When debtors cannot comply with terms of a confirmed plan due to unexpected circumstances, the noncompliance cannot always be fixed by modifying the plan or seeking court approval after the fact. This post is about two cases that were dismissed for reasons you might find surprising (but shouldn’t).
Case #1 – Keeping “Toys”: Debtors proposed a 100% plan in exchange for keeping a Harley and three vehicles. They only had about $7,000 in general unsecured claims, but they really wanted to keep their Harley and a truck they didn’t need, and they had a very good income at the time. Plan confirmed.
By month 50, the debtors’ income dropped because their employers cut back on hours and reduced hourly rates, and the debtors fell behind in plan payments. They tried to modify the plan to surrender the Harley, lower plan payments, and substantially reduce the dividend to unsecured creditors. The court overruled their motion, opining from the bench that the debtors made their choice at confirmation to keep “toys,” so their change in circumstances – fairly routine by chapter 13 standards – did not warrant a modification of their 100% plan. Their case was dismissed because they could no longer afford the payments necessary to pay 100% per the confirmed plan.
Lesson Learned: These debtors focused on their wants and not their needs, and they did not think about contingencies like job layoffs or reduced wages. Debtors who want to keep toys (boats, motorcycles, expensive vehicles, etc.) will have a hard time reducing plan payments later, even if they can no longer afford their payments due to circumstances beyond their control (like job changes, extended illness or injury, divorce, etc.). The same result will occur in those cases where debtors propose a 100% plan in lieu of paying all of their disposable income (i.e., all they can afford to pay each month). They might keep extra spending money each month, but they will have a hard time getting plan payments lowered if their circumstances change down the road.
Case #2 – Status Reports: The debtors’ confirmed plan required them to file a report at the end of March of each year advising of the amount of bonus, if any, received by the debtor husband, and to pay to the trustee such bonus amount within 30 days of receipt.
In the first year of the plan, the debtor filed his report (2 months late) advising that he did not receive a bonus in the preceding year. In the second year of the plan, the debtor did not file a report, so I filed a motion to dismiss for unreasonable delay that is prejudicial to creditors. In response, the debtors filed a motion to allow them to retain the bonus income nunc pro tunc. Apparently the debtor had received $12,000 net from the bonus in February 2016 but spent it primarily on unforeseen medical expenses, as well as on car repairs and college tuition for his daughter. By the time of the hearing, nine months had elapsed since the debtor was required to file the report about his bonus.
The court dismissed the case, finding that the debtor did not file the required report for the second year or offer a legitimate excuse for not filing the report. The court further found that the debtor filed his first report 2 months late. Because the debtor did not comply with the terms of the confirmed plan, the case was dismissed. The dismissal was based on the failure to timely file the required report, not the failure to pay the bonus money. The court treated the motion to retain the bonus as moot.
Lesson Learned: When the confirmed plan requires the debtor to file a report regarding the status of bonus income, a cause of action, etc., debtors need to timely comply. Debtors need to understand that their failure to comply with the terms of a confirmed plan is the same as disobeying a court order, and the consequences of noncompliance can be severe. Keep this in mind in cases where the confirmed plan requires debtors to provide to the trustee copies of tax returns, paystubs, or status reports on or before May 1 of each year. Make sure all such cases are tickled so debtors don’t miss those important deadlines.