Proposed National Model Chapter 13 Plan

This is a post that will probably be more of interest to bankruptcy practitioners than bankruptcy debtors.  However, there is potential for some substantial changes that will drastically impact how Chapter 13s are administered, so potential bankruptcy filers shouldn't completely blow this off.

Currently, each federal district has its own way of handling Chapter 13 Plans.  Most if not all have a "model plan" which is the form template attorneys and debtors are encouraged to use when drafting the Chapter 13 repayment plan.  Many districts have made use of their model plan mandatory.  I was on the Local Rules Committee back in 2009, which ultimately made our model plan in the Eastern District of Wisconsin mandatory in early 2010, if memory serves (and over my sole objection).  In districts without a mandatory plan, attorneys can and do have their own versions.

But even if each district adopted a mandatory model plan, it would still leave 94 different plans, which makes it difficult to create uniform case law.  It also becomes burdensome to creditors who do business nationally (though as debtors' counsel, I care less about that).

So, for quite some time now, a committee has been established to draft and propose a national model plan for use everywhere in the United States.  There are also proposals floating around to the Federal Rules of Bankruptcy Procedure to accommodate this national model plan.  The proposal for FRBP 9009 would prohibit alteration of the model plan except in the special provisions area of the plan.  That rule seems to suggest that the committee will recommend that the model plan be mandatory (and frankly, if it isn't mandatory, there isn't much point in having a model plan).  The downside to a mandatory plan, of course, is that if the plan is not drawn up well, it will - at the very least - create some administrative problems.  Worst case, it has the potential to force changes on the rules and procedures at the local level.  Also, there are rumors that what is allowed in the special provisions section of the model plan will be far more restrictive than what we currently do in the Eastern District of Wisconsin (which is basically - 'anything goes', so long as it doesn't violate established law).

So what do we know?  Well, the rule-making process is a long and arduous one.  If everything remains on schedule, the earliest we expect to see implementation of this proposed national model plan is December 2015.  That's right - 2.5 years from now.  On the upside, this gives us more time to address concerns that exist concerning the current draft of the model plan.

It is worth noting that there is a form modernization project in the works (also referred to as the form lengthening project).  Although there appears to be no set date yet, I expect the new forms to go into effect December 2013, roughly coinciding with the eight year anniversary of BAPCPA.

Because this is the early draft, and is likely to go through substantial changes after feedback has been submitted, there's not much point in going through the document line by line.  I do want to highlight a few of the expected changes that I think will be the most dramatic.

FRBP 3002 - would shorten the time-frame for filing proofs of claim.  Currently, it is 90 days after the sec. 341 meeting of creditors, which itself is scheduled between 21 and 50 days after the bankruptcy petition is filed.  So all in all, creditors have upwards of 4-5 months to file a proof of claim.  The government has 180 days (or 6 months) after the petition date to file its claim.  This makes administration of a case difficult, as plans are often confirmable long before the bar date to file claims has passed, and feasibility can't really be addressed until all claims have come in.  So, the new bar date should really help in administration.  The catch is - the government's 180 days appears to be unaffected by the proposed rule change.  I don't mind the government getting more time to file claims that private creditors, but 6 months seems excessive to me.

Certain actions to strip liens that have traditionally been done by separate motion or adversary proceeding.  Those are now being folded into the plan, which does cut down on paperwork.  To address notice requirements, however, Rule 3015 is expected to be amended to integrate enhanced service requirements of the Chapter 13 Plan in those circumstances.

The current draft of the plan is no doubt reflective of the districts that its chief authors hail from.  There are a lot of references to confirmation hearings, which not all districts have (unless a creditor objects to confirmation).  Our judges have stopped having confirmation hearings in cases that are not being contested (after the appropriate time to object has passed).  At the moment, lessons learned in law school escape me, and I forget the relative authority of the federal rules to district court cases.   But if this model plan doesn't force districts to hold confirmation hearings, the language is going to make administration of the plan tricky.

The current draft also is pretty rigid in how payments are structured.  It doesn't provide for splitting payments between joint debtors, it doesn't provide for customization of payroll orders into weekly or bi-weekly pay periods, and it only provides for one step provision.  Of course, these issues can be addressed in the special provisions section, but we could save a LOT of unnecessary special provisions by having a better structured paragraph.  For the record, this is what I have been proposing for the last... oh, let's say two years...

