Judge Denies Trustee’s Motion to Modify Debtor’s Plan after the 36 month Commitment Period Expired in the Middle District of Alabama

One of the hardest concepts for clients in bankruptcy to understand is “disposable income”.  Essentially, while you are in an active chapter 13, if you have money or come into money that can be paid to your creditors then that money should go to your creditors.  Specifically, the Bankruptcy Code defines disposable income as “[C] urrent monthly income received by the debtor” less domestic support obligations (i.e., child support, alimony), charitable contributions and money used to continue the operations of the debtor(s) business.  11 U.S.C. § 1325(b)(2)

In interpreting the Bankruptcy Code, some districts, like the Southern District of Alabama, are strict about disposable income requiring you to stop voluntary 401k contributions while you are in chapter 13 so that those funds can be disbursed to your creditors.  A recent opinion by the Honorable Judge Dwight Williams in the Middle District of Alabama held that below median debtor(s) are only required to pay only disposable income that becomes available during the first 36 months of the plan regardless for how long they are in chapter 13.

The issue in In re Russell, Chapter 13 Case No. 13-30160, involved a debtor who was in a car accident approximately two years after filing chapter 13.  The debtor was to receive a settlement from a personal injury claim after 36 months from confirmation and the trustee filed a motion to modify the plan to capture those proceeds to be disbursed to the debtor’s unsecured creditors.  The debtor objected.  The Court held that “modification under Section 1329 is discretionary and requires “cause” in order for a court to approve an extension of a below-median income debtor’s applicable commitment period beyond three years” due to the language under 11 U.S.C.A. § 1329(c): “A plan modified under this section may not provide for payments over a period that expires after the applicable commitment period under section 1325(b)(1)(B) after the time that the first payment under the original confirmed plan was due, unless the court, for cause, approves a longer period, but the court may not approve a period that expires after five years after such time.”  The Court held that whether there is “cause” to extend an applicable commitment period is a question of fact and it “is not a sufficient cause to extend the plan term beyond three year[s]” when the trustee is doing so to increase payment to unsecured creditors.

It will be interesting to continue to watch this case if the Trustee decides to appeal this decision since it controls whether a below-median debtor at the time of confirmation would be required to turn over funds received after the 36 month commitment period.