Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Who Gets To Choose Your Bankruptcy Chapter?

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future-1126760_1280_optDoes someone other than the debtor get to choose which chapter a bankruptcy case is filed under?

Some seem to think so.

There’s an ongoing tug of war in the courts between the bankruptcy establishment on one side and debtors and their lawyers on the other about whether a Chapter 13 that pays only the attorneys fees necessary for the bankruptcy is allowed.

Some courts mutter that such a plan is a “disguised Chapter 7” as though Chapter 7 was the default choice and the choice of Chapter 13 needs to be justified.  Those courts propose to dismiss or convert cases that in the court’s view would be appropriate Chapter 7 cases.

That view is wrong, for many reasons which I’ll get to in a minute.

But the most compelling reason to choose Chapter 13 is baked into the Bankruptcy Code after Congress “reformed” it in 2005:

Choose Chapter 13 and, if your finances go to hell after you file your case, you can file another, full strength Chapter 13 to deal with new troubles.

File Chapter 7, and you are locked out of a subsequent bankruptcy discharge for four years.

How can anyone other than the debtor make that choice about future risks?  Where do judges get a crystal ball that sees into the debtor’s future? [Read more…]

Tugging On Superman’s Cape

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When a Chapter 13 trustee complains that the means test is not easy to administer when only one spouse files, should I be sympathetic?

After all, Chapter 13 confirmation is often a negotiation on disputed issues between the trustee and debtor’s counsel.

Here’s what I said recently at ConsiderChapter13.org on that issue.

Come on, Madame Trustee, get over it. What is there about BAPCPA that leads you to expect that it or its misbegotten spawn of a means test treats debtors fairly or equally?

And where does the Chapter 13 trustee have a mandate to challenge the filing of a case by a debtor whose spouse will not or cannot join in the filing?

The Bankruptcy Code clearly permits a married person to file without their spouse. I see no basis to deny relief to one spouse or to hedge that relief because their spouse does not file.

The single spouse filing has become more attractive for debtor’s counsel in a world of longer periods between bankruptcy filings and Chapter 13 debt limits that disqualify homeowners in sections of the country that once had a hot real estate market.

I will join in the chorus of boos about how the means test is obscure. In so many ways, it simply does not fit neatly with a myriad of real world configurations.

How does it apply to the recently married, the recently widowed, the family whose composition will change when the expected baby is born? What’s the logic of including family support received in Chapter 7 but backing it out in Chapter 13?

Face it, this is simply an instance of drafter’s malpractice. The formerly explicit power of judges to determine whether expenses were reasonable or the plan non-abusive has been superseded by a judicial warrant to interpret an opaque and ill-conceived statute.

I sympathize with your difficulty in determining how to assess the appropriate elements of the marital deduction. We don’t get much help in the statute.

Some expenses seem obviously deductible: support arising from a previous marriage and debts incurred pre-marriage come to mind. It’s harder to find an analytic line for debts incurred during marriage in the non-filer’s name only. Is the deciding factor who is liable or the purpose of the expenditure?

But looking at the issue of fairness from another perspective, why should a creditor who has no claim against the non-filing spouse get the benefit of all of the non-filing spouse’s income? If the creditor expected recourse against the spouse, they should have bargained for it at the inception of the debtor/creditor relationship. Is the creditor any worse off than they would have been had the marriage failed before the bankruptcy case was filed?

Join debtors’ counsel in trying to make sense out of nonsense.

Image courtesy of aka kath

 

 

 

 

 

Why I Love Chapter 13

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13 reasons to love Chapter 13

How do I love thee, Chapter 13?

Let me count the ways.

Hang on, because it’s a long list.  Thirteen reasons Chapter 13 rocks.

I love Chapter 13 because:

1.    Debtors keep control of their assets. They run their businesses. There is no trustee tasked to sell assets. 

2.    Repayment to creditors can be little or even nothing.  It depends on the debtor’s income and the value of their assets. 

3.    Chapter 13 plans  can be changed during the case. If income falls or is temporarily interrupted, the plan can be changed to accommodate the change.  

4.    The case can be freely dismissed.  You can get out of bankruptcy if you want, unlike Chapter 7 . 

5.    The automatic stay protects the debtor for the 3 -5 years of the plan.  No foreclosures, no repossessions, no levies. 

6.    Mortgage defaults can be cured over as long as five years. 

7.    The interest rate on car loans can be reduced to today’s market rate. 

8.    Mortgage liens that are totally underwater can be eliminated forever in 13. 

9.    The IRS has to go along with the repayment terms in your plan, without interest. 

10.  Tax penalties are dischargeable, even when the tax is recent. 

11.   Debts to former spouses, other than support, can be discharged. 

12.   Tax liens greater than the value of the debtor’s assets at filing are eliminated. 

13.   Attorneys fees for the case can be paid after filing.  

More advantages to Chapter 13

When you file Chapter 13, you are eligible to file another Chapter 13 case, if you need to, far more quickly than if you had filed a Chapter 7.

In fact, you are eligible to file a second Chapter 13 after two years from the filing of your first case.  (But you can’t have two cases active at once.)

