permissive, commencement dater earlier than the 70 ½ mandatory age. The decision of the lower courts in Solomon were reversed by the Fourth Circuit. See Solomon, 67 F.3d 1128.

The lower courts in Solomon recognized that the determination of what constitutes a reasonable amount to be attributed requires a consideration of the particular circumstances of each Chapter 13 debtor. The specific facts of the case therefore is important. Solomon involved a physician debtor seeking to discharge allegations of intentional torts in an amount of about $160 million. The debtor claimed as exempt about $2.1 million in assets including IRAs of about $1.4 million. The debtor anticipated little or no prospective earnings (based on the demise of his practice once the tort claims had been made public). The debtor proposed to fund his plan from whatever was to be left over after his costs of maintenance and support were paid from a state pension and dividend and interest income. Under those facts the court apparently had little difficulty in deciding it proper to attribute income from the debtor's IRA. One suspects, however, that the lower courts may have decided differently had the IRAs been significantly smaller and/or if the debtor had still been working. Notwithstanding the reversal of the decision of the lower courts, the holding is still important as an illustration of how far the definition of income might be pushed.

A certain amount of controversy also surrounds the question of whether insurance proceeds is income for purposes of the determination of disposable income. While at least one court has held that automobile insurance proceeds are income under a Chapter 13 plan, In re Boothe, 167 B.R. 943, 945 (Bankr. D. Colo. 1994), there is a rational argument that it is not. See In re Moore, 188 B.R. 671, 676-77 (Bankr. D. Idaho 1995) (holding insurance proceeds in excess of secured claim was not disposable income to the extent that the surplus arose from the appreciation, sale or conversion of a pre-confirmation asset and the asset would have to be replaced).

(ii) what is reasonably necessary for maintenance or support of individual debtor or dependents

It's not surprising that courts have wrestled with the standard which should be applied in determining a debtor's reasonably necessary expenses. On the one hand courts have expressed an uneasiness about being required to make judgments regarding lifestyles and about the moral issues which emerge because what may be a reasonably necessary expense for one debtor might not be such to another debtor. [Citation omitted.] On the other hand courts recognize that bankruptcy judges are required by different Code sections to make very similar lifestyle determinations. . . . As one court so aptly stated, "[i]t's an unpleasant job, but someone has to do it." In re Rogers, 65 B.R. 1918, 1021 (Bankr. E.D. Mich. 1986).

Notwithstanding the recognition by the courts of the need to review the debtor's expenses, the review is a narrow one.

[T]he court cannot and should not order debtors to alter their lifestyles where there is no obvious indulgence in luxuries, even where one or more unsecured creditors demand such a change. To engage in such close judgments and supervision would be to contravene the intent of Congress. It would also place impossible burdens on the court in determining the absolute necessity of every expense in each debtor's budget.

The general standard for determining what is reasonably necessary, as noted in Gillead, is as follows:

the reasonably necessary standard requires that the Court take into account other income and exempt property of the debtor, present and anticipated . . . and that the appropriate amount to be set aside for the debtor ought to be sufficient to sustain basic needs not related to [the debtor's] former status in society or the lifestyle to which he is accustomed.

First, the court agrees with the Debtors that the standard requires that reasonably necessary expenses be determined on a case by case basis. Second, the standard must be flexible to allow a debtor some latitude with regard to what can be claimed as a discretionary expense and in what amount. Although some discretionary expenses are necessary for maintenance and support, Matter of Anderson, 143 B.R. 719, 721 (Bankr. D. Neb. 1992), the amount claimed must be subject to a reasonableness limitation. Finally, the court would agree that a debtor with a high income who is paying substantial amounts into the plan may retain a greater dollar amount for discretionary expenses than a debtor of more modest income who proposes little or no payment to unsecured creditors. 143 B.R. at 721.

Gillead concluded, based on types of assets (luxury) and debts listed, that the debtors in the case had "mortgaged their future" and spent their way into bankruptcy. The court refused to approve a plan which permitted the debtors to maintain their luxurious lifestyle in order to reduce their disposable income. The court did decide, however, that while the monthly mortgage payment on the debtors' residence was well above the amount necessary to provide a decent abode, permitting the debtors to retain their residence makes enough economic sense to find that the payment is reasonable rather than excessive. 171 B.R. at 891 n.4.

