Articles Posted in Chapter 13

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An inventive use of federal bankruptcy law enables some debtors to eliminate liens from their homes through a process known as “Chapter 20.” The name refers to the sum of 7 and 13, since the process uses both Chapter 7 and Chapter 13 proceedings. Not all courts agree that Chapter 20 lien stripping is permissible after the changes made by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Federal courts in different parts of California have reached different conclusions about Chapter 20. The Fourth Circuit Court of Appeals on the East Coast joined the ranks of courts that have affirmed the process last year. In a 2-1 ruling, the court offered an overview of how Chapter 20 works and the objections against it. In re Davis, 716 F.3d 331 (4th Cir. 2013).

The court heard appeals brought by the bankruptcy trustees in two Chapter 13 cases. In both cases, the debtors initially filed Chapter 7 petitions and obtained final discharges. A discharge in a Chapter 7 case removes a debtor’s personal liability, but still allows a creditor to collect against any collateral. In both cases, the value of the debtors’ residences was significantly less than the amount of indebtedness secured by the homes. In one case, a home valued at $270,000 had first-, second-, and third-priority liens totaling more than $508,000. The debtors filed Chapter 13 petitions less than four years after their Chapter 7 discharges, seeking to strip the worthless, low-priority liens from their residences. The bankruptcy courts approved the debtors’ requests, and the trustees appealed.

Chapter 13 generally allows stripping of worthless liens against debtors’ homes, but it does not allow a final discharge of debt if the case was filed within four years of a Chapter 7 discharge. 11 U.S.C. § 1328(f)(1). A Chapter 20 proceeding works around this restriction, as the court describes. A court may determine that a low-priority lienholder’s claim is unsecured if the total value of all secured claims is greater than the value of the collateral. 11 U.S.C. § 506(a). Now that the lienholder is an unsecured creditor, the court has the authority to modify their rights, which includes stripping the lien from the property. Davis, 716 F.3d at 335, citing 11 U.S.C. § 1322(b)(2). Continue reading

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A married couple in a Chapter 13 bankruptcy proceeding filed a motion to value the lien on their homestead property, a condominium in Florida. This type of motion can be useful to debtors who believe that the value of their property is less than the total amount of claims secured by liens. A court can rule that the amount of secured claims in excess of the property’s value is unsecured in a process often known as “lien stripping.” The Florida couple’s case involved liens held by several homeowners’ associations (HOAs) for unpaid assessments. In re Sain, No. 13-13325, order (Bankr. S.D. Fla., Oct. 29, 2013). The court held that it could not strip off the assessments because of a particular feature of Florida law. It sustained the HOAs’ limited objection to the debtors’ motion.

A creditor’s secured claim on property owned by the bankruptcy estate is only secured up to the value of the secured property. The remainder of the claim is unsecured. 11 U.S.C. § 506. For example, if a creditor has a claim to real property, secured by a lien, in the amount of $200,000, but the value of the real property is $180,000, then $20,000 of the creditor’s claim is unsecured. A debtor may move the court to make a finding regarding the value of a creditor’s secured claim in order to determine the unsecured amount.

At the time the debtors filed their bankruptcy petition, their condominium was encumbered by first and second mortgages, as well as recorded liens from three HOAs involving unpaid assessments governed by Florida law. The debtors did not dispute the validity or amount of the HOAs’ liens, but claimed that the condominium had no equity in excess of the amount due to the holders of the two mortgages. They filed a “motion to value and determine secured status of lien on real property” asking the court to strip off the HOA liens. Continue reading

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Student loan debt is a growing burden for people in Los Angeles and all over the country, as the cost of higher education seems to grow faster than the job market. Student loan debt is also one of the few types of debt that is almost never subject to discharge in a bankruptcy case. A recent article in the Wall Street Journal gave several examples of the lengths to which educational lenders sometimes go to oppose discharge of these debts. Some of the stranger arguments did not convince the judges who decided those specific cases, but the mere fact that lenders feel comfortable raising them in court demonstrates the importance of having the help of a skilled and experienced personal bankruptcy lawyer.

