Articles Posted in Chapter 13

Published on:

2015 marks the 10-year anniversary of the comprehensive law known as the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, Pub. L. 109-8, 119 Stat. 23. Supporters of the bill claimed that it would streamline the bankruptcy process and cut costs for everyone involved, but analyses of the law’s impact have suggested that creditors received most (or all) of the benefits. Some studies have suggested that BAPCPA has actually caused debtors’ costs to go up. Now that 10 years have passed, let us take a look at the bill and a handful of the changes it brought.

Passage of the Bill

Much of the support for BAPCPA came, unsurprisingly, from creditors. These are often the parties that bear the greatest loss when a bankruptcy court grants a discharge of debt, so they sought changes to the Bankruptcy Code that would ease this burden.

Opponents of the bill covered a wide spectrum, but a major point of contention was the assumption of widespread bankruptcy fraud. It was not clear to many that fraud was occurring at a rate that merited such a radical overhaul. Regardless of the opposition, however, the bill passed both houses of Congress—74 to 25 in the Senate, and 302 to 126 in the House of Representatives. President George W. Bush signed it into law on April 20, 2005.

Continue reading

Published on:

Medical debt may be the single biggest factor leading to personal bankruptcy in the country. The Affordable Care Act (ACA), which began to take effect in 2014, makes health insurance coverage much more widely available to people. It does not, however, address many of the health care issues that lead to bankruptcy, such as high premiums, high deductibles, out-of-pocket costs, and external costs like missed work. It seems that wider access to insurance has not led to fewer bankruptcies. At least one report indicates that nearly 80 percent of debtors filing for bankruptcy due to medical bills have health insurance. The bankruptcy system offers solutions for people with overwhelming medical bills, and California law also offers some options short of bankruptcy.A 2013 study found that as many as 10 million adults with full health insurance coverage would incur more medical debt that year than they could pay. This is only a small part of the 56 million adults who the study predicted would have some amount of difficulty paying their medical bills. A study of one county in Oregon found that medical debt was a factor in almost three-fourths of new bankruptcy cases in 2014. Over half of the total medical debt in that county was owed to hospitals and hospital systems, where costs can quickly skyrocket, and patients are often surprised to find bills for services that are not included in their insurance provider’s network.

Part of the purpose of a bankruptcy filing is to stop debt collection activities with the automatic stay. California offers some ways for debtors to seek relief from certain types of debt collection, short of filing for bankruptcy. The tools that creditors may use to enforce judgments vary from state to state, and California allows one of the worst ones, at least from a debtor’s point of view:  wage garnishment.

Continue reading

Published on:

A bankruptcy judge recently denied a debtor’s request to convert his case from Chapter 11 to Chapter 7, finding that he had not acted in accordance with his fiduciary duties throughout the case. Most individual debtors do not find Chapter 11 to be helpful. It is much more common for business bankruptcies and individuals with very large estates. In this case, the debtor is a professional hockey player. In re Johnson, No. 2:14-bk-57104, petition (S.D. Oh., Oct. 7, 2014). When he moved for conversion to Chapter 7, the court reviewed the course of the case and issued a 150-page order denying the motion and criticizing the debtor’s conduct. Johnson, op. and order (Feb. 26, 2016). The judge’s reasoning offers an idea of the concerns that courts address in Chapter 7 cases.

A key difference between the Johnson case and a Chapter 7 or Chapter 13 case is that the bankruptcy estate had no independent trustee. The debtor was acting as trustee when he moved for conversion to Chapter 7. In Chapter 11 cases, a trustee is only appointed if requested by a party in interest or the U.S. Trustee’s Office. 11 U.S.C. § 1104. If no trustee is appointed, the debtor serves in the capacity of trustee, with all the same fiduciary duties towards creditors and others. Under Chapters 7 and 13, the Bankruptcy Code states unconditionally that a trustee “shall” be appointed. 11 U.S.C. §§ 701, 1302.