The Gillead court's reluctance to require the debtors to move to more reasonably priced housing as a condition of approval of a chapter 13 plan may not be unreasonable in light of the totality of the circumstances in that case, including the costs of moving. Courts have not, however, been reluctant to conclude that the costs involved in maintaining other types of discretionary assets is not necessary or reasonable. See e.g., Harshbarger v. Pees (In re Harshbarger), 66 F.3d 775 (6th Cir. 1995) (repayment of loan from debtor's ERISA qualified profit sharing plan is not necessary for maintenance or support); Univest-Coppell Village, Ltd., v. Nelson, 204 B.R. 497 (E.D. Tex. 1996) (disallowing private school tuition); In re Lees, 192 B.R. 756 (Bankr. D. Mont. 1994) (denying confirmation of plan that proposed monthly payments to creditors of $150 and tithe of $200; court concluded that tithing is not a reasonable and necessary expense and that while debtor could tithe out of discretionary income retained for recreational spending, the debtor has no right to more discretionary income then other debtors merely because he wished to use some of it to make charitable donations); In re Delnero, 191 B.R. 539 (Bankr. N.D.N.Y. 1996) (repayment of loans from retirement accounts was included in disposable income, notwithstanding negative tax consequences, unless repayment was compulsory and a condition of employment); In re Moore, 188 B.R. 671, 675 (Bankr. D. Idaho 1995) (401k contributions and loan repayments are not necessary expenses); In re Smith, 187 B.R. 678 (Bankr. D. Idaho 1995) (absent evidence that life insurance is required by law, life insurance premium is not a necessary expense); In re Cavanaugh, 175 B.R. 369 (Bankr. D. Idaho 1994) (voluntary contributions to retirement plans are not reasonably necessary for maintenance or support, cosmetic repairs to the debtors house are not reasonably necessary, charitable contributions are not reasonably necessary although the debtor may make charitable contributions out of whatever recreational spending the court approves); Schnabel, 153 B.R. at 818-19 (business expenses for a business which is not anticipated to generate any income during the life of the plan is not reasonably necessary, the voluntary acceleration of installment obligations (not otherwise required under §§1322(b)(2) and 1325(a)(5)) is not reasonably necessary); In re Rybicki, 138 B.R. 225 (Bankr. S.D. Ill. 1992) (payments of a camper is not a reasonably necessary expense); In re Reyes, 106 B.R. 155 (Bankr. N.D. Ill. 1989) (payments on a new four-wheel drive Chevrolet Blazer is not reasonably necessary); In re Hedges, 68 B.R. 18 (Bankr. E.D. Va. 1986) (payments on a Chapparell boat is not reasonably necessary); In re Rogers, 65 B.R. 1018 (Bankr. E.D. Mich. 1986) (payments on a Corvette automobile is not reasonably necessary).

Courts appear to generally allow the consumer debtor to maintain some monthly "contingency fund." Fries, 68 B.R. at 683 n.7. A reasonable reserve is perceived to be necessary to guard against unexpected needs that arise from time to time. See, e.g., Fries, supra ($92.16 held to be a reasonable monthly reserve); In re Greer, 60 B.R. 547 (Bankr. C.D. Cal. 1986) ($75 monthly reserve held reasonable); In re Otero, 48 B.R. 704 (Bankr. E.D. Va. 1985) ($117 a month allowed for reserve). In addition, some amount of recreational spending will be permitted. See, e.g., In re Fields, 190 B.R. 16 (Bankr. D.N.H. 1995).

Ultimately, the question of what is reasonable seems to come down to the court's perception as to what is fair under the circumstances. Illustrative is the following comments from Rybicki:

The Court does not wish to deny the debtors their camper, but the Court cannot ignore the requirements of the Bankruptcy Code. Debtors in Chapter 13 must undergo some belt-tightening. [Citations omitted.] The Court cannot permit the debtors to pay a debt on a camper they do not need while the unsecured creditors receive only 10% of their claims.

(iii) what is reasonably necessary for continuation, preservation and operation of the debtor's business

There are at least three issues that frequently arise in a determination of disposable income in a business context. The first is the appropriateness of maintaining a cash reserve against future business needs. The second is the extent to which the debtor should be obligated to finance his working capital and other business costs by borrowing rather than the reinvestment of cash proceeds of the business. Lastly there is the question of the appropriateness of capital expenditures. Unlike an individual consumer who may merely suffer some inconvenience or discomfort by the deferral of savings or capital expenditures, a business may be put at a competitive disadvantage.

(a) Cash reserve. Arguably, a cash cushion is necessary for plan feasibility. It provides a source of funding in the event of some unexpected expense. On the other hand, the retention of the cushion, if it is not used, results in a windfall to the debtor. An obvious conflict exists between the self-employed debtor's interest in maintaining the cushion and the interest of unsecured creditors in maximizing their recovery.

In In re Schneider Farms, Inc., 83 B.R. 1003, 1014-15 (Bankr. M.D. Ind. 1988), the court refused to confirm a Chapter 12 plan because, among other things, the plan failed to include a reserve. As observed in the opinion, some kind of a reserve must be provided in a plan to make it feasible, whether in Chapter 11, 12 or 13. Many courts, in considering plan feasibility, have noted that a realistic budget must include some cash reserve for unexpected expenses. Id., at 1014. There is, however, some limit to the amount of the cash reserve which can be retained. In re Rott, 94 B.R. 163 (Bankr. D.N.D. 1988), explored that limit.