2.   Plan Payments and Length of Plan. Debtor shall pay the total amount of $0.00 by paying $0.00 per month for the period of 60 months by

[ ] Direct Payments to the Trustee, or

[ ] Periodic Payroll Deductions from the:

[ ]  Debtor	[ ]  Joint Debtor
in the amount of: $0.00	in the amount of: $0.00
[ ] weekly [ ] bi-weekly [ ] semi-monthly [ ] monthly	[ ] weekly [ ] bi-weekly [ ] semi-monthly [ ] monthly

The duration of the plan may be less if all allowed claims in every class, other than long-term claims, are paid in full.

The tax refund committal paragraph is similarly rigid and doesn't account for variances in local customs on the subject.

Another concern is that the plan allows certain "options" that are not available in all districts or not available in all circumstances.  It is said that the Chapter 13 Plan is being drafted to help pro se debtors.  Quite frankly, Chapter 13 is complicated enough that no debtor should try it without an attorney.  Moreoever, without the legal knowledge, pro se debtors will be filing uncomfirmable plans because they won't know in which districts or in which circumstances certain plain provisions are available.

Other concerning language - the absence of a provision that discusses which aspects of administration are controlled by the plan and which aspects are controlled by the proof of claim; and language in the signature section allowing debtor's counsel to sign the plan without the debtors' signatures; the conduit mortgage provision isn't terribly detailed enough for districts that do not have conduits as a default.  On the upside, this version provides for vesting of property of the estate upon "closing of the case" instead of upon "discharge", which helps resolve an ambiguity in attorneys who prefer not to have revestment on confirmation, but are filing cases in which a discharge is not available.

Those who wish to review the proposed rule changes or the proposed model plan can try the following links:

• http://www.bankruptcylawnetwork.com/wp-content/uploads/2013/01/Model-Plan-and-Proposed-Rules-12-11-2012.pdf
• http://www.uscourts.gov/rulesandpolicies/rules.aspx
• http://www.wieb.uscourts.gov/index.php/document-manager/doc_download/1380-the-proposed-national-model-plan-outline
• http://www.wieb.uscourts.gov/index.php/document-manager/doc_download/1381-recording-of-lou-jones-breakfast-05-14-2013

Tweet

April 2013 Foreclosure Statistics

If you've been served with foreclosure papers - don't give up.  It's not too late to save your home.  But waiting until the week before the Sheriff's Sale is cutting it a bit close!  Don't procrastinate.  Call us now and find out how Chapter 13 can stop foreclosure.

Brown	52
Calumet	13
Door	8
Florence	0
Fond du Lac	13
Forest	3
Green Lake	2
Kewaunee	3
Langlade	3
Manitowoc	16
Marinette	11
Marquette	8
Menominee	0
Oconto	11
Outagamie	37
Shawano	8
Sheboygan	25
Waupaca	20
Waushara	8
Winnebago	37
NEWI Total	278
Statewide	1331

Tweet

Post-Petition Mortgage Changes

If you're a Chapter 13 debtor with a mortgage, you have probably been noticing the occasional letter in the mail from your mortgage company with a form captioned either as "Notice of Mortgage Payment Change" and/or "Notice of Post-Petition Mortgage Fees, Expenses, and Charges".

Debtors who have been in Chapter 13 for more than a year and a half might be a little more puzzled about these notices than newer Chapter 13 clients.  That's because, before December 2011, these notices didn't exist.  They are part of Fed. R. Bankr. P. 3002.1(b) and (c).

Apart from curing mortgage arrears, bankruptcy law doesn't allow for the modification of the terms of a mortgage secured solely by a principal residence (11 U.S.C. § 1322(b)(2)).  That means that if you have an adjustable rate mortgage, a balloon provision, a high mortgage interest rate, or any other unfavorable term - you're still stuck with those terms in a Chapter 13 bankruptcy.

So, when your interest rate adjusts periodically per the terms of the mortgage, your mortgage has and will continue to change throughout the life of your mortgage.  However, while in bankruptcy, and effective 12/1/2011, the mortgage company is required to file a Notice of Mortgage Payment Change" with the bankruptcy court.  These notices are also very commonly filed each year in cases where there is an escrow for property taxes.

Really, the notice of mortgage payment change doesn't have a material impact on a bankruptcy case, other than it affords your attorney and other interested parties a chance to be aware of the change.  But, aware or not, you are responsible for making the new mortgage payment as reflected on the notice, unless you have grounds for objecting to that change (and successfully contest that change).

The second notice is for post-petition fees, expenses, and other charges.  I see these most often filed some time after a motion for relief from stay (which happens when a debtor defaults on post-petition mortgage payments) for late fees, penalties, and legal fees associated with the motion for relief.  I also see these for periodic property inspections.