Your Chapter 13 filing generally drops off your credit report three years earlier than if you had filed a Chapter 7 bankruptcy.  It’s gone two years after the Chapter 13 discharge in a five year plan.

Unlike debt settlement arrangements, your repayment plan is enforced by a federal judge. All creditors are required to go along. No creditor can elect not to be involved and opt out of the plan.  Whether a creditor files a claim or not, the creditor’s claim is likely toast at the end of the case.

Chapter 13 can be a powerful and affordable tool for getting back on your financial feet.

 

Debt Limits Increase For Chapter 13 Bankruptcy

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bankruptcy debt limitsApril Fool’s Day brought us new numbers that drive Chapter 13 bankruptcy eligibility.

The new debt limits in Chapter 13 are effective for cases filed for the next 3 years.

And those limits are:

 unsecured debt = $394,725

 secured debt = $1,184,200

In the Bay Area, that will mean more families will be eligible to file Chapter 13.

Why Chapter 13 rocks

Chapter 13 bankruptcy allows individuals to strip off worthless liens, cure home loan defaults, and pay recent taxes over time, without interest. [Read more…]

Chapter 13 To The Rescue In Ruinous Business Lawsuit

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rescued

Twice in the last six months, Chapter 13 bankruptcy has saved clients facing catastrophic lawsuits arising out of business.

And because the targets of these lawsuits filed bankruptcy before they’d spent a fortune on lawyers and before the court had a chance to award huge damages, they fit beneath the Chapter 13 debt limits.

We think of Chapter 13 as a consumer tool.  It’s designed for those with a regular income.  It’s sometimes called a wage earner plan.  The amount of debt involved has to be below certain limits.

So, Chapter 13’s application to business litigation isn’t obvious.

But it works like a charm.

Here’s how Chapter 13 rescued one client sued about a business dispute.

Chapter 13 filed before judgment

[Read more…]

Claim Tax Deductions Lurking In Your Chapter 13

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Tax deductions may be hiding in your Chapter 13.

Did you file for an extension of time to file your income tax return?

Well, time to get the return done is running out:  returns are due October 15th.

If you are in a Chapter 13 bankruptcy case, you may have deductions you haven’t considered found in the payments the Chapter 13 trustee has made in your case.

If your plan provides for

  • curing mortgage arrears,
  • paying taxes,
  • spousal support or
  • business expenses,

consider claiming amounts paid to those creditors through your plan as deductions.

The Chapter 13 trustee is paying those claims with your money.  I see no reason that the trustee’s expenditures aren’t deductible to you.

Check with your tax professional.

And if you are several years into a Chapter 13, consider whether you can amend prior years to claim the trustee’s distributions for earlier years.

More on tax issues when you’ve filed bankruptcy:  the 1099.

Lurking kitty courtesy of Aftab Uzzaman and Flickr under Creative Commons license.

 

Why Creditors Should Get Less in Chapter 13

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Pink Piggy BankSpending every dollar they make, and then some, is often how our Chapter 13 clients got into financial trouble.

Yet Chapter 13, as practiced, validates the practice of continuing to spend 100% of each month’s income during the life of the plan. In doing so, we squander the chance to use Chapter 13 to teach new budgeting habits.

Shame on us.

It was more obvious before BAPCPA: we calculated the debtor’s projected income and living expenses, and all of what was on the bottom line was paid into the plan.

Now, we use Congress’ objective measure of what it should cost to live, and pay 100% of the arbitrary formula into the plan. There is no provision in the Chapter 13 means test for savings other than long term retirement savings required by an employer.

I’m not knocking saving for retirement. In fact, as debtor’s counsel, my most oft-repeated reason for clients reluctant to take the plunge and file bankruptcy is to provide for retirement.

American Express does not have to retire, and you do. What have you saved for that day?

But every household needs some savings for today, for tomorrow, and next month.

The Supreme Court’s Ransom decision reinforces the sense that saving is not a financial virtue.

A debtor with a paid for car is not reminded that the old car will need to be replaced, and saving toward that inevitability is a good thing. Rather, the car is paid for and we’ll indulge in the idea that the car will last another 5 years and devote that cash flow to unsecured creditors.

We have effectively mandated that, instead of putting a serious down payment on the next car, our client will again finance the next purchase at whatever interest rate is available to the newly discharged. The cycle of borrowing is perpetuated.

Debtors are required to take a class in personal financial management to get their discharge. Those classes surely do not promote consuming 100% of one’s income. Short term saving is needed to provide for the unexpected and the infrequent. Otherwise, you continue to live on the financial brink.

It is ironic, but true, that a Chapter 7 debtor can begin reforming the way she handles money almost immediately after filing bankruptcy. A Chapter 13 debtor lives for 3 to 5 years with a budget that makes no provision for an emergency fund.

I would like to think that Chapter 13 is rehabilitative, that it uses the duration of the plan to build new and better habits of money management. That isn’t what’s happening. As it is, the system’s distaste for savings while debts are unpaid perpetuates budgeting to spend every single dollar the debtor handles.

