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Debtors May Not Modify Payment Plans More Than Change of Circumstances Warrants - Johnson v. Fink

November 4, 2011

Our Riverside personal bankruptcy attorneys handle many, many cases of Chapter 13 bankruptcies. These are "reorganization" bankruptcies that settle debts by helping the filer form a payment plan and repay them slowly over time, rather than the quicker, but often more painful, liquidation offered by a Chapter 7 bankruptcy. The payment plan lasts three to five years, so it's not uncommon for the filer's income or needs to change during the repayment period. When they do, the filer may petition for a change in payments to reflect the changed circumstances. That rule was behind Johnson v. Fink, a recent decision of the Bankruptcy Appellate Panel of the Eighth U.S. Circuit Court of Appeals. Ultimately, the court decided that while a change was warranted, it should not be greater than that warranted by the change in income.

Norman and Paulette Johnson of Missouri filed for Chapter 13 bankruptcy in December of 2009. The plan confirmed in late February of 2010 called on them to pay $1,890 a month to their trustee, which included income from two jobs, Social Security and a pension. In December of 2010, Norman Johnson lost his second job, a loss of $1,240 in income a month. The Johnsons filed an amended statement of income, but did not include their Social Security income, which they argued should be excluded. Their new plan called for payments to the trustee of $100 a month. The trustee successfully moved to deny confirmation of this plan; the court agreed it was not proposed in good faith. The Johnsons then proposed a new plan and immediately objected to it, as did the trustee. The court eventually confirmed that plan, which called for a payment of $500 a month. The Johnsons appealed.

On appeal, the Johnsons argued that the admissibility of Social Security payments was the issue; the BAP said the issue was actually how much the Johnsons may amend their bankruptcy plan. The Johnsons and their trustee agree that a 2010 Eighth Circuit BAP decision, In re Thompson, would not permit the Social Security income to be included if the plan were confirmed today. They also agree that the loss of the second job qualifies as a substantial enough change in circumstances to warrant a change in the plan. However, the Johnsons argue that this should leave the door open for any changes, including to parts of the plan not affected by the change in circumstances, and the trustee disagrees. The BAP ultimately sided with the trustee, finding that changes to a bankruptcy plan must conform to the change in circumstances that required them. The Johnsons voluntarily added their Social Security payments to the original plan, it said, and did not object or appeal at confirmation. Thus, the BAP upheld the bankruptcy court.

We believe this shows the importance of having experienced Orange County consumer bankruptcy lawyers by your side from the beginning of your bankruptcy case. A bankruptcy plan is binding once it's confirmed by the court, so the confirmation stage is where bankruptcy filers need to air their objections. This is somewhat unfair to filers who could not have known that an appeals court was going to change the rules in the near future; the Johnsons may yet appeal the issue to the Eighth Circuit. However, an experienced Carson individual bankruptcy attorney can help clients identify which areas of the plan may be vulnerable to challenge; some may even be current with the appeals courts. Never hesitate to ask your attorney if you're not sure about the rules.

If you're considering bankruptcy because you're stuck with an overwhelming amount of debt and you don't know what to do, call Howard Law, P.C. for help. For a confidential discussion about your case, send us an email or call toll-free at 1-800-872-5925.

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