Now, these fees are above and beyond your ordinary mortgage payment, and they will need to be paid separately - either soon after the charge is incurred, or at the end of your bankruptcy plan.  FRBP 3002.1(f-h) outlines the procedure for the mortgage company to make a statement concerning any remaining arrears that exist prior to you receiving your Chapter 13 discharge.  These post-petition charges are not paid by the trustee unless they are filed as supplemental proofs of claim.

So - it's something to be careful of and watch out for, especially as you near the end of your Chapter 13 Plan.  Again, there's nothing new about post-petition charges, but at least now you are receiving notices about them through the bankruptcy court - which is more notice than debtors got before December 2011.

Note:  The way we have constructed our new conduit mortgage provision does allow for the trustee to automatically make adjustments to plan payments to accommodate both a change to mortgage payments and a for additional charges.

Tweet

Proofs of Claim & Burdens of Proof

So, you've filed for bankruptcy.  And in your case - whether it's because you filed for bankruptcy under Chapter 13 or because you have assets that will be liquidated in Chapter 7 - creditors will be getting paid.

How will they be getting paid?  Well, creditors in these types of cases are directed to file what's called a proof of claim.  This is a document filed with the bankruptcy court asserting that the creditor is entitled to payment in your bankruptcy case.  While creditors cannot be forced to file a proof of claim, they will not be paid if they do not file one.  Sometimes - that's important.  For example, a mortgage creditor who never files a claim for arrears may pounce on you for foreclosure the moment you get out of bankruptcy.  Or, a child support claim that isn't paid for lack of a proof of claim would jeopardize your discharge.  Fortunately, your attorney can file claims on behalf of certain critical creditors to try to avoid these problems.

All right, so we know that creditors are out of luck if they don't file a proof of claim.  The Federal Rules of Bankruptcy Procedure, at 3001, 3002, and 3004 set forth the majority of criteria and deadlines for a proper proof of claim.  We know that we want certain creditors to file claims.  We also know that if certain other creditors (who received notice of the bankruptcy - see 11 U.S.C. § 523(a)(3)) don't file claims - they're out of luck.

But what about the creditors who do file claims?  What if we want to filter some of them out?  For example - you may have a dispute with a particular creditor over whether you owe them money or how much money you owe them.  You may also want to make sure that some clever and vindictive enemy of yours doesn't catch wind of your bankruptcy case and try to lodge a false claim in the hope of getting paid.  Or, you may think that a particular claim was discharged in a prior bankruptcy.  What then?

Rule 3001(f) states that a properly filed proof of claim shall be considered prima facie evidence of the validity and amount of the claim.  What does that mean?  It means the court is not going to scrutinize every single claim that is filed in your case.  It's not going to hold a hearing for each claim to make sure it's a proper claim.  If you think a claim is improper, it's up to you to bring it to the court's attention (through your attorney, of course) by filing an objection to the claim.

The burden of proof then shifts to you, the debtor, to demonstrate that the claim is improper - with evidence sufficient to negate the claim's original prima facie validity.  If you succeed, then the creditor bears ultimate responsibility for showing that the claim is valid by a preponderance of the evidence.

Or, as stated in two leading opinions on the matter:

Federal Rule of Bankruptcy Procedure 3001(f), provides that a proof of claim completed and filed in accordance with 11 U.S.C. § 501 and any applicable Bankruptcy Rules constitutes prima facie evidence of the validity and amount of the claim. Thus, if a procedurally proper claim is filed, the objecting party carries the burden of going forward with evidence contesting the validity or amount of the claim.  However, once the objecting party succeeds in overcoming the prima facie effect given to the claim by Rule 3001(f), the burden shifts to the claimant to prove the validity of his/her claim by a preponderance of the evidence.

In re Dumontier, 389 B.R. 890, 897-898 (Bankr. D. Mont. 2008)

The burden of proof for claims brought in the bankruptcy court under 11 U.S.C. § 502(a) rests on different parties at different times. Initially, the claimant must allege facts sufficient to support the claim. If the averments in his filed claim meet this standard of sufficiency, it is "prima facie" valid.  In other words, a claim that alleges facts sufficient to support a legal liability to the claimant satisfies the claimant's initial obligation to go forward. The burden of going forward then shifts to the objector to produce evidence sufficient to negate the prima facie validity of the filed claim. It is often said that the objector must produce evidence equal in force to the prima facie case. In practice, the objector must produce evidence which, if believed, would refute at least one of the allegations that is essential to the claim's legal sufficiency. If the objector produces sufficient evidence to negate one or more of the sworn facts in the proof of claim, the burden reverts to the claimant to prove the validity of the claim by a preponderance of the evidence.  The burden of persuasion is always on the claimant.

