Does 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?
Here’s the problem.
Paying for bankruptcy
Cases that challenge the right of the debtor to choose which chapter to file often really represent a concern that a Chapter 13 case that pays only the debtor’s attorney is filed for the benefit of the attorney, not the debtor.
Attorney fees are generally higher in Chapter 13 than in Chapter 7. The judge harbors a suspicion that Chapter 13 was selected either for the higher fee or to “land” the debtor as a client, even though they couldn’t pay today for the attorney’s services.
Judges using that analysis seem to overlook the fact that a significant number of Chapter 13 cases fail and the attorney won’t get paid should the case crater down the road.
It also fails to recognize that payment of a fixed fee over 3 years isn’t the same economically as payment of that amount now.
Would you rather have $3000 now, or 36 monthly payments of $83?
If we’re talking about my well-being as the debtor’s lawyer, I want the money now. But I often recommend the Chapter 13 monthly payment approach, because it works for my client.
It strains credulity to argue that getting the same fee in 36 payments is a decision made to benefit the recipient of those payments.
Judges imagine that the debtor can “just save up the money” required to file a Chapter 7, where the attorneys fees must be paid in full, up front. They can just wait for bankruptcy relief until the savings are sufficient.
That of course glosses over both the difficulty of saving for people living on the edge and the toll taken by stress while the debt situation remains unaddressed.
Congress favored Chapter 13
Getting more people to file Chapter 13 was an articulated goal of the 2005 bankruptcy amendments. Those who can pay their creditors, should pay, intoned Congress.
And Congress was so wedded to that idea that it wrote a (bad) formula to decide who could pay. That’s how we got the means test.
While they were pushing people to Chapter 13, they stripped out virtually all of the elements of the Chapter 13 discharge that had previously been incentives to choose Chapter 13.
So, whatever reason might have existed in the past to weed out people choosing the “super discharge” of 13 over 7, when 7 was a possibility, no longer exists after “reform”.
There is no reason for courts to guard the entrance to Chapter 13 against those otherwise eligible.
Judge Karlin gets it
Kansas bankruptcy judge Janice Karlin recently held trials in 10 cases where the United States Trustee had objected to confirmation of Chapter 13 plans of families where the plan paid little more than the attorneys fees necessary to prosecute the case.
Note that it wasn’t the Chapter 13 trustee, whose day to day job is assessing Chapter 13 plans, who objected. It was the bankruptcy watchdog from the Department of Justice who inserted himself in the mix.
After hearing from each of the debtors, under oath, about their circumstances and their choice of Chapter 13, when they were eligible for Chapter 7, she sided with the debtor’s entitlement to choose which chapter they filed their bankruptcy case under.
The Court finds no abuse of the provisions, purpose, or spirit of Chapter 13 by the choices made in the cases discussed above. Yes, there may be no distribution to unsecured creditors. Again, in a perfect world, all debtors would file Chapter 13 plans and repay all their debts, and no creditor would walk away empty handed. But we do not live in that world. Instead, this is a world where debtors are harassed by daily collection calls for admittedly delinquent debts. Where they are repeatedly required to miss work to attend a cattle call docket to explain why they haven’t paid old medical bills. Where they cannot afford to keep the gas on, and feel compelled to incur title or payday loans at exorbitant rates to feed their families. Where their meager wages are reduced even further by garnishments. Where they opt not to seek necessary medical care or take prescribed medication because they cannot afford it. This is the world these Debtors live in, and this real world sometimes requires bankruptcy, even if the debtor cannot save enough to pay the up front attorney’s fees required to file a Chapter 7.
Her opinion, reported under the case name of Wark, focused on the here-and-now issues and the utility of Chapter 13 to spread the cost of immediate bankruptcy relief over months in the future.
I think there’s more.
There’s another compelling reason to choose Chapter 13, even if you can afford to file Chapter 7 now.
The best reason to choose Chapter 13
The uncertainty of the future is hands down the best reason to file Chapter 13 even if Chapter 7 provides equal relief today.
If tomorrow brings job loss or big medical bills, choosing Chapter 13 increases a family’s options for those new money troubles.
Get a Chapter 7 discharge and you are barred from a further discharge for at least four years. §1328
Get a Chapter 13 discharge, and you can file a new Chapter 13 within two years of the filing of the previous Chapter 13.
That usually means that you are eligible to file a new Chapter 13 before the minimum duration of a repayment plan has run. (This doesn’t mean that you can have two Chapter 13 cases running simultaneously; it means that the statutory time intervals found in the bankruptcy code don’t lock you out of a new 13).
The choice of Chapter 13, then, keeps your options open should financial disaster strike again.
Do we really want to put judges in charge of second guessing a decision by a debtor to minimize future risk?
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