Courts rarely discharge student loans at the end of a Chapter 7 or Chapter 13 case, because they are subject to their own separate rule. A debtor must prove that the debt would impose an “undue hardship” on them and their dependents. 11 U.S.C. § 523(a)(8). Courts have often interpreted the term “undue hardship” very strictly. The Brunner test, which most courts have adopted, requires a debtor to prove (1) that repaying the loan would leave the debtor unable to “maintain a minimal standard of living” on current income and expenses, (2) that “the state of affairs is likely to persist” for most or all of the repayment period due to “additional circumstances,” and (3) that the debtor “has made good faith efforts” at repayment. Brunner v. New York State Higher Educ. Serv. Corp., 831 F.2d 395, 396 (2nd Cir. 1987).

In one of the cases discussed in the Wall Street Journal article, a debtor sought to discharge a $2,500 student loan in a Chapter 7 proceeding. The lender, in arguing that the debtor had failed to reasonably maximize her income and minimize her expenses, noted that she had given birth to three children since taking out the loan, despite being unmarried and having health problems that interfered with her ability to work. In re Ivory, 269 B.R. 890, 910 (Bankr. N.D. Ala. 2001). The court rejected this argument and ruled for the debtor, stating that “[t]here is nothing in the Bankruptcy Code that suggests that Congress did not intend for student loan debtors to procreate.” Id. at 911. Continue reading

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Credit card debt can be incredibly stressful for people experiencing financial difficulties. High interest rates and late fees, along with increasingly high minimum payments, may make final payment of the debt seem impossible. The bankruptcy system may allow the discharge of some or all of a person’s credit card debt. It prevents discharge, however, of debt(s) incurred fraudulently or in bad faith, such as if a person charges a large amount to a credit card shortly before a planned bankruptcy filing.

Unsecured vs. Secured Debt

Most credit card debt is unsecured, meaning that the creditor does not have the right to repossess property, known as collateral, if the debtor defaults. In the case of a credit card issued by a retail store, the store may have the legal right to repossess whatever items the debtor purchased, although it is not always financially feasible to do so. Secured debt, such as a mortgage or car loan, generally receives higher priority for repayment from the bankruptcy estate than unsecured debt.

Bankruptcy Schedule F

Certain unsecured debts, such as child support or tax debt, are treated as “priority claims,” while the rest are “nonpriority claims.” A debtor filing for personal bankruptcy under Chapter 7 or Chapter 13 must complete Schedule F, which identifies creditors who have “unsecured nonpriority claims.” Most forms of credit card debt go on this schedule. Continue reading

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A bankruptcy court recently ruled on a seeming conflict between two sections of the Bankruptcy Code dealing with proofs of claim (POCs) for tax debts. In re DeVries, No. 13-bk-41591, mem. dec. (Bankr. D. Id., Apr. 28, 2015). The Chapter 13 trustee objected to a POC filed by the debtors on behalf of the Internal Revenue Service (IRS) for their 2013 federal income tax. The court ruled that only a creditor may file a POC for tax debts incurred after the date the debtors file their petition, drawing on multiple precedent cases to determine precisely when tax debt is “incurred.”

The debtors filed a Chapter 13 petition in December 2013, and the court set a deadline in June 2014 for creditors, including the IRS, to file POCs. The IRS timely filed POCs for tax debts from 2011 and 2012. The debtors filed their 2013 federal income tax return in April 2014, which showed that they owed $1,021 to the IRS. The bankruptcy court confirmed the debtors’ Chapter 13 plan that May. The plan included full payment of all allowed tax claims.

The IRS did not file a POC for the 2013 tax debt by the June 2014 deadline. The debtors therefore filed a POC on behalf of the IRS the following month. The Bankruptcy Code generally allows a debtor to file a POC for a creditor if the creditor misses the filing deadline. 11 U.S.C. § 501(c), Fed. R. Bankr. P. 3004. The trustee objected to the debtors’ POC, however, arguing that only creditors may file “for taxes that become payable to a governmental unit while the case is pending.” 11 U.S.C. § 1305(a)(1).