In re Allegheny Int'l, Inc., 954 F.2d 167, 173-174 (3d Cir. Pa. 1992)

(Citations omitted.)

Tweet

Discharge Violations / Collection of Business Debts

From time to time, I will receive a phone call or letter from a former client of mine, concerned that they are still receiving billing statements in violation of the discharge they received in bankruptcy.  Sometimes, these are legitimate complaints.  Sometimes, the creditor wasn't listed on the bankruptcy schedules (and for no-asset Chapter 7 cases, that's not a big deal under Judge Kelley's Guseck case).  In either case, we send a polite reminder to the creditor, and 99% of the time, that's the end of it.  Very rarely do discharge violations need to be litigated in front of a bankruptcy judge.

It's worth pausing to note that, unlike stay violations, which have a clear statutory basis for the recovery of damages - 11 U.S.C. § 362(k) - there is no such provision in § 524.  To receive awards and sanctions in a discharge violation, you must invoke the court's general powers and authorities in § 105 and case law.  The standard of proof is 'clear and convincing' evidence.  And if the violating creditor is the IRS - administrative remedies at 26 U.S.C. § 7433(3) must first be exhausted.

Sometimes, the creditor that the client is complaining about was listed on their schedules, was discharged, and yet - I have to tell my client that there is no violation of the discharge.  Why?  Because my client owned a business - either a corporation, partnership, LLC, or other separate legal business entity.  Let's consider a very common example, so we don't wander off into the land of abstracts.,,

John Doe is the sole owner, operator, and representative of Acme, LLC.  Acme LLC incurred a business loan through Moneypenny Bank, which John Doe was required to personally guarantee.  Acme LLC doesn't do very well, and as a result, John Doe ceases business operations and files an individual bankruptcy case.  He does everything his lawyer tells him to do, he receives his discharge, and a month later, he starts receiving bills from Moneypenny Bank.

What went wrong?

Well, nothing, actually.  John Doe filed for bankruptcy.  Acme LLC did not.  The bankruptcy discharge protects John Doe from being personally collected against from Moneypenny Bank.  However, Moneypenny Bank can still attempt to collect against Acme LLC.  John Doe continues to receive correspondence because he is the owner and representative of Acme LLC.  John Doe looks at the billing statements again and realizes that the bills are not addressed to him (John) but to his business (Acme).

While this is not a violation of the discharge, John is annoyed by the billing statements.  Is there anything he can do to stop the billing statements?

Moneypenny can continue to collect against Acme LLC until one of three things happens...

Option 1:  Acme LLC pays the debt, as agreed.  This option is the likely route if John Doe intends for Acme LLC to continue to exist and operate.  Since John Doe is the sole owner of the LLC, this means that the money is ultimately coming out of his own pocket.  But that is the consequence of owning the LLC.

Option 2:  Acme LLC can file bankruptcy.  This is generally an unnecessary step if John Doe intends to fold the business.  There may be certain benefits to liquidation under Chapter 7 (such as the distribution of assets to priority creditors).  If Acme LLC is to continue operating but needs to file bankruptcy, it would have to do so under Chapter 11.  In either event, I leave it to bankruptcy attorneys who specialize in business filings to explain those benefits.

Option 3:  Formally dissolve Acme LLC.  Dissolution of a business is the corporate equivalent of death of an individual.  Creditors can't collect against dead people (though they can collect against probate estates).  Nor can Moneypenny Bank collect against an LLC that doesn't exist.  Again, I leave it to business attorneys to discuss the proper steps to formally dissolve a business (you want to make sure your LLC is dissolved properly to avoid issues with government agencies and taxing authorities).  But this is the simplest and most straightforward way to deal with the problem if John Doe does not intend to continue on with Acme LLC.

Of course, Moneypenny Bank will retain certain rights.  For example, if they have a lien on assets - they will be able to exercise those security rights.  They may also have rights if Acme LLC owns non-pledged assets.  To determine specific consequences of dissolution, speak to a competent business attorney.

Tweet

Western District Developments - Bronk and Clark

Last year I reported on two cases in the Western District of Wisconsin that had created some concern for debtors and debtors' attorneys.  As always, I caution people who are reading this to be mindful that cases in the Western District of Wisconsin are not binding on cases in the Eastern District of Wisconsin (which covers the areas I typically practice in, including Green Bay, Appleton, Oshkosh, Marinette, Oconto, Sturgeon Bay, Kewaunee, Fond du Lac, and Sheboygan).  Nevertheless, I  like to share these cases because they may influence our judges here in the future, or be brought up on appeal to the circuit court, which would create binding law here.

