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 Debtors incurred unexpected medical and home-repair expenses, but they had another potential option to address those expenses — the availability of funds in their exempt retirement plans. The Debtors believed they could use the funds in their exempt retirement plans to pay the unexpected expenses outside of their confirmed plan. Therefore, the Debtors unilaterally withdrew all of the available funds in their exempt retirement plans and paid the medical and home-repair expenses directly. Unfortunately, they did so without consulting their attorneys, notifying the Trustee, or obtaining prior court approval.
The Trustee eventually discovered that the Debtors had withdrawn the funds from their exempt retirement plans, so the Trustee filed the Plan Modification under § 1329, which triggered several questions and disputes,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 Debtors' Plan Base for the benefit of the pre-petition unsecured creditors. In response, the Debtors argued that the distribution of the exempt retirement funds did not affect their exempt status and that they could use their exempt retirement funds as they 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.
On February 1, 2016, the Debtors filed their Chapter 13 Petition.
At the hearing, Mr. Sullivan testified credibly that during 2017, he was diagnosed with congestive heart failure, which caused the Debtors to incur substantial out-of-pocket medical expenses and forced Mr. Sullivan to take early retirement, resulting in a 40% decrease in the Debtors' post-petition monthly disposable income. Mr. Sullivan further testified credibly that during 2017, the Debtors' house sustained damage to the roof, water damage to its interior, and damage to the air conditioning unit—all of which resulted in substantial and unbudgeted post-petition out-of-pocket repair costs. The Court finds and concludes that all of the unexpected and unbudgeted post-petition medical and home-repair expenditures were reasonably necessary for the maintenance or support of the Debtors and their dependents.
Rather than (i) seeking advice from their attorneys, (ii) seeking the Trustee's prior consent, (iii) filing a proposed plan modification, or (iv) seeking any form of prior Court approval, the Debtors unilaterally withdrew the entire balance
On or about April 7, 2018, the Debtors filed their 2017 Federal Income Tax Return
Following the filing of the Plan Modification, the Debtors amended their Schedules I and J
Although the parties focused their argument and briefing primarily on the impact, if any, the distribution had on the exempt status of the Exempt Retirement Funds, the Court must ultimately answer the following two questions: (i) does the Plan Modification or the Oral Plan Modification satisfy the requirements of § 1329; and if so, (ii) in exercising its discretion, should the Court approve either such modification? The short answer to both questions is "no."
Based on the appearance of a substantial increase in the Debtors' 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 Mr. Sullivan established that (i) the substantial increase in the Debtors' 2017 taxable income was based solely on the distribution of the available funds from their Retirement Plans, and (ii) the Debtors have not received and do not receive increased post-petition monthly disposable income that would enable them to pay the substantial increase in plan payments sought by the Plan Modification. Further, the Trustee offered no evidence to establish that the Debtors 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 her burden to establish that the Plan Modification (to increase the Debtors' 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 be approved to require the Debtors to make a lump-sum payment of $ 71,927 (the Gross Distribution)
Even if the Trustee's position is correct, the uncontroverted evidence and credible testimony of Mr. Sullivan confirm that the entire balance of the Gross Distribution has long since been spent
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 unresolved significant underlying issues and disputes raised by the parties during the hearing and in their post-hearing briefs. Therefore, the Court will address those issues and disputes.
The Debtors opted to exempt the funds in the Retirement Plans under § 522(d)(12).
Even though the Debtors did not roll over the Gross Distribution into another qualified plan, the Debtors assert that the distributed funds remained their exempt property under § 522(d)(12) to use as they saw fit. The Trustee, on the other hand, argues that the distributed funds lost their exempt status protection after such funds were distributed to the Debtors and became non-exempt property of the Debtors' bankruptcy estate pursuant to § 1306(a)(1).
The Debtors, however, did not cite any authority addressing the federal exemption statutes. Rather, the Debtors rely on several cases analyzing the Texas exemption statutes and argue that such cases should be persuasive when analyzing § 522(d)(12). The Court disagrees. Although there may be similarities between § 522(d)(12) and the Texas exemption statute, each statute must be fully analyzed and applied independently.
A fundamental rule of statutory construction requires courts to give effect to every word, clause, and provision in a given statute so that no part of the statute would be rendered insignificant, inoperative,
In this case, the source of the exemption dispute revolves around the distribution of the Exempt Retirement Funds to the Debtors. Sections 522(b)(4)(C) and (D)
Sections 522(b)(4)(C) and (D) provide that exempt retirement funds that are (i) directly transferred from one eligible fund to another eligible fund,
In this case, there is no dispute that the Gross Distribution was not rolled over into an eligible fund within sixty days as required by § 522(b)(4)(D)(ii). Therefore, the Exempt Retirement Funds lost their exempt status and the Gross Distribution became property of the bankruptcy estate under § 1306(a)(1). As noted below, however, even though the Exempt Retirement Funds lost their exempt status and became property of the bankruptcy estate under § 1306(a)(1), the Court still denies both proposed modifications.
Section 1329(a) provides that a
Given Mr. Sullivan's age, medical condition, and reduced ability to work, it is clear to the Court that the Debtors had a good-faith basis to use their Exempt Retirement Funds to pay the unexpected and unbudgeted medical and home-repair bills. Had Mr. Sullivan not suffered his medical setback and the Debtors not endured damage to their home, then the Debtors would not have had a reason to withdraw the Exempt Retirement Funds from the Retirement Plans and such funds would have remained the Debtors' exempt asset, out-side the reach of pre-petition creditors' claims.
Finally, even though the Debtors made the imprudent unilateral decision to spend the non-exempt proceeds from their Exempt Retirement Funds to pay the medical and home-repair expenses in violation of their confirmed Plan,
Based on the totality of the relevant facts and circumstances in this case and considering the concepts of a fresh start for the Debtors and fairness to their 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
For all of the reasons stated above, it is therefore
Debtors utilizing the federal exemptions apparently may elect to exempt eligible retirement funds under either 11 U.S.C. §§ 522(d)(12) or 522(b)(3)(C). The language regarding eligible retirement funds contained in both subsections of § 522 is identical. In addition, § 522(b)(4) specifically applies to both §§ 522(d)(12) and 522(b)(3)(C).
