In May 7 decision the First Circuit Court of Appeals ruled that a debtor was limited to the amount of his stated objections. For those thinking of preparing cases on their own, or for others with perhaps different motives, the case teaches a good lesson: you reap what you sow.

In a chapter 7, all of the debtor’s property becomes property of the estate, and is sold. The proceeds of the sale are used to pay creditors and other administrative expenses. The debtor is permitted to keep property – what are referred to as exemptions. In addition to other documents, debtors are required to file schedule B, which identifies personal property, and schedule C, which sets forth the debtor’s claimed exemptions. The code requires that if any party wants to object to any claimed exemption of the debtor, the party must file an objection within 30 days following the conclusion of the creditors meeting, or Section 341 meeting. If that is not done, the property slips “beyond the estate’s grasp.”

In this case, the debtor listed on Schedule B a total of about $170,000 in money that was owed to him. On Schedule C, he claimed that the claims were only worth $8,000 and were otherwise exempt from the estate. No objection was filed. About a year later, the trustee asked the bankruptcy court to approve a settlement in the amount of $100,000.

The debtor argued that the estate had no interest in the lawsuits at all. But the Bankruptcy Court in Puerto Rico ruled that the debtor had not exempted the lawsuits, but only $4,000 partial interest in each suit. It approved a settlement where the proceeds could be paid to the trustee, with $8,000 paid to the debtor reflecting the amount of their exemption. The US District Court for the District of Puerto Rico affirmed and the debtor appealed.

The Appeal
The First Circuit noted that the debtor had listed the two lawsuits on the schedules, but noted that the claimed exemption was $4,000. Debtor argued that the identification of the law suits “clearly embraced all of the proceeds of the law suits and not just a $4,000 share of each.” He also found that this was his value of the claim at the time. The Court found this implausible in light of the fact that the lawsuits originally sought to collect $4 million from a government agency for unpaid invoice and because the suits sought damages for the accounts receivable (the $170,000 owed to the debtor). So the suits are settled, but the debtor only gets $8,000.

Debtor could have listed the value of the suits as “unknown” or claimed that they had a nominal value. Following other precedent, the First Circuit noted that “Use of terms like 100% [of the property’s value],’ ‘unknown’, ‘to be determined,’ ‘tba’ and ‘$1.00’ are red flags to trustees and creditors….[They] put them on notice that if they do not object, the whole value of the asset – whatever it might later turn out to be – will be exempt.” Had the debtor done this and there were no objection to the exemption, he’d be getting more than his $8,000.

As an aside, the Bankruptcy Court suggested that the debtor had acted in bad faith. Whether he did is a question I cannot answer, but it is clear that he could have and should have been more forthright with his disclosures on Schedules B and C. There’s also more to this case that what I can explain in this summary. You can read the entire case here.

Posted by Bill McLeod at 6:40 AM | Permalink | Comments (0) | TrackBacks (0)

A chapter 13 debtor proposes a plan to pay creditors over a period of time. Their creditors may include credit cards and utilities, and as in most cases I deal with, prepetition mortgage arrears. In some cases, debtors simply make a monthly payment to the chapter 13 trustee over the life of the plan. In others, debtors propose plans that provide for gradual increases in monthly payments (what might be referred to as a “step plan”). Other proposals might include monthly payments, with the last payment being a large balloon. That final balloon payment might be paid by the sale of an asset or a refinancing of property. However, a recent Massachusetts Bankruptcy Court decision says that this practice is no longer permissible since BAPCPA. The decision is on its way to the Bankruptcy Appellate Panel and debtors and practitioners should follow it closely.

Why?

There are many reasons why these types of plans are proposed. Some debtors have seasonal employment, while others expect raises or bonuses that they can use to fund future plan payments. Other debtors expect to refinance their property in 3-5 years, or perhaps sell property to make a balloon payment. The more practical reason is this: at the time the debtor’s file their chapter 13 plan, they do not have the income or resources to make equal monthly payments enough to fund a confirmable plan. For many debtors, step or balloon plans are the only way some debtors can keep their homes.

This decision comes from two separate cases. In one, the debtors proposed a step plan: 12 $500 per month payments, 12 $1,000 per month payments, 35 $1,500 per month payments and one balloon payment of about $105,000. The other debtors proposed 59 payments of $550 per month, with one balloon payment of about $38,000.

The Bankruptcy Court found that the plans did not comply with Section 1325(a)(5)(B)(iii)(I) which was added by BAPCPA which requires that a chapter 13 plan provide for periodic payments to a secured creditor in equal amounts. “[I]t seems apparent that once periodic payments to that creditor commence, a subsequent balloon payment would be unequal to those that preceded it.” Because the Court found that this was a requirement for confirmation of the plan, the Court could not confirm the plans.

In referring to In re Erwin, 376 B.R. 897 (Bankr.C.D.Ill. 2007), the Court noted that “[s]ecured creditors, particularly those secured by a vehicle, viewed [step plans or balloon payments] as unfair, exposing them to undue risk in light of the constant depreciation of their collateral.”

