Decision: In re Jose Luis Alonso and Erika M. Alonso, 570 B.R. 622 (Bankr. D. Idaho 2017), Case No. 14‑41215‑JDP
Judge: Honorable Jim D. Pappas, United States Bankruptcy Judge
Counsel for Debtors: Paul Ross, Idaho Bankruptcy Law, Paul, Idaho
Chapter 13 Trustee: Kathleen A. McCallister, Meridian, Idaho
Trustee’s Counsel: Holly Sutherland, Office of Kathleen A. McCallister, Meridian, Idaho
Background
Jose Luis Alonso and Erika Molina Alonso filed a Chapter 13 petition on 28 October 2014. Their second amended plan was confirmed on 17 August 2015, with an applicable commitment period of 36 months and a plan term of 54 months. The plan did not pay unsecured creditors in full. It included the District of Idaho’s standard form provision requiring Debtors to turn over all net income tax refunds to the Trustee during the applicable commitment period.
In 2015 Debtors fell behind on their mortgage payments, and an agreed order increased their monthly plan payment by $109 to cure that arrearage. Additional arrearages arose from a wage withholding error and confusion — attributable in part to counsel — about the correct amounts to remit to the Trustee. By 31 December 2016 the total plan arrearage stood at $8,055.
For the 2014 tax year, Debtors received a $2,919 federal refund consisting entirely of overwithholding. After paying $1,066 in Idaho taxes owed, they properly remitted the $1,853 net balance to the Trustee. For the 2015 tax year, Debtors received a $5,610 federal refund comprising $1,853 in overwithholding, $1,915 in Earned Income Credit (EIC), and $1,842 in Additional Child Tax Credit (ACTC). After a $915.69 IRS offset for a prior liability, $4,694.31 was paid to Debtors, along with a $679 Idaho state refund — $6,289 in total 2015 refunds. Debtors remitted only $1,187 to the Trustee and kept $5,102. They later amended their schedules to claim the EIC and ACTC amounts exempt under Idaho Code § 11-603(4). The Trustee initially objected to those exemption claims but withdrew her objection at the February 2017 hearing, and the Court proceeded on the assumption that the credits were properly exempt.
The Competing Motions
Two motions came before the Court simultaneously. On 10 October 2016, Debtors moved to modify their confirmed plan, proposing to cure the arrearage by extending the plan from 54 to 60 months with the final six months of payments applied entirely to the arrearage, and by using “fourth year” tax refunds — those received after the 36-month commitment period had expired — to cover any remaining balance. Debtors also argued that the EIC and ACTC, being exempt, were not “tax refunds” subject to the plan’s turnover provision, which would reduce the arrearage they owed.
On 19 December 2016, the Trustee moved separately to modify the plan or dismiss the case. Her motion was based on Erika’s income having increased by approximately $518 per month through bonus payments she had neither reported nor reflected in amended schedules as the confirmation order required. The Trustee sought to increase monthly plan payments from $650 to $1,150. The Court held a hearing on both motions on 21 February 2017, ordered supplemental briefing, and took them under advisement.
Debtors’ Motion to Modify
Do EIC and ACTC Constitute “Tax Refunds” Under the Plan?
Debtors argued that refundable federal tax credits are legally distinct from withholding refunds — a credit supplements income rather than returning money previously paid — and that the plan’s “tax refunds” provision therefore did not reach the EIC and ACTC. The Trustee disagreed, maintaining that the form plan’s language encompasses all payments received from a taxing authority as a result of filing a return, regardless of source.
The Court agreed with the Trustee. Relying on In re Stevens, 90 I.B.C.R. 386 (Bankr. D. Idaho 1990), it declined to attach technical legal distinctions to commonly used plan terms, finding that doing so would complicate plan administration unnecessarily for all parties. The Court adopted a straightforward definition: “tax refunds” means all payments received from the government as a result of filing a tax return. Debtors who wish to carve out refundable credits must include specific language to that effect in their proposed plan. Having not done so, Debtors were bound by the confirmed plan and were required to turn over the full 2015 EIC and ACTC to the Trustee.
Retroactive Modification
Debtors argued in the alternative that the plan could be retroactively modified — framed as a clarification of ambiguous language rather than a true modification — to permit them to retain the 2015 credits. The Court rejected both framings. The plan language was unambiguous, leaving nothing to clarify. And retroactive plan modifications are disfavored across the board: a confirmed plan operates as a contract, and modification replaces terms going forward without unwinding obligations already accrued. The request was denied.