The first case I reported on was Halling.  In this case, a son cosigned a loan for his mother, the mother made payments, and then later filed for bankruptcy.  Her payments on the loan would ordinarily just be considered an ordinary preference.  However, her payments were also deemed to benefit the cosigning son (the son being an insider) in terms of decreased liability from the son to the creditor.  Therefore, the payments the mother made to the creditor constituted an insider preference from the mother to the son.  The son was then sued to recover the value of this preference.  Unfortunately, there is no subsequent history on that case yet.

The second case was Bronk.  In this case, the bankruptcy court held that the debtor's conversion of non-exempt assets into exempt assets was not done with intent to hinder, delay, or defraud creditors, but that the debtor - as account holder of several college savings accounts - was not entitled to take their value as exempt, as the statute permitting the exemption only permitted the beneficiaries to exempt their interest in such accounts.  Both issues have since been affirmed on appeal to the District Court.

There is a third case that I didn't mention last time.  In re Clark, which has been appealed and ruled at 466 B.R. 135 (W.D. Wis. 2012).  In this case, the trustee objected to use of exemptions on an inherited retirement account.  On appeal, Judge Crabb noted that the statutes did not distinguish between retirement accounts that had been built up by the debtor and retirement accounts inherited by the debtor.  The decision of the bankruptcy court was overturned.

Tweet

March 2013 Foreclosure Statistics

Brown	51
Calumet	6
Door	7
Florence	0
Fond du Lac	22
Forest	3
Green Lake	4
Kewaunee	6
Langlade	5
Manitowoc	19
Marinette	9
Marquette	4
Menominee	0
Oconto	8
Outagamie	34
Shawano	14
Sheboygan	32
Waupaca	18
Waushara	10
Winnebago	39
NEWI Total	291
Statewide	1414

Tweet

Chapter 20 Update

Last year, I mentioned Fair v. GMAC case, in which Judge Randa from the District Court in the Eastern District of Wisconsin ruled that there was nothing in the statutes that prevented the stripping of a wholly unsecured mortgage in a Chapter 13 case in which the debtor was not eligible for a discharge.

This past September, Judge Clevert - also in the District Court for the Eastern District of Wisconsin, ruled contrary to his colleague, in the case of Lindskog v. M&I Bank, 480 B.R. 916 (E.D. Wis. 2012).  This now sets up a split on the district court level.

The issue of whether lien stripping is permissible in so-called "Chapter 20" scenarios is heavily split throughout the country.  Although it is not expected that the Lindskog case will be appealed, it is likely that we will see a 7th Circuit appellate case or even a Supreme Court case on this issue in the next year or two.

Local attorneys have expressed concern over what was likely haphazard word selection by Judge Clevert in his decision, in which he remarked that "Lindskog did not qualify for a Chapter 13 having received a Chapter 7 discharge within four years of filing," incorrectly suggesting that the statutes preclude a debtor from filing Chapter 13 unless the debtor is eligible for a Chapter 13 discharge.  It appears that omission has been corrected, as the language appearing on Lexis now includes the word "discharge" following "Chapter 13".

Lindskog did not qualify for a Chapter 13 discharge having received a Chapter 7 discharge within four years of filing.

Lindskog v. M&I Bank, 480 B.R. 916, 919 (E.D. Wis. 2012)

Tweet

Spotting Fraud & the Importance of Literacy

The other day, I received an e-mail from a a woman who works for a local bank.  She was concerned because one of my clients had taken to writing threatening e-mails to the bank, stating that the bank held no valid mortgages, that by accepting payment from the client, they were committing fraud, and demanding documents that (quite frankly) don't exist.

It's interesting to note that this bank is the creditor that I have sued more times than any other creditor for artificially pumping up appraisal values in order to give out home equity loans to homeowners who are already underwater with their first mortgage.  Why is that interesting?  I'll get to that in a minute.

The banker asked me to investigate and reach out to my client to figure out what was wrong.  And so I did.  My client responded with two lengthy e-mails and two forms (eight pages in total) attached that I had to parse through.

Apparently, my client had been targeted by a group that I am going to refer to as "PT76".  There isn't a whole lot of information (and even less reputable information) available on this group.  But from what I could gather, this is an ultra-nationalist, quasi-anarchist, anti-corporate organization.  That's the polite version.  A more apt description would be an ultra-radical gang of tinfoil hat wearing thugs.

