Mark X. Mullin, United States Bankruptcy Judge.
Before the Court is the Trustee's Modification of Chapter 13 Plan after Confirmation (Increased Gross Income) (the "
Unforeseen and unanticipated life events frequently cause Chapter 13 debtors to incur material unbudgeted post-petition expenses. Usually debtors in that predicament seek to modify their plans under § 1329 or seek some other form of relief from the court to address such expenses, but other debtors face the unenviable choice between making their Chapter 13 plan payment or using their available cash to pay the unexpected post-petition expenses. The cash-strapped debtors who choose to pay their post-petition expenses often default under their plans and risk possible dismissal of their Chapter 13 cases.
In this case, the Debtor incurred unexpected medical and home-repair expenses, but she had another potential option to address those expenses — the availability of funds in her exempt 401k Plan. The Debtor believed that she could use the funds in her 401k Plan to pay the unexpected expenses outside of her confirmed plan. Therefore, the Debtor unilaterally withdrew all of the available funds in her 401k Plan and paid the medical and home-repair expenses directly. Unfortunately, she did so without consulting her attorneys, notifying the Trustee, or obtaining prior court approval.
The Trustee eventually discovered that the Debtor had withdrawn the funds from her 401k Plan, so the Trustee filed the Plan Modification under § 1329, which triggered several questions and disputes, including the impact, if any, the distribution had on the exempt status of such funds. Specifically, the Trustee argued that the exempt retirement funds lost their exempt status and became property of the estate under § 1306, thereby requiring such funds to be paid to the Trustee to increase the Debtor's Plan Base for the benefit of the pre-petition unsecured creditors. In response, the Debtor argued that the distribution of the funds from her exempt 401k Plan did not affect the exempt status of the funds and that she could use the funds as she saw fit. Although the resolution of this dispute appears, at first blush, to be limited and straightforward, the facts in this case produced several procedural and legal implications beyond the exemption issue.
The Debtor filed her Chapter 13 Petition and her Schedules A through J on April 15, 2016.
Rather than (i) seeking advice from her attorneys, (ii) seeking the Trustee's prior consent, (iii) filing a proposed plan modification, or (iv) seeking any form of prior Court approval, the Debtor unilaterally withdrew the 401k Funds from her 401k Plan in March 2017, June 2017, and September 2017 totaling $ 22,900 (the "
On or about March 4, 2018, the Debtor and her husband filed their 2017 Joint Federal Income Tax Return (the "
Following the filing of the Plan Modification, the Debtor filed Amended Schedules I and J
Although the parties focused their argument and briefing primarily on the impact, if any, the Withdrawals had on the exempt status of the 401k Funds, the Court must ultimately answer the following two questions:
Based on the appearance of a substantial increase in the Debtor's post-petition income reflected in the 2017 Tax Return, the Trustee had a good-faith basis for filing the Plan Modification. Even though the Trustee had a good-faith basis to file the Plan Modification, the Court must determine if that modification or the Oral Plan Modification satisfies the mandatory requirements for approval under § 1329. If either modification does, then the Court must still exercise its discretion to determine if the modification should be approved.
Section 1329(a) permits plan modification for four given purposes, one of which is "to increase or reduce the amount of payments on claims of a particular class provided for by the plan."
The uncontroverted evidence and credible testimony of the Debtor established that (i) the substantial increase in the Debtor's 2017 taxable income was based solely on the distributions of the available funds from her 401k Plan, and (ii) the Debtor has not received and does not receive increased post-petition monthly disposable income that would enable her to pay the substantial increase in plan payments sought by the Plan Modification. Further, the Trustee offered no evidence to establish that the Debtor had the ability to make the increased plan payments sought by the Plan Modification. Based on the uncontroverted evidence, the Court finds and concludes that the Trustee failed to satisfy his burden to establish that the Plan Modification (to increase the Debtor's monthly plan payments) is feasible as required by §§ 1329(b)(1) and 1325(a)(6).