Debtors are typically allowed to convert their case from one chapter to another if they meet various criteria established in the Bankruptcy Code. A Chapter 11 debtor can convert their case to Chapter 7, with several exceptions. A bankruptcy court may not convert a case to Chapter 7 if it finds that appointment of a Chapter 11 trustee would be in the estate’s and the creditors’ best interest, or if it “identifies unusual circumstances” indicating that conversion would not be in their best interest. 11 U.S.C. § 1112(b). A Chapter 7 debtor can convert their case to Chapter 11 or Chapter 13 with the court’s permission, after establishing cause. 11 U.S.C. § 707. A Chapter 13 debtor is far less constrained in converting a case to Chapter 7. 11 U.S.C. § 1307.
Continue reading

Published on:

Individuals and families may file for bankruptcy protection under Chapter 7, which focuses on liquidating assets and paying down debts in a short period of time. Or they may use Chapter 13, which allows debtors to pay down large portions of their debts over a period of several years and avoid unsecured debts. Deciding which to choose depends on each debtor’s individual circumstances. Some, but definitely not all, courts allow debtors to file a Chapter 7 case in order to pay down their debts and obtain a discharge of unsecured debts, followed shortly afterwards by a Chapter 13 case, which the debtor uses to “strip” one or more liens from their home. This process is informally known as a “Chapter 20” case.

What Is Lien Stripping?

Chapter 13 may be an appealing option for a debtor with an “underwater” second mortgage, meaning a mortgage with a principal balance that exceeds the debtor’s equity in their home, or the amount not covered by a first-priority mortgage. A debtor may be able to use Chapter 13 to avoid an underwater mortgage, a procedure known as “lien stripping.”

By law, a secured creditor’s claim is only “secured” to the extent that the amount owed is equal to or lesser than the collateral’s value—meaning that any amount over that value is considered unsecured debt. 11 U.S.C. §§ 506(a)(1), (d). A Chapter 13 plan may avoid unsecured debts. 11 U.S.C. § 1322(b)(2). The U.S. Supreme Court held earlier this year, however, that lien stripping is not permitted in Chapter 7 cases. Bank of America v. Caulkett, 575 U.S. ___ (2015).

Continue reading

Published on:

When a debtor files a bankruptcy petition, a bankruptcy estate is created that exists as a distinct legal entity. The court-appointed trustee has the authority to manage this estate, and the debtor’s non-exempt property becomes the estate’s property. Property obtained by the debtor after the filing date may also become estate property, depending on the circumstances and the chapter of the Bankruptcy Code that the debtor chooses. A debtor in a Chapter 13 case disputed the trustee’s claim to money received by inheritance more than 180 days after the filing date. In a decision that turned on principles of statutory construction, the Ninth Circuit Bankruptcy Appellate Panel (BAP) ruled that the inheritance was estate property. In re Dale, 505 B.R. 8 (9th Cir. BAP 2014).

The debtors, a married couple, filed a Chapter 13 petition in October 2011. In August 2012, the husband’s mother passed away, and he received about $30,000 in inheritance. At that time, the bankruptcy court had not yet confirmed a Chapter 13 bankruptcy plan. The debtors filed a declaration notifying the court of the inheritance in December 2012.

The trustee demanded that the debtors turn over the full amount of inheritance funds to the estate. In January 2013, he filed a motion to dismiss the Chapter 13 case, partly for failing to disclose the inheritance and turn over any non-exempt amounts. The debtors argued that the inheritance was not part of the bankruptcy estate. After a hearing in May 2013, the bankruptcy court ruled that the estate was entitled to the inheritance and ordered the debtors to turn over all funds to the trustee. The debtors appealed to the BAP.

Continue reading

Published on:

A bankruptcy court granted a Chapter 13 trustee’s motion to dismiss a debtor’s case and barred the debtor from further bankruptcy filings, in any district in the country, for a two-year period. In re Weik, No. 14-61298, mem. dec. (Bankr. D. Mont., Feb. 24, 2015). The trustee had argued that the debtor was ineligible for bankruptcy relief because of recent prior bankruptcy cases, 11 U.S.C. § 109(g)(1); that the debtor had abused the bankruptcy process; and that he was not seeking bankruptcy relief in good faith.