The forms were nothing more than gibberish.  Someone strung together a long mess of legal-sounding words in the apparent hope of sounding smart, tough, and ultimately - legitimate.  It's not even fair for me to say that they were misstating the law.  More accurately, they weren't saying much of anything.  Their intent appears to be to incite and rile up victimized American consumers.

Here's the crazy part.  I *should* be with these people.  Anti big bank?  Hell yeah!  I've been working in bankruptcy too long not to have developed a vitriolic hatred for the big banks.  Pro government reform?  Absolutely!  I'm tired of listening to Congressmen behave like spoiled brats on a school playground.

That forced me intro a little Cartesian bout with existentialism.  For those of you who haven't had a class in Philosophy, think: Matrix.  I can only be aware of my own existence.  Everything else could be an illusion.  So, for all I know - I'm living in a fantasy world, and these people whom I have dubbed 'tinfoil hat people' are the only ones with their heads screwed on straight.

But I got over it, and here's why.  My beef with PT76 is NOT that they are stupid or uninformed.  I do not think that a person has to be highly educated in order to express an opinion.  I do not think that a person must be wealthy enough to hire an attorney to be active in politics or government.

My problem with PT76 is that they are too emotional not to be involved, but also too lazy to be involved properly.  It's one thing to be stupid.  It's quite another thing to be stupid, but try to pretend that you're smart.  When you string a bunch of nonsensical and incoherent legalese together in order to feign legitimacy, intelligence, and strength, then you are no better than the 'bank cartels' you claim to be rising up against.  How can you call the bank's conduct fraud when you yourself are engaged in fraud?

---

One of the dead giveaways that PT76 is a group of morons were the forms they supplied to my client.  A fifth grader could have composed better forms.

Cell phones and Twitter have been the biggest enemies of literacy - forcing people to abandon years of formal English training in favor of absurdly long acronyms and abbreviations.  People have a tendency to mock those of us who are sticklers for good grammar and spelling.  Some might call me a literary snob.  You know what?  I am.

You could argue that presentation is 'superficial' and unimportant relative to the content of the words.  But I disagree.  The use of good grammar and style - particularly in this case - had a much bigger impact on the forms presented by PT76 than the words did (which were meaningless drivel).

The forms offered by PT76 were riddled with misspelled words, poor grammar, faulty capitalization, faulty punctuation, poor spacing, poor alignment, and poor formatting.  Anyone who was educated enough to speak intelligently enough about the laws that PT76 was referring to would have had the basic composition skills necessary to churn out a decently formatted document.

Does that mean that all properly formatted documents are legitimate?  Of course not.

Does that mean that a document with a single type-o is not legitimate?  Of course not.

A document that reads like it was prepared by a fifth grader is, however, pretty indicative that its content is equally specious.

Grammar and style are important.  Using words properly goes a long way at effectively communicating your ideas with other people.  But more importantly - people who have to read your poorly-formatted documents will become fatigued when they have to spend half their energy trying to translate your poor grammar into actual English, and they are more likely to disregard what you have to say.

Tweet

Lien Perfection

Among the many documents requested by trustees are copies of mortgages and, in the case of vehicles that have liens on them, titles for those cars.  Ever wonder why?

Under 11 U.S.C. § 547, the trustee has the authority to void certain transactions called preferences.  Although the statute is quite lengthy, the vast majority of preferences include payments to individual creditors in excess of $600 (§ 547(c)(8)) in the 90 day period before the bankruptcy case is filed (§ 547(b)(4)(A)) or between 90 days and 12 months for insiders (§ 547(b)(4)(B)) - insiders being relatives and business partners.

It also includes acts to perfect a lien (§ 547(c)(3)) unless the lien was perfected within 30 days of acquisition of the collateral.  To err on the safe side, most attorneys will boil this down into simplified advice: new liens should be created and perfected at least 90 days before filing bankruptcy - and the date appearing on the title or the recording stamp of a mortgage is usually referenced.

Why are preferences avoidable and what happens if the trustee can avoid a preference?  Preferences are voidable by statute in order to deter certain activity and fulfill a public policy goal.  The activity being deterred is the debtor making payments and bestowing benefits to certain "preferred creditors" at the expense of all of their other creditors at large.  While the debtor may think that their Kohl's credit card is worthy of special treatment, Congress and the Bankruptcy Courts look down on the practice of showing favoritism.  All creditors within a certain class ought to be treated equally in bankruptcy.