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The Bankruptcy Code provides individuals and families with several options when they need to file a bankruptcy petition, and it allows them to convert a case from one chapter to another in certain circumstances. A federal appellate panel in California recently considered an interesting question:  if a debtor converts a case from Chapter 11 or 13 to Chapter 7, what happens to income earned after the petition but before conversion? It would belong to the bankruptcy estate under Chapters 11 or 13, but to the debtor under Chapter 7. The court ruled that it reverts to the debtor once the case is converted from Chapter 11 back to Chapter 7. In re Markosian, 506 B.R. 273 (B.A.P. 9th Cir. 2014) (PDF file).

By filing a bankruptcy petition, a debtor creates a legally distinct “bankruptcy estate.” A court-appointed trustee has the right to make certain decisions about estate property and the duty to manage the estate responsibly. In general, any property that a debtor owns when he or she files a bankruptcy petition becomes part of the estate. 11 U.S.C. § 541. In Chapter 11 or 13 cases, property acquired and earnings received for services rendered by the debtor, including salary or wages, also become part of the bankruptcy estate until the case is dismissed, converted, or closed. 11 U.S.C. §§ 1115, 1306.

The debtors in Markosian, a married couple, filed a Chapter 7 bankruptcy petition in February 2009. The trustee moved to dismiss the case for abuse under 11 U.S.C. § 707(b), claiming that the debtors had enough income to pay their debts. In response, the debtors converted the case to Chapter 11. While Chapter 13 is much more common among individuals and families, the Bankruptcy Code sets upper limits on the amount of debt a Chapter 13 debtor can have. Currently, Chapter 13 is not available to debtors whose secured and unsecured debts exceed $1,149,525 and $383,175, respectively. 11 U.S.C. § 109(e), “Revision of Certain Dollar Amounts in the Bankruptcy Code Prescribed Under Section 104(a) of the Code”, 78 F.R. 12089 (Feb. 20, 2013). Continue reading

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An article published earlier this year in The Week tells the story of a professional debt counselor who filed for bankruptcy. His account is notable, as he candidly admits, in part because it seems odd for someone who makes a living advising other people about their debt to find himself unable to pay his own debts. The moral of the story, to the extent that any real-life story has a “moral,” is that financial difficulties can happen to anyone. It is not always the result of some major crisis and, despite some lingering negative perceptions in our culture, it is not necessarily brought on by laziness or irresponsibility. Someone might do everything exactly right, but things still don’t always work out. This person’s story offers a glimpse of how filing for bankruptcy is not a cause for shame or an admission of failure, but a useful tool that allows people to get a fresh start.

According to Dave Landry’s piece in The Week, he and his wife married just after graduating college, when they had $40,000 in student loan debt between them. He admits that they lived beyond their means for a few years, accumulating $20,000 in credit card debt on top of the student loans. The birth of their first child caused them to cease their “jet-setting ways,” but they needed a bigger place to live. After the birth of their second child, they upgraded to a larger house, one that Landry admits was bigger than they absolutely needed. This occurred around the time of the recession of 2008, resulting in a $100,000 loss on the sale of their first house.

With the benefit of hindsight, it might seem easy to look at this story and identify mistakes. Life never works like that in real time, though, and much like doctors who neglect their own health, a debt counselor can overlook important issues. People grow accustomed to a certain lifestyle and may not recognize changing circumstances until they have already gone deeper into debt. “A certain lifestyle” does not even have to mean extravagance. It might simply mean taking vacations every year, or eating out several times a week, or any other activities or expenses that push the boundaries of their income. Continue reading

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A bankruptcy court dismissed adversary proceedings brought in a Chapter 13 case, in which the debtors sought to strip off junior liens held by the U.S. government for loans issued through the Small Business Administration (SBA). In re Brisco, 486 B.R. 422 (Bankr. N.D. Ill. 2013). The SBA had junior liens on two properties owned by the debtors:  their residence and a rental property. The SBA did not file proofs of claim for either lien by the deadline established by the Federal Rules of Bankruptcy Procedure (FRBP), and the court held that this prevented it from valuing the SBA’s liens as requested by the debtors. The debtors objected, arguing that the SBA’s failure to file proofs of claim apparently shielded their liens from avoidance, but the court noted that the Bankruptcy Code allows a debtor to file a proof of claim on a creditor’s behalf.