The plan in Rott contained a reserve for unexpected expenses, although the plan did not specify exactly what potential expenses were to be absorbed by the reserve. In discussing the plan, the Rott court noted that disposable income is a residual amount which is calculated by subtracting from total income all expenses which are consistent with the concept of "reasonably necessary." The court concluded that a cash reserve, while perhaps necessary, should be built into the projection as a separate line item that is supported by a reasonable explanation. The debtor in Rott had, instead, determined how much he was going to pay unsecured creditors, subtracted that from his income, and then called what was left his cash reserve.

The lesson of Rott is that the justification for the existence and the amount of the cash reserve must be given as much thought as every other line item on the budget. While the justification for the reserve will by definition lack specificity, it must bear some reasonable relationship to total budget, the nature of the business, the types of emergency expenses which the reserve will be used to pay, and probably what is considered reasonable in the industry.

(b) Obligation to borrow working capital. Somewhat related to the question of whether it is appropriate for the debtor to be permitted to maintain some cash reserve is whether he should be permitted to use some of his left over income at the end of the year to finance the next year's working capital.

In In re Coffman, 90 B.R. 878 (Bankr. W.D. Tenn. 1988), the court confronted the question as to whether "net income," as shown on a Chapter 12 debtor's annual report, was disposable income available for unsecured creditors or was fully or partially available to be used for the next year's planting. The alternative to allowing the debtor to carry over some cash year to year is to force him to borrow to finance the following year's working capital needs. In seeking to resolve the question of whether such a carryover is consistent with the concept of disposable income, the court focused on the statutory language which referred to the continuation, preservation and operation of the business. The court believe it logical to assume that in order to continue, preserve and operate the business it was necessary for the debtor to finance at least part of the working capital needs. Therefore, in the business context, disposable income is that which is in excess of the amount reasonably necessary for the maintenance and continuation from one year to the next. Id., 90 B.R. at 884-85; In re Bowlby, 113 B.R. 983 (Bankr. S.D. Ill. 1990) (agreeing that the Coffman conclusion also applied with respect to the carryover in the last year of the plan).

Bowlby noted that Chapter 12 was designed to give farmers a "fighting chance" to save their farms, not to put them in an advantageous position relative to other farmers. The court felt that a Chapter 12 debtor should be placed on an equal footing with other farmers upon the successful completion of the plan. Thus:

While no provision of Chapter 12 requires a farm debtor to borrow money for crop production either during the term of its plan or afterwards, the obtainment of a yearly operating loan secured by that year's crop is common practice among farmers generally. Like other persons in business, the farmer must often borrow the capital necessary to produce goods that will be sold to generate a profit, with the interest cost being deducted from that profit as part of the farmer's overhead expenses. Because the necessity and feasibility of borrowing depend upon an individual farmer's cash flow situation, no per se rule may be stated as to whether a farmer who has availed himself of Chapter 12 protection should be required to borrow the funds to produce his crop following bankruptcy in order to the meet the disposable income requirement. . . . The question is, rather, part of the "reasonable necessary" inquiry to be determined based upon the facts of a particular case.

In order to determine what was reasonably necessary for the maintenance and continuation from one year to the next requires a case by case analysis. Some of the factors to be considered, as identified by Coffman, were: the source of the debtor's business income, i.e., did the generation of income actually require the types and amount of working capital investment which was contemplated; whether the debtor was able to borrow (or made any attempt to borrow) to finance all or part of his working capital needs; and whether the investment was to be used to maintain or expand the pre-bankruptcy operations. 90 B.R. at 885-86. Also relevant is a consideration of what was commercially reasonable in light of other similar businesses, the debtor's prebankruptcy borrowing practices, the actual availability of credit, the necessity of costs such as capital improvements, and the amount and reason for any variance between what the debtor projected and what was actually realized. In re Kuhlman, 118 B.R. 731 (Bankr. D.S.D. 1990).

(c) Appropriateness of capital expenditures. Consistent with the resolution of cash reserves and working capital investment, the courts hold that capital expenditures are not, per se unreasonable. See, e.g., In re Wood, 122 B.R. 107 (Bankr. D. Idaho 1990). Instead, the court must engage in a case by case inquiry into the particular circumstances of the business and the reasonableness and necessity of the expenditure. On the other hand, courts must consider that a "fundamental purpose of the disposable income provisions is to prevent large expenditures by debtors for non-essential items which ultimately reduce the sum available to pay holders of unsecured claims." In re Fleshman, 123 B.R. 842, 845 (Bankr. W.D. Mo. 1990).