The debtor filed a Chapter 13 petition in approximately October 2014. According to the court’s ruling, he had previously filed at least nine bankruptcy petitions, mostly under Chapter 13:  five in Montana, two in Arizona, and two in Texas. Several of the cases had been dismissed by the court for delinquency in plan payments. A bankruptcy court dismissed the most recent prior case in April 2014 because of missed Chapter 13 plan payments.

At the hearing on the trustee’s motion to dismiss, the trustee called the manager of a self-storage business in Tucson, Arizona to testify. She stated that the debtor had entered into a month-to-month storage contract for three units at her facility in 2012 and continued to occupy all three units. He allegedly had not made a rent payment since January 2013, and as of January 2015 he owed more than $8,600. She testified that she had attempted to repossess his property under Arizona law, but the debtor filed each of his three most recent prior bankruptcy cases on the day she had scheduled a sale. The automatic stay prevented the auction each time.

Continue reading

Published on:

A California bankruptcy court recently ruled on a motion to lift the automatic stay in a Chapter 13 case by a company that purchased real property at a foreclosure auction. In re Richter, No. 6:14-bk-10231, mem. dec. (Bankr. C.D. Cal., Jan. 20, 2015). The purchaser sought to initiate an unlawful detainer proceeding, commonly known as an eviction, in order to take possession of the property. The debtor argued that he had a right of redemption under California law, which allowed him to recover the property by paying the amount owed to the lienholder. The court expressed sympathy for the debtor but ruled that his right of redemption had expired under both California law and the Bankruptcy Code.

The debtor owned a condominium in Palm Desert, California. Since it was part of a common interest development, the property was subject to covenants, conditions, and restrictions (CC&Rs) enforced by a homeowner’s association (HOA). When the debtor fell behind on assessments, the HOA commenced nonjudicial foreclosure. Under state law, a property owner has a 90-day right of redemption after the sale of a property in a nonjudicial foreclosure by an HOA. Cal. Civ. Code § 5715(b), Cal. Civ. Proc. Code § 729.035.

A trustee appointed by the HOA conducted a foreclosure auction in October 2013. The purchaser bought the property for $36,000, which more than covered the debtor’s $18,836 assessment arrearage. The foreclosure trustee notified the debtor of his 90-day right of redemption. On the last day of the redemption period, in January 2014, the debtor filed for Chapter 13 bankruptcy. According to the court, he intended to use the Chapter 13 bankruptcy plan to exercise his right of redemption. The HOA refused to accept his payments, however, arguing that the sale of the property was complete. The foreclosure trustee recorded the trustee’s deed in August 2014, perfecting the purchaser’s title. In October, the purchaser moved to lift the automatic stay.

Continue reading

Published on:

A bankruptcy court allowed Chapter 13 debtors to pursue an adversary claim against their loan servicer for unapproved fees. The debtors claimed that the loan servicer intentionally misapplied a lump sum payment intended to go towards their mortgage principal after the discharge. The court granted the debtors’ request for a preliminary injunction. In re Moffitt (“Moffitt I”), 390 B.R. 368 (Bankr. E.D. Ark. 2008) (PDF file). It dismissed the debtors’ non-Bankruptcy Code claims in two subsequent opinions, 406 B.R. 825 (Bankr. E.D. Ark. 2009) (“Moffitt II”) (PDF file) and 408 B.R. 249 (Bankr. E.D. Ark. 2009) (“Moffitt III”) (PDF file), but it allowed the remaining claims to proceed. The parties settled the dispute several months later.

The debtors filed a Chapter 13 petition in October 2004. They listed a first-lien deed of trust of $35,000 to their mortgage servicer, EverHome, which filed a proof of claim alleging a debt of over $36,000. It filed amended proofs of claim that progressively increased that number throughout 2005, claiming expenses like attorney’s fees and inspections. The debtors objected to the additional fees, but they also moved to settle and administer the case in order to use a personal injury settlement to pay off the Chapter 13 plan. Although the debtors wanted to continue to pursue the objection, the court ruled that it was moot and granted a discharge.

