When Congress amended the Bankruptcy Code in 2005, they implemented the means test. The purpose of the means test was to provide a higher return of funds to unsecured creditors. The test requires debtors filing chapter 13 bankruptcy to pay all “projected disposable income” into the plan. Projected disposable income is a calculation of all income received by the debtor preceding the six months prior to filing minus allowed expenses. After calculating the means test, a debtor in chapter 13 is required to pay a fixed amount to unsecured creditors. The calculation is defined as the “mechanical-approach”. Eventually problems arose with using the mechanical approach because it failed to deal with situations where debtor’s income actually decreased or increased during the life of the plan. As a result, bankruptcy trustees and courts began to use a “forward-looking” test to calculate the debtor’s plan payments.
Under the “forward-looking” approach, the debtor’s chapter 13 payment amount is based on the income they received during the life of the chapter 13 plan. So if income increased over the life of the plan the debtor would be required to pay more of their income just as they would pay less to creditors if their income decreased.
In the case of Hamilton v. Lanning, the Supreme Court decided which approach was correct. The court adopted the “forward -looking” approach. The court reasoned that the ordinary meaning of the word “projected” supports looking to debtor’s current income. The court also realized that following the “mechanical-approach” could lead to absurd results as debtor’s income could increase or decrease over the life of the plan, and thus some debtors would actually pay less than they were required under the Bankruptcy Code.
The ruling has both positive and negative affects for creditors. A positive is that if a debtor’s income increases during the life of the plan, the debtor will be required to pay more into the plan, which could lead to increased distribution to unsecured creditors. The negative result occurs along the same line, as a debtor’s income may decrease during the length of the plan, and thus distribution to unsecured creditors may decrease. Creditors will also need to keep on their toes as to monitor for possible increases in debtors’ incomes, as debtors are not likely to volunteer this information. Some chapter 13 trustees require debtors to submit yearly tax returns so that creditors can check with the court for filed returns, indicating any change in income.
If you have any questions, please contact David Yunghans directly at 513.723.2211 or via email at dyunghans@weltman.com.
Bankruptcy filings for the year through May 2010 are up over 9% nationwide as compared to filings through the same time last year. From January 2010 to May 2010 there were 136,142 consumer bankruptcy filings nationwide as compared to 124,838 at the same time last year. The increase is likely attributed to the high unemployment rate and tight credit restrictions of banks. Although filings have increased when compared to last year’s numbers, there was an overall decline nationwide in filings from April 2010 to May 2010. Filings in April were approximately 145,000 as compared to 137,000 in May 2010. The two states with the highest filings are Nevada and Georgia. Some states have experienced a decrease in filings when compared to last year. States such as Tennessee, South Carolina, Alabama, and West Virginia have all seen the number of filings drop. However, states such as Arizona and California have seen an increase in filings this year by 43% and 36% respectively. Filings for the year are projected to reach the records set in 2005 when over 2 million households filed for bankruptcy.
If you have any questions, please contact David Yunghans directly at 513.723.2211 or via email at dyunghans@weltman.com.
On March 24, 2010 the Sixth Circuit Court of appeals which covers Ohio, Michigan, Kentucky, and Tennessee, in line with a recent decision in the Seventh and past decisions of the Second, Fourth, Fifth, Tenth, and Eleventh Circuit Courts of Appeal, ruled that negative equity is purchase money and cannot be crammed down through bankruptcy proceedings.
Under bankruptcy law, a debtor cannot cram down a secured claim when the creditor has a purchase money security interest in a motor vehicle acquired for the debtor’s personal use within 910 days of the debtor’s bankruptcy filing. In some vehicle purchase transactions, debtors trade in a vehicle in order to purchase a new vehicle. If there is a difference between the value of the vehicle that the buyer trades in and the amount of the buyer’s preexisting debt, this shortfall is financed into the purchase of the new vehicle. This is referred to as negative equity. Debtor attorneys have argued that the negative equity is not considered purchase money, therefore a debtor can cram down the difference of the value of the negative equity financed into the new car purchase.
The decision, which affects the Sixth Circuit Court, ensures that debtors must pay the negative equity amount as fully secured in their Chapter 13 bankruptcy. The favorable ruling for creditors now encompasses 26 states.
If you have any question, please contact David Yunghans directly at 513-723-2211 or via email at dyunghans@weltman.com.
Bankruptcy filings for January 2010 are up 15% from January 2009. There were a total of 102,600 bankruptcy filings in January 2010 as compared to 89,000 in January 2009. Overall in 2009 there were a total of 1,434,600 bankruptcy cases filed. These figures are approaching the record set in 2005 when over 1,600,000 cases were filed. Bankruptcy filings in 2010 are expected to increase throughout the year and eclipse last year’s total filings. Total filing numbers are taken from, “The Bankruptcy Database Project at Harvard (http://bdp.law.harvard.edu) in cooperation with Automated Access to Court Electronic Records (AACER).
A recent case decided in the sixth circuit court of appeals outlines what is considered “reasonable” inquiry under Rule 9011(b) and what documentation is required to support a proof of claim filed which is not listed on the bankruptcy petition. Rule 9011(b) requires when filing documents with the court, the party filing is, “certifying that to the best of the person’s knowledge, information, and belief”, the documents filed are supported by facts. Further, under rule 9011 a party filing documents without “reasonably” inquiring into the factual basis is subject to sanctions. In the context of filing proofs of claims the issue may arise when documentation supporting the proof of claim is difficult to obtain or nonexistent and does not appear on the bankruptcy petition. A creditor filing a claim may be subject to sanctions if they file an unsupported proof of claim. To avoid potential sanctions creditors should keep in mind the following guidelines and procedures for filing a proof of claim and claims regarding debt not scheduled on a bankruptcy petition.
First, a creditor if a debt purchaser should make sure the purchase agreement contains an explicit representation and warranty from the seller that the accounts being purchased are valid obligations of the debtor. Including these terms in the purchase agreement demonstrate that the purchaser has acted in a reasonable manner to support evidence of the debt. Second, the creditor should investigate the claim after purchase by researching the origins of the claim. By contacting the debtor through mail to inform the debtor they have thirty days to dispute the debt owed will validate the claim and be considered sufficient investigation. Third, before purchasing the debt a creditor should verify account information for flaws such as an invalid address or social security number. If these steps are followed creditors and debt purchasers can avoid violations of rule 9011(b) and potential monetary damages.
The next question is once a creditor has “reasonably” investigated the claim under the sixth circuit standard what documents should they attach to the proof of claim. The federal rules of bankruptcy procedure require that a proof of claim based on writing include a copy of the writing. So if the origination document is available it should be attached to the proof of claim. If this is unavailable the creditor must follow the “reasonableness” test outlined above to substantiate the claim and avoid sanctions under Rule 9011. The creditor can also file a document explaining why copies of the originating documents are unavailable.
The bottom line is that even if you attach nothing to a proof of claim if the above steps are followed a creditor can satisfy the “reasonableness” standard and avoid sanctions for filing unsupported claims.