So, if a preference is voidable, that means the trustee has first dibs on whatever has been voided.  In the case of an ordinary preference or insider payment - he can sue to recover the preference payments.  In other words - that $5,000 you paid back to your mom right before filing for bankruptcy - that will likely have hurt your mother more than it helped her.

The trustee can also void improperly perfected liens: liens that were not perfected before the bankruptcy case was filed, liens that were perfected within 90 days of filing bankruptcy but after 30 days after acquisition.  In this event, the trustee steps into the shoes of the lien holder.  The debtor cannot exempt the value of a voided preference ahead of the trustee's interest.

What usually happens?  Well, the trustee has a non-exempt asset that he wants to liquidate for the benefit of unsecured creditors.  This often results in a bidding war between the improperly perfected lienholder and the property owner / debtor.  The debtor is seldom in the financial ability to make an offer, but the potential to buy back the property with better financing terms exists - regardless of the probability.

Since the likelihood of a debtor obtaining financing is slim, the worst case scenario involves the debtor losing the collateral to the trustee and still being liable to the lienholder for the money due under the note.  As such, it is usually preferred that all PMSI liens be properly perfected before a bankruptcy case is filed.

Tweet

Early Payoffs in Chapter 13

With tax season drawing to a close, one question that frequently pops up with debtors currently in Chapter 13 Bankruptcy (or at least among those who are required to pay in 1/2 of their tax refund) is whether they are close to completing their plan.

I'll give a real simple case as an example.  John Doe files for Chapter 13 Bankruptcy and has a $4,000 car loan that has to be paid in full.  His income requires him to pay nothing to his unsecured creditors, but he has to pay in 1/2 of this tax refunds.  After a year in the plan, he has paid down the car loan to $2,500.  He gets a $5k tax refund and pays in half - as he is obligated to - to the trustee.  That should be enough to pay off the car loan and end the plan, right?

Not quite.  Although it is true - the trustee will use the tax refund to pay the car loan first (secured and priority creditors get paid in full before any money goes to unsecured creditors) - the tax refund money is earmarked for unsecured creditors.  Therefore, John will have to continue making plan payments pursuant to the terms of his Chapter 13 Plan, and those future payments (which would undoubtedly equal or exceed $2,500) will then go to unsecured creditors.

Why is this?  Well, since secured and priority creditors are required to be paid in full in Chapter 13, most plans are required to fund those creditors in equal monthly payments over 3-5 years.  Tax refunds are the result of over-withholding taxes, which reduces disposable income.  Since plans require that all disposable income come into the plan, tax refunds are intercepted and earmarked for unsecured creditors.

There are, of course, exceptions (and unspoken truths and loopholes) to what I've just said.  But that is the main principle of the matter.

So, can you ever get out of a plan early?  Yes.  But with some caveats.

First, you may be eligible to convert to Chapter 7, but the factors that go into such a determination are too numerous for me to list in this article, so you should speak to your attorney if you think conversion is something you want to consider.  If you filed a Chapter 13 because you were ineligible to file Chapter 7 due to a prior bankruptcy, you won't be able to convert.  Also, generally, there must be a change in financial circumstances such that you can no longer have disposable income.

Second, you can get out of a Chapter 13 Bankruptcy at ANY TIME if you can pay off all claims in full (the caveat here being that the claims deadline must pass, which is about 90 days after the 341 hearing for most creditors, but 180 days after filing for government creditors).  You're not getting a discharge, but you're ending the bankruptcy.

After 36 months, below-median debtors (assuming they're in Chapter 13 for longer than 36 months to begin with) can buy out of a Chapter 13 early by paying off any balance owed on secured and priority debts plus any obligations to pay unsecured debts up to that point.  The plan must also be amended to shorten the length of the plan.

At present, many circuits have held that above-median debtors cannot get out earlier than 60 months (since that is their applicable commitment period)  without paying all debts in full.  It has not yet been established in the Eastern District of Wisconsin whether an above median debtor can buy out between 36-60 months with the benefit of a partial discharge on unsecured debts, but if and when that challenge is made, it is unlikely to go in the debtor's favor.

On a side note:  Last week, I discussed conduit mortgage payments.  For those who will be making post-petition mortgage payments directly to their lender and have pre-petition arrears, be advised that your first mortgage payment is due with the first contractual due date after your bankruptcy case is filed.  Keep this in mind when planning to file your case.  I get a lot of clients who schedule their appointment toward the end of the month, and their mortgage due date is the first of the month.  They are unprepared to make their first mortgage payment within a few days.  On the other hand, if you file early in the month, you have most of the rest of the month to get ready to resume mortgage payments (just make sure that your reinstatement quote that you provide your attorney includes the current month's mortgage payment!).