EverHome transferred the debt to America’s Servicing Company (ASC), which the debtors claim is an alter ego of Wells Fargo Bank, in late 2005. ASC submitted a payoff amount to the trustee of just under $10,000. In April 2006, the trustee paid that amount to ASC, and the debtors sent a personal check to ASC in the amount of $10,000, directing ASC to apply the funds to the mortgage principal. Instead, ASC applied the debtors’ payment to other fees, causing their mortgage “to go into complete disarray.” Moffitt I at 389. Continue reading

Published on:

Years after a debtor obtained a discharge of personal debt in a Chapter 7 bankruptcy proceeding, a mortgage lender with a second-lien mortgage sought to enforce its lien. A bankruptcy court ruled, over the debtor’s objection, that the lender was allowed to do so. In re Cusato, 485 B.R. 824 (Bankr. E.D. Pa. 2013). It ruled that an order issued during the bankruptcy proceeding, which held that the creditor’s claim was unsecured, did not avoid its lien. Bankruptcy law holds that a discharge only applies to a debtor individually, meaning that a creditor can still enforce a lien against property.

The dispute arose in late 2011, more than six years after the debtor obtained a Chapter 7 discharge, when the debtor applied for a reverse mortgage loan to prevent foreclosure by the first-lien mortgage holder. Springleaf Financial Services of Pennsylvania sent the title agent a letter claiming a second-lien mortgage. Although the debtor disputed Springleaf’s claim, she reportedly agreed to pay the claimed amount from the loan proceeds because she could not close on the reverse mortgage loan otherwise. The debtor obtained leave to reopen the Chapter 7 case and filed an adversary proceeding against Springleaf in May 2012, claiming that Springleaf had violated the statutory injunction against collecting discharged or avoided debt under 11 U.S.C. § 524(a).

Springleaf’s claim arose from a loan, secured by a second mortgage, made by its predecessor-in-interest in 2000. The debtor filed for Chapter 13 bankruptcy in November 2000. Several days later, she filed an adversary proceeding against Springleaf’s predecessor asking the court to avoid the second mortgage lien. The predecessor filed a proof of claim that December but never answered the adversary complaint. The court entered a default order in March 2001 classifying the claim as unsecured. Continue reading

Published on:

A federal district court affirmed a bankruptcy judge’s order converting a Chapter 13 bankruptcy to a Chapter 7 based on a finding of bad faith on the part of the debtor. In re Killian, No. 3:12-cv-03156, order (C.D. Ill., Sep. 30, 2013). Federal bankruptcy law allows a court to dismiss a case, or to convert it to a different chapter, for cause. The bankruptcy court found that the debtor failed to disclose, among other transactions, a transfer of cash that occurred just days before he filed his Chapter 13 petition, and held that he filed the petition in bad faith. It ordered a conversion to Chapter 7 to protect the creditors’ interests.

A debtor may wish to convert their case from one chapter to another for a near-infinite number of reasons, but this option is only available automatically once. The law specifically prohibits conversion of a case that has already been converted unless specifically set for hearing. 11 U.S.C. §§ 706(a), 1307(b). In a Chapter 13 case, the court can dismiss the case or convert it to a different chapter if a party in interest or the trustee makes a motion and shows cause. “Cause” may include material failures by the debtor to comply with court orders or the Chapter 13 bankruptcy plan, 11 U.S.C. § 1307(c), but may also involve a showing of the debtor’s bad faith. Marrama v. Citizens Bank of Massachusetts, 127 S. Ct. 1105, 1113-14 (2007).

A conversion by the court in such a case should serve “the best interest of the creditors.” Killian, order at 11. Most personal bankruptcies are filed under either Chapter 7 or Chapter 13. Each offers distinct advantages depending on an individual debtor’s circumstances. From a debtor’s perspective, a Chapter 13 case could safeguard certain assets that a trustee might sell in a Chapter 7 case. Creditors, however, might want to convert a Chapter 13 case to a Chapter 7 if the debtor has not made a full disclosure of all assets. A creditor could then ask the court to find that a previously-undisclosed asset is non-exempt. Continue reading