Projected Disposable Income
The Trustee argued that if Debtors were permitted to retain the credits going forward, they would need to include those amounts in their projected disposable income calculation under § 1325(b), effectively paying their value into the plan regardless. The Court agreed with the underlying premise — EIC and ACTC are not excluded from the Code’s disposable income calculation by their exempt status — but held that the § 1325(b) best-efforts test simply does not apply to post-confirmation plan modifications. Under In re Sunahara, 326 B.R. 768 (9th Cir. BAP 2005), § 1329(b) does not incorporate § 1325(b). The governing standard for a modification is good faith under § 1325(a)(3). Because the Court had already denied Debtors any mechanism to retain the 2015 credits, the point was in any event academic.
Fourth Year Refunds and Plan Extension
Two elements of Debtors’ proposal survived scrutiny. The confirmed plan required turnover only during the 36-month applicable commitment period, so refunds received after that window belonged to Debtors to use as they chose. Applying those funds toward the arrearage through the plan would not harm creditors who were never entitled to them. The Court also approved in principle extending the plan from 54 to 60 months, with the additional payments devoted to the arrearage. Other creditors would receive no less than the confirmed plan promised, and there was no indication of bad faith in either proposal. The Court indicated it would also permit the plan to conclude before month 60 if the arrearage could be resolved sooner, provided creditors received the equivalent of their 54-month entitlement.
Despite approving these elements in principle, the Court denied Debtors’ motion as a whole — the package as presented could not be approved. The Court invited Debtors to file a new modified plan consistent with its rulings.
Trustee’s Motion to Modify
At confirmation, Erika’s net monthly income was $1,200. By the time the motions were filed her amended schedules reflected net income of $1,755 — an increase of more than $500 per month. The Trustee sought a corresponding $500 monthly increase in plan payments, attributing the rise to what she characterized as a sustained improvement in Erika’s earnings. Debtors did not contest that some increase was warranted but argued that the higher income reflected inconsistent bonus payments rather than any permanent raise in base pay, pointing to the most recent pay stubs — covering 16 October through 15 November 2016 — which showed no bonus at all.
The Court reviewed six months of bi-monthly pay stubs. Erika’s base pay was a consistent $750 per period. Bonuses of $400 to $500 appeared in most periods but not all. Averaging the $2,950 in total bonuses paid across 23 of 26 annual pay periods, and applying the roughly 16% withholding rate visible throughout the stubs, the Court calculated a net average bonus of approximately $108 per month. It declined to dismiss the case, finding that remedy disproportionate, and granted the Trustee’s motion in part — ordering plan payments increased by $108 per month, from $821 to $929, for the remainder of the plan.
The Court’s Ruling
Debtors’ motion to modify was denied as a package. The 2015 EIC and ACTC are “tax refunds” under the confirmed plan and must be turned over to the Trustee. Retroactive modification to allow Debtors to retain them was not permitted. Fourth year refunds and a 60-month extension were sound in concept but could not save a motion that could not be approved as presented. Debtors were directed to file a new modified plan.
The Trustee’s motion was granted in part. Plan payments were increased to $929 per month for the remainder of the plan. Dismissal was denied.
Why This Matters
1. “Tax refunds” in the District of Idaho’s form plan means everything received from the taxing authority as a result of filing a return. EIC and ACTC are included. Practitioners who want to exclude refundable credits from the turnover obligation must include explicit plan language at confirmation.
2. Retroactive plan modification is disfavored. A confirmed plan binds the parties as a contract. Modification replaces terms prospectively and does not unwind obligations already accrued — whether the moving party is a debtor seeking to reduce what is owed or a trustee seeking to capture income already received and spent.
3. The § 1325(b) projected disposable income test does not apply to post-confirmation plan modifications. Under In re Sunahara, § 1329(b) omits § 1325(b). The governing standard for a modification is good faith under § 1325(a)(3). Trustee arguments grounded in the best-efforts test must be reframed as good faith arguments in the modification context.
4. Exempt status does not remove EIC and ACTC from the disposable income calculation. Both credits are excluded from neither current monthly income under § 101(10A) nor disposable income under § 1325(b)(2). A debtor who retains them must factor them into the income calculation, or face a good faith challenge to the modified plan.
5. Post-commitment-period tax refunds belong to the debtor. Where the plan requires turnover only during the applicable commitment period, refunds received afterward are outside the Trustee’s reach and the debtor may apply them as desired — including toward an arrearage cure.
6. Bonus income disputes require a complete evidentiary record. The Court declined to treat peak bonus months as representative of ongoing income, instead averaging across all pay periods including those without any bonus. A full run of pay stubs, including lean periods, is essential in contested income modification proceedings.
Full Decision: In re Alonso, 570 B.R. 622 (Bankr. D. Idaho 2017), Case No. 14‑41215‑JDP, Doc. 138