The language of our confirmation order provides that the debtor’s post petition income is submitted to the supervision and control of the Chapter 13 trustee. What kind of financial professional is the Chapter 13 trustee if that supervision and control doesn’t encourage some level of savings?

Or is the required financial management class just window dressing whose lessons don’t really apply until the creditors have gotten their pound of flesh?

This article was originally written for the Variety of Views feature at ConsiderChapter 13.org.

Image courtesy of kenteegardin

Lien Stripping Works Without A Bankruptcy Discharge

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Real estate conceptThe waiting and uncertainty is over.  The judges have decided.

Chapter 13 debtors can void underwater junior liens even if they aren’t eligible for a bankruptcy discharge in the Chapter 13 case.

So says the 9th Circuit Court of Appeals in a case called Blendheim, decided October 1.

And so, a myriad of Chapter 20 debtors and title insurers round the circuit heave a sigh of relief.

“Chapter 20” is legal slang for a Chapter 13 case that follows a Chapter 7 case so closely that the debtors don’t get a discharge in the new case.

Bankruptcy courts in many districts have been voiding worthless liens in cases where the homeowner isn’t eligible for a discharge generally since the Great Recession began.

Yet some judges and some scholars questioned whether the law allowed elimination of a lien at the end of a Chapter 13 when the cases concludes without a discharge.

I have tried to imagine the chaos that would be created if the appeals court had ruled that all these lien strips in Chapter 20 cases were themselves void. [Read more…]

No Discharge Chapter 13 Effective To Strip Lien

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Group of business people sitting on chair in office

The wait is over; the decision is in.

Homeowners in the 9th Circuit can strip off underwater mortgages in Chapter 13 cases even when they aren’t entitled to a bankruptcy discharge, the 9th Circuit BAP has held.

Thus, courts have taken another step in the building consensus that the debtor doesn’t have to be eligible for a Chapter 13 discharge in order to use Chapter 13 to eliminate an entirely underwater mortgage.

Lien strips in Chapter 20

Voluntary liens can be stripped off the debtor’s real estate only in a reorganization chapter of bankruptcy:  Chapter 11 or Chapter 13.  And since bankruptcy “reform” in 2005, you can’t get a discharge in a Chapter 13 case filed less than 4 years from a previous Chapter 7 case.

You aren’t barred from filing a Chapter 13 right after a Chapter 7.  It’s just that any debts that survived the Chapter 7 don’t get discharged in the no-discharge Chapter 13.

In bankruptcy slang, we call it a case of Chapter 20:  a Chapter 7 plus a Chapter 13.

Chapter 20 cases are useful for curing mortgage defaults or paying taxes or support that isn’t dischargeable in Chapter 7.  But it was undecided, until now,  whether a mortgage lien that was “out of the money” with respect to the value of the property could be stripped off in a Chapter 20.

A basic of bankruptcy law is that liens pass through bankruptcy undisturbed, unless the bankruptcy court, pursuant to some code section, ordered otherwise.

Thus, some argued, that the discharge was the essential element that voided the lien upon plan completion.  Without eligibility for a discharge, could a mortgage lien be voided.

Lien strip OK without discharge

In Boukatch, the Bankruptcy Appellate Panel of the 9th Circuit held that it was plan completion that made the lien strip possible, not the discharge of personal liability. [Read more…]

The Most Important Bankruptcy Decision Of 2013

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airstream trailer-flickr-stephen hillA bankruptcy case nominally about  travel trailers, ATV’s, and a car for a an adult child gets my vote as the most important bankruptcy decision of 2013 for Californians.

When the 9th Circuit decided Welsh, it told us, and Chapter 13 trustees, that you take your Chapter 13 debtors as you find them.

If you are a person filing a Chapter 13, it’s OK to have a house the Chapter 13 trustee deems “too grand”, or debts secured by things the trustee thinks “unnecessary”.

Welsh upheld the importance of the means test implemented by Congress in 2005.  The means test purports to calculate what unsecured creditors  are entitled to get through a Chapter 13 plan.

If the proposed plan meets the means test figure for a distribution to unsecured creditors, says Welsh, the debtor doesn’t have to stop paying secured creditors for “luxury” items in order to pay unsecureds more.

The “stuff” in dispute

The facts in Welsh are all too common.  The Welsh’s lived in rural Montana.  They had a car loan for a car driven by an adult daughter as well as loans on the two cars driven by the debtors.

They lived in a $400,000 home in Missoula Montana.  The opinion doesn’t tell us what the average home there costs, but the trustee clearly felt the home was too up scale for people who were in bankruptcy.

Then, there were two ATV’s and an Airstream trailer, each subject to a secured loan.

And, given the way the means test is laid out, the future payments on all of those loans, for house, vehicles, and recreational trailer, were deductions from the Welsh’s income.  After the means test calculation subtracted the loan payments, there was only about $200 a month left to pay to unsecured creditors through the plan.

And that, argued the Chapter 13 trustee, was evidence that the debtors lacked the “good faith” necessary to get court confirmation of their plan.  They were keeping the big house and the toys at the expense of the unsecured creditors. [Read more…]

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