In one of the cases, the creditors did not object and the debtors argued that the creditor's silence should be construed as consent to their treatment under the plan. However the court noted from a prior decision that “even in the absence of objection by a creditor, the court has an affirmative duty to review [a Chapter 13 plan] and ensure its provisions comply with the provisions of the Bankruptcy Code.”

This decision is headed to the BAP for review, and given the importance of the issue, it is likely to head to the First Circuit. Reasonable minds can disagree as to what the outcome will be or should be. For now, debtor’s attorneys can at least try – at least in this district – to propose a step or balloon plan. However, debtor’s attorneys and prospective debtors should watch this issue closely. If this Bankruptcy Court decision is upheld by the higher courts, many debtors will not benefit from the protections afforded by chapter 13 because they will not be able to fund a confirmable plan.

Stay tuned.

In re: Melillo, Chapter 13 Case no. 07-10238 (Bankr.D.Mass 2008).
In re: Flynn, Chapter 13 Case no. 07-15470 (Bankr.D.Mass 2008).

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I’ve of written about the emotions that one goes through when contemplating bankruptcy. In one of my older blog postings, I harkened back to a cold February day where I had to put my 16 year old cat to sleep. There were a plethora of emotions that filled that experience, and some of which were the same that I see in my clients who are facing debt problems. It was with this in mind when I recently read articles (which lead me to read others around the net) that discussed the 5 stages of dying, and how they are transferable to other life changing events, including filing bankruptcy.

Elizabeth Kubler-Ross was the author of On Death and Dying. First published in 1969, the book is a study of the five stages an individual experiences when facing their own death: denial, anger, bargaining, depression and ultimately, acceptance. Those stages are not just for those facing their own death; the family of a dying loved one also goes through the same stages, although not necessarily at the same time.

Perhaps some will think me weird, but I first read the book in high school as a part of an English book report project. It was a book that stayed with me because if for no other reason, it was just as much a study of living as it was a dissertation about the process of dying. And bankruptcy is in many ways like death.

Since I wrote that article in January 2007 (the link is below), I’ve lost another cat. Bridget was just over 6 years old. For reasons I will never be able to fully understand, she died very unexpectedly. She was not hit by a car, or attacked by another animal. She just got very sick, very quickly, and in very short order, she was gone. I had no say in the matter. She very likely had a genetic heart defect that is difficult to detect, and even more difficult to treat even if detected in time. Facing that, there was denial, and anger (and boy, was there anger), and bargaining, followed by depression and ultimately acceptance. We all go through these stages when we face something that is difficult and painful. Facing the prospect of filing a bankruptcy petition is no different.

While I endured those emotional stages with my cats, I also went through them with my friends and family members who have passed away: my grandparents, my mom and many friends. There’s no way I can explain (or for that matter anyone can) what “denial” is, or what “acceptance” looks like. But I can share my own personal and professional observations and experiences. If you’re reading Storm Preparation because you see that bankruptcy coming, be sure to come back over the next five weeks. I’m taking this series into a new (albeit temporary) direction. And next week, I'll tackle stage one: denial.

You might also be interested:
When Enough is Enough

Storm Preparation is a weekly series appearing on Wednesdays and offers tips and information to people who think they may need bankruptcy protection in the future. Questions, comments or suggestions can be addressed to info@mcleodlawoffices.com.

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In January, the Executive Office of the US Trustee announced that audits of consumer debtor cases were suspended due to budgetary constraints. On May 9, the US Trustee program announced that it was resuming random audits. Originally, 1 out of every 250 cases filed in a judicial district could expect to be selected. Apparently, the budgetary issues have not been completely resolved because now, it is 1 out of every 1,000.

Read more here

Previous posts:
Audits of Bankruptcy Petitions

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By the time many people contact a bankruptcy attorney, their credit card balances are already high – if not at their limit. Sometimes, when there is room to spare on the balance, it can be tempting to use credit if a bankruptcy filing is down the road. Here’s a bit of advice: don’t.

Let’s start with the practical view: if you know you will be filing bankruptcy in the future, then you know you will not pay back what you borrowed (or perhaps not all of it at the terms you agreed to). While understandably, you might think that the big bad bankers have it coming to them, it still does not change the fact that it is wrong to take money under the pretense of borrowing, when you know you have no intention of paying it back. And there are legal consequences as well.

Section 523 (a)(2) of the Bankruptcy Code precludes discharge of debts that were incurred by fraud. If the charge was incurred during a certain period of time prior to the bankruptcy filing, the debt may be presumed fraudulent. In other words, it’s up to the debtor to prove that it’s dischargeable. If a debt is incurred outside that presumptive period, a creditor may still challenge dischargeability if the facts warrant it. They will have the burden of proof, but the debtor will still need to defend his or her decisions. This is all done through an Adversary Proceeding. And there are consequences with that as well.

Adversary Proceedings are civil lawsuits within the bankruptcy case itself, and it is the procedural mechanism that creditors use to litigate dischargeability issues. They can be complex, long and in some cases, the end result is not all together predictable. It can delay the closure of the bankruptcy. I have seen it cause great consternation and anxiety with debtors. One debtor recently told me that she has not slept well since her Adversary Proceeding started. In addition to all that, the Adversary Proceeding adds to the costs of the case – sometimes substantially. All around, it’s not a good time.