The Trustee also requests, as an alternative, that the Oral Plan Modification
Even if the Trustee's position is correct, the uncontroverted evidence and credible testimony of the Debtor confirm that the entire balance of the Withdrawals has long been spent and is no longer available to the Debtor to pay the requested lump sum payment to the Trustee. Furthermore, the Trustee offered no evidence that the Debtor has sufficient other funds to make the proposed lump-sum payment. Based on the uncontroverted evidence, the Court finds and concludes that the Trustee did not satisfy his burden to establish that the Oral Plan Modification (to require the Debtor to make a lump-sum payment to the Trustee in the amount of $ 22,467.40) is feasible as required by § 1329(b)(1).
Because the Plan Modification and the Oral Plan Modification are denied due to lack of feasibility, arguably the Court's work is finished. Concluding the ruling at this point, however, would leave significant underlying issues and disputes between the parties unresolved. Therefore, the Court will address the additional underlying issues and disputes raised by the parties during the hearing and in their post-hearing briefs.
The Debtor opted to use the Texas exemptions rather than the federal exemptions and exempted the 401k Funds pursuant to § 42.0021 of the Texas Property Code.
Even though the Debtor did not roll over the Withdrawals into another qualified plan, the Debtor asserts that the Withdrawals remained her exempt property under Texas law and that she could use the funds as she saw fit. The Trustee, on the other hand, argues that the 401K Funds lost their exempt status protection
Although the words in § 42.0021 of the Texas Property Code appear to be unambiguous, courts do not agree on the interpretation and application of the statute when exempt funds in a retirement plan are distributed. In a chapter 7 case, a Texas bankruptcy judge analyzed § 42.0021 and came to the following well-reasoned conclusion:
The Moore court also concluded that the 60-day period in subsection (c) did not create a "conditional" exemption that disappears retroactively, and that such an interpretation of § 42.0021(c) "is contrary to the Texas exemption scheme for IRAs."
After Moore, the Fifth Circuit issued its Hawk
It appears that Hawk disagrees with Moore's interpretation and application of § 42.0021(c) to a distribution of exempt retirement funds. Therefore, even though this is a Chapter 13 case as opposed to a Chapter 7 case, this Court is bound by the Fifth Circuit's application of § 42.0021(c) as specified in Hawk, thereby requiring the Court to conclude that the 401k Funds lost their exempt status when the distributed funds were not rolled over into another retirement account within sixty days. Therefore, the Withdrawals became non-exempt property of the Debtor's bankruptcy estate pursuant to § 1306(a)(1).
Even if there is an argument that the statement in Hawk was not necessary to the Fifth Circuit's ruling and, as such, is dicta or can be distinguished, the Court does not need to decide if Hawk is controlling or if Moore correctly applies Texas law. As detailed below, if the 401k Funds lost their exempt status and the Withdrawals became property of the bankruptcy estate under § 1306(a)(1), the Court still denies both proposed modifications.
Section 1329(a) provides that a plan may be modified.
Given the Debtor's testimony, it is clear to the Court that she had a good-faith basis to use her exempt 401k Funds to pay the unexpected and unbudgeted medical and home-repair bills. Had the Debtor not suffered her medical issues or incurred home repair bills, then she would not have had a reason to withdraw the 401k Funds from her 401k Plan and such funds would have remained the Debtor's exempt asset, outside the reach of pre-petition creditors' claims.
Finally, even though the Debtor made the imprudent unilateral decision to spend the non-exempt Withdrawal proceeds from her 401k Plan to pay the medical and
Based on the totality of the relevant facts and circumstances in this case and considering the concepts of a fresh start for the Debtor and fairness to her creditors, the Court finds and concludes, in the exercise of its discretion, that it is not appropriate to approve the Plan Modification or the Oral Plan Modification even if such modifications had satisfied the requirements of § 1329. Therefore, the Plan Modification and the Oral Plan Modification are hereby denied.
For the reasons set forth above, the Court concludes that the Plan Modification and the Oral Plan Modification do not satisfy the requirements of § 1329. Alternatively, even had those modifications complied with the requirements of § 1329, the Court, in the exercise of its discretion, declines to approve either modification.
For all of the reasons stated above, it is therefore