The debtors owned two properties: their residence, which was appraised at $135,000 and had a first-priority lien held by JPMorgan with a secured claim of $161,064.57, and a rental property appraised at $100,000, with a first-priority lien and secured claim by JPMorgan of $213,829. The SBA had junior liens on both properties and secured claims of $25,800 and $25,700, respectively. The court entered a judgment reducing the amount of JPMorgan’s secured claim on the rental property to its value of $100,000, with the remaining $113,829 becoming an unsecured claim under 11 U.S.C. § 506(a).

In two adversary proceedings brought against the United States, the debtors asked the court to rule that the SBA’s liens were wholly unsecured under § 506(a), and to strip the liens off the two properties under 11 U.S.C. §§ 506(d) and 1322(b)(2). The United States moved to dismiss for failing to state claims on which the court could grant relief, in large part because of the absence of proofs of claim. Secured creditors are not required to file a proof of claim, but if they choose to do so, the deadline for a governmental unit is set by FRBP 3002(c)(1). If the creditor does not file a proof of claim, the debtor may do so for them under 11 U.S.C. § 501(c). Continue reading

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Personal bankruptcy under Chapters 7 and 13 offer ways for people to obtain financial relief when their income is not high enough to continue making required payments on their debts. The federal Bankruptcy Code deals with different types of debt in different ways. The Bankruptcy Code establishes that certain types of debt have priority over others, and these creditors are therefore entitled to payment from the bankruptcy estate first. While many debts may be subject to discharge at the end of a personal or business bankruptcy case, some debts are expressly excepted from discharge, such as debts for recent taxes or child support obligations. However, these priority debts can be paid back via a Chapter 13 over a period of 3 to 5 years. Understanding how bankruptcy law treatss various types of debt is critical to planning and preparing for a bankruptcy filing.

Secured vs. Unsecured Debt

A key distinction in bankruptcy is between secured and unsecured debts. A secured debt has one or more specific items of property attached to it, known as collateral. See 11 U.S.C. § 506. A secured creditor has the right to take possession of the collateral if the debtor defaults on their repayment obligation. A mortgage, for example, is typically secured by the real property purchased with the mortgage loan.

Unsecured debt does not have collateral. The Bankruptcy Code divides unsecured debts into priority and nonpriority debts. 11 U.S.C. § 507. Many priority unsecured debts are also included in the list of debts excepted from discharge. 11 U.S.C. § 523.

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Seniors, generally defined as people age 65 or older, comprise a growing percentage of the U.S. population. According to the Administration on Aging, part of the U.S. Department of Health and Human Services, seniors accounted for 14.5 percent of the population in 2014. That percentage is expected to increase to 21.7 percent by 2040. A greater and greater number of people want to retire, or are no longer able to work, and must rely on various types of fixed income. Increased health care costs for the myriad medical issues that seniors face will become an increasingly pressing concern. While specific debts are not necessarily passed on to a person’s heirs, creditors can cause considerable havoc in a person’s estate. Seniors who find themselves in financial distress may find that bankruptcy offers some solutions. Many types of income that seniors receive are exempt from creditors both before and during a bankruptcy case, and many debts commonly associated with seniors are unsecured and therefore subject to discharge in bankruptcy.

Debtors filing for personal bankruptcy usually choose between Chapter 7 and Chapter 13. In a Chapter 7 case, a debtor’s non-exempt assets are liquidated to pay debts, and the court discharges most debts at the end of the case. A Chapter 13 case involves a repayment plan that lasts several years, followed by a discharge. While some debts are not subject to discharge, bankruptcy can result in having most of one’s unsecured debts wiped out.

A California debtor filing for bankruptcy has two options for claiming property as exempt under California law. The first system allows exemptions for seniors that include up to $175,000 of the equity in their residence, up to $2,300 in motor vehicles, and up to $6,075 in “jewelry, heirlooms, and works of art.” See Cal. Code Civ. P. §§ 704.010 et seq., 704.730. The second system does not include a specific homestead exemption but allows multiple other exemptions and a “wildcard” exemption for property valued up to $24,060. Cal. Code Civ. P. § 703.140.

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