If you see bankruptcy in the future, think twice before using that credit card. Think twice before asking for that personal loan. Think twice before accepting that preapproved offer of credit. Yes, the extra money might bring a temporary fix. However, if you find yourself in bankruptcy court, that decision could be costly. If you find yourself itching to use that credit card, and knowing you cannot pay it back, it’s time to talk to a bankruptcy attorney.

Storm Preparation is a weekly series appearing on Wednesdays and offers tips and information to people who think they may need bankruptcy protection in the future. Questions, comments or suggestions can be addressed to info@mcleodlawoffices.com.

Posted by Bill McLeod at 10:19 AM | Permalink | Comments (0) | TrackBacks (0)

I recently read a bankruptcy court decision concerning a very serious matter: nondischargeability of a debt. While serious, there was also a bit of humor in it. The facts of this case were just too good not to share.

The Plaintiffs were homeowners who wanted to have a swimming pool. They lived in Texas, which I hear can get quite warm. The Plaintiffs presumably considered a number of pools before resting on what we can probably infer was the swimming pool of their dreams: “an in-ground swimming pool (with water fall and cave area), space, spa therapy chair, fire pit, covered patio, and outdoor kitchen.” It sounds sweet! In addition to the “drainage and irrigation work” they also wanted to install a rock façade on their home. In November of 2004, they hired the (soon to be) debtor for an agreed price of $100,000, and gave him a $250 deposit.

Apparently, the Plaintiffs were impressed with the (then soon to be) debtor because he “seemed serious about directly managing the project, with on-site supervision, until all work by the subcontractors was completed.” Work on the project began in January of 2005 and shortly after the excavation work, the plaintiff gave the (then soon to be) debtor a check for $40,000. About a week later, the Plaintiffs paid another $40,000 towards the contract price.

Plaintiffs were starting to get concerned about things and they drove out to the (soon to be) debtor’s shop. There, they were told he was not in the office. They were told he was on the lake “with his new boat.” They were told he purchased the boat within three weeks of receiving the $40,000 check. This news was followed by weeks and months of phone calls not being returned.

The pool man then became a debtor in bankruptcy. Plaintiffs’ brought an adversary proceeding claiming that the debt was nondischargeable and it eventually went to trial.

At the trial, the Plaintiffs demonstrated that in addition to the amounts they paid the Defendant, they spent an additional $50,527.87, and had additional estimates for another $17,000 in needed costs and repairs. Fortunately, they were able to get their pool finished.

The Defendant did not submit any documentary evidence. He claimed that he “lost most of his document in connection with this construction job, as a result of losing his home and having to make subsequent moves. He testified that he did not have records from his checking account, and that he was unable to obtain copies from his bank since he is involved in litigation with the bank over a dishonored check.”

Not an altogether impressive argument and the court ultimately agreed. “In failing to complete the job and in using the construction funds for his own benefit [was] willful in that they were done deliberately and intentionally. The Defendant’s actions were “done in conscious disregard of his obligations under the contract, and without just cause of excuse.” The Plaintiffs’ claims were deemed non dischargeable under Section 526(a)(6).

Hanson v. Kelly, Adversary No. 07-3001, US Bankruptcy Court for the Southern District of Texas at Houston

Related:
Destroyed Documents leads to Denial fo Discharge

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There seem to be debtors everywhere who think they can file bankruptcy without an attorney. Of course, in many, many cases, debtors only end up causing themselves greater problems. A case out of the Eastern District of Pennsylvania proves my point.

The debtor in that case got his case dismissed because he did not received the requisite credit counseling. The case was filed on Valentines Day of this year, and along with his petition, the debtor filed a statement of “Exigent Circumstances” to excuse his failure to comply with the credit counseling requirement. The debtor represented that he was facing a foreclosure sale.

On February 20, the court ordered him to file by the 29th a Supplement to the Certification to enable the court to determine whether the requirements of Section 109(h)(3) had been satisfied. Debtor didn’t. Instead, the debtor filed his Certificate of Credit Counseling on the 28th. The case was dismissed. Debtor filed a motion for reconsideration.

Bankruptcy Code Section 109(h)(3) has at least requirements for establishing that there are Exigent Circumstances justifying a failure to obtain prepetition credit counseling. First, there must be some emergency compelling the filing before the counseling was obtained. Second, the debtor has to have tried to obtain credit counseling before filing the case but was unable to get it within the 5 day period prior to filing. The pro se debtor did not provide any information on this second requirement.

The case got dismissed. Hopefully, when the debtor again files bankruptcy (since he was facing foreclosure, I am assuming he did or will), he will have a lawyer. One of the first things he’ll have to do is seek an extension of the automatic stay because he will then be a repeat filer.

In re Kaufman, No. 08-11087 (Bankr.E.D.Pa.)

You might have missed:

Pro Se Perils: When a Case Gets Dismissed
No Ticket? No Bankruptcy

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