Tweet

Debit Cards

Later this week, Holbus Law Office will begin accepting debit cards for payment of attorney fees.  We have had a dramatic increase in requests for debit card payments recently, and after carefully reviewing the Wisconsin Supreme Court Rules governing attorneys and the use of debit and credit cards, we have decided to open an account through Square.  You can learn more about Square here.

There will be some restrictions on these payments.  Some of these restrictions may be lifted after we gain some experience with this process (noted with an asterisk).  Some of these restrictions will be permanent because of the Supreme Court Rules and other laws.

• Debit cards may only be used to pay for attorney fees (advanced fees).  They cannot be used to pay for court filing fees, credit reports, counseling courses, or tax transcripts (advanced costs).
• Only debit cards will be accepted from clients.  The word 'DEBIT' or 'PREPAID' must appear on the lower right corner of the card near the card logo (Visa, Mastercard, Discover, or American Express).
• You must be at the office, in-person, to sign for the transaction.  We will not accept payments over the phone, by fax, by mail, or by e-mail.*
• We will only accept cards with the client's name on them, and the client must be present.*
• Clients who have bounced checks in the past will not be allowed to pay with a debit card.*
• We will not accept credit cards, even if it belongs to a third party.*
• We do not anticipate that we will be charging processing fees for this service.

Tweet

Conduit Mortgage Payments

Effective March 18, 2013, it will be the policy of this office to prescribe “conduit mortgage payments” to clients who have pre-petition mortgage arrears to be cured in Chapter 13 Bankruptcy.

In a traditional Chapter 13 Bankruptcy case that provides for the curing of pre-petition mortgage arrears, the debtor makes two payments: (1) plan payments to the trustee which is then distributed to creditors, including the mortgage company for pre-petition arrears, and (2) direct payments to the mortgage lender for post-petition obligations.

If the debtor defaults on plan payments to the trustee, the trustee files a motion to dismiss the case.  This is usually resolved by a slight increase in plan payments to cure the default plus a six month “doomsday provision” during which the debtor must make all plan payments on-time, otherwise, the case is automatically dismissed without further hearing.  The same is true on post-petition mortgage payments, except the lender files a motion for relief from stay to proceed with foreclosure.

What is a conduit mortgage?

Put simply, a conduit mortgage is where the post-petition mortgage payments are funneled through and distributed by the trustee.  Instead of two payments as described above, the debtor has only one payment to the trustee, plus ordinary living expenses (groceries, fuel, utilities, insurance, etc.).

It’s also worth pointing out that conduit mortgages are required in several districts throughout the country.  Although conduit mortgages are not currently required in the Eastern District of Wisconsin, that may soon change.

What are the disadvantages?

One payment instead of two?  That sounds great, doesn’t it?  So why haven’t we been doing that all along?  Obviously, there is a drawback.  The trustee gets paid a fee out of payments he distributes to your creditors under the plan.  That fee is set by the U.S. Trustee and is capped at 10%.  Usually, it hovers between 3-7%, but since the fee is variable, we have to compute your plan payments based on a presumption of 10%.  Since most mortgage payments run between $500 - $1,500 a month, that can be a $50-$150/mo increase.  For this reason, we have been reluctant to implement conduit mortgages.  However, based on recent behavior of certain mortgage lenders, we now believe the advantages of conduit mortgages far outweigh the disadvantages.

What are the advantages?

The main advantage is that if you default during the Chapter 13 Plan, you will only have to deal with a trustee’s motion to dismiss.  There should be no motion for relief from stay from the mortgage lender.  This means…

• Having 21 days to object to a trustee’s motion to dismiss rather than only 14 days to object to a creditor’s motion for relief from stay.
• The trustee’s records of payments to the mortgage lender are accessible and easier to prove.
• Fewer motions, fewer objections, and fewer amended plans means a decreased likelihood of a supplemental fee application from debtors’ counsel.
• Fewer attorney fees from the mortgage lender.
• Never having two doomsday provisions running concurrently.
• It is far easier to negotiate a settlement with the trustee’s office than it is to negotiate a settlement with the mortgage lender.  The trustee’s office is more responsive, more accessible, and they want your plan to succeed.
• Eliminates problems with mortgage lenders who refuse to timely file motions for relief from stay or supplemental claims, theoretically reducing the foreclosure walk-away problem.
• Districts where conduit mortgages are mandatory tend to have an overall higher plan success rate.

Tweet