Archive for the 'Chapter 13' Category

Supreme Court Adopts “Forward-Looking” Approach to Define Projected Disposable Income When Calculating Chapter 13 Repayment Plans

Published
by
David Yunghans
on July 1, 2010
in 2005 BAPCPA and Chapter 13
. 0 Comments

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 & The Economy: A Valuable Session

Published
by
Beth Schenz
on May 6, 2010
in Bankruptcy Court, Bankruptcy Filings, Chapter 11, Chapter 13 and Chapter 7
. 0 Comments

Cleveland, Ohio – May 6, 2010

The William J. O’Neill Regional Bankruptcy Institute, a part of the Cleveland Metropolitan Bar Association, is conducting a bankruptcy seminar offering an entertaining and comprehensive approach to the latest and best in the bankruptcy and insolvency arenas at the Marriott at Key Tower on May 12 and 13.  The two-day seminar, “What Hath the Great Recession Wrought: The Bend, The Bar and Congress Respond,” will feature regionally and nationally recognized speakers, including principal attorneys and judges from some of the nation’s highest-profile bankruptcy cases.

Beth Ann Schenz, an attorney in the Bankruptcy Department at Weltman, Weinberg & Reis Co., L.P.A. (WWR) played an integral part in putting together these dynamic presentations.  Over the last year, Ms. Schenz was Co-Chair of the 2010 Institute.  This undertaking involved coordinating over 58 speakers including 12 federal judges to speak on issues which touch the very heart of our economy.  For more information or if you would like to attend the discussion, visit www.clemetrobar.org/ONeill_Bankruptcy_Institute.aspx. 

The following is a capsule of some of the hot topics that will be discussed: 

Revitalizing a City
With lackluster economic growth, high jobless rates and dynamic talent loss in most of Midwest Cities, this lunch will focus on how a region turns around these staggering statistics.  The luncheon discussion will focus on the positive efforts that area organizations have gained over the course of the last year and what efforts they have planned to help propel this region into a strong, vibrant economic force.

Who Is Behind the Bankruptcy Statistics
The country continues to see statistics of the overwhelming amounts of people filing bankruptcy.  With bankruptcy numbers continuing to rise, the questions that are never asked are: what is behind the numbers, who are behind the numbers and what circumstances are behind the numbers.  This speaker will address those questions by taking the academia approach mainstream.  By understanding the numbers, community and economic leaders can address the situation and make policy that will help our economic future.  

Why Are They Too Big to Fail – We Have Chapter 11
Lead counsel from the Chrysler and Lehman Brothers bankruptcies will discuss the effect on bankruptcy sales of the Second Circuit’s ruling in Chrysler, and of Judge Peck’s recent decision allowing a lawsuit to proceed against Barclay’s, the bankruptcy purchaser of Lehman’s.   These disputes have reshaped the business landscape in important ways. This will be a great discussion considering the ongoing news stories involving companies and banks that are too big to fail.  Also, the discussion will continue on what is in the future of Chapter 11 bankruptcies.

Victims of Madoff & Other Ponzi Schemes
Irving Picard will lead a panel of the primary participants in the Madoff case.  They will review the hotly-litigated issues governing distributions to victims of the Ponzi scheme fraud. 

What is the Federal Legislature Doing
John Rao of the National Consumer Law Center and William A. Brandt, Jr. DSI are no strangers to Washington D.C.  Come hear what they have to say.

Loan Modification Ordered in Bankruptcy
Economic Issues before the Bench is a panel consisting of Judge Drain, Judge Isgur and Judge Morgenstern-Clarren.  Of note is Judge Drain’s piece on court-ordered loan modification procedures, which forces the creditor to enter into talks on loss mitigation.

If you have any questions regarding this bankruptcy seminar or would like a copy of the seminar materials, please contact Beth Schenz. Beth is an associate in the Bankruptcy department of WWR located in the Brooklyn Heights office. She can be reached directly at 216.739.5645 or via email at bschenz@weltman.com.

Sixth Circuit Rules That Negative Equity Is Purchase Money

Published
by
David Yunghans
on March 26, 2010
in Chapter 13 and Motor Vehicle
. 0 Comments

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.

Beware of Chapter 13 Plans That Depend on HAMP Modification

Published
by
Monette Cope
on March 25, 2010
in Chapter 13, Homeowners Affordable Modification Program and Real Estate
. 0 Comments

The bills in both the House and Senate which would have allowed bankruptcy judges to modify the terms of certain mortgages died long ago.  However, one prominent Chapter 13 bankruptcy trustee is promoting his own version of reform by promoting the use of HAMP (Homeowners Affordable Modification Program) in concert with a Chapter 13 bankruptcy.  Lenders and Servicers need to be aware of this and the issues it presents.

The idea is to submit an application for a HAMP modification at the same time a Chapter 13 bankruptcy is filed.  Because both require proof of income, a budget, and the debtor’s most recent tax return, it should be “easy” for the debtor’s attorney to submit them to HAMP along with the Request for Modification and Affidavit of Hardship.  Because lenders and servicers are required to respond to applicants within 30 days with a yea or nay, it would in theory dovetail perfectly with the timing of most districts’ confirmation hearings, and result in reduced mortgage payments and so affordable plan payments.

The assumptions behind this idea show its inherent problem – delay.  Among the assumptions are the following: the debtor is a viable candidate for a HAMP modification; the documents the attorney sends are complete and sufficient the first time; the lender or servicer will be able to respond within the 30 days; the debtor can afford the proposed modification; the modification is accepted immediately; the plan will work with the modification; and the modification documents are signed soon after the 30 day response period has passed.  It is more likely that there will be snags in the process and it will not move as smoothly as the trustee assumes.   Debtor’s counsel will certainly use any delay in the HAMP process to delay the Chapter 13 proceedings.

Even if the modification process goes smoothly, a huge delay is overlooked.  Confirmation hearings are usually set within 60-90 days after a case is filed, and plans can be confirmed in 60 days in some jurisdictions. Under HAMP, a signed modification will not be permanent until and unless the debtor pays according to the modification for three consecutive months. Assuming that a plan cannot be confirmed until the modification is finalized, it will be at least 4 ½ months until the plan can be confirmed. Meanwhile, the creditor is bound by the automatic stay.

Moreover, if the debtor cannot afford the existing mortgage payments, how will it be paid after the bankruptcy is filed?  If a post-petition default accumulates, creditors have grounds for relief from stay.  Will courts put off granting relief while a HAMP application or trial period is pending?  More delay.

How could a debtor propose a budget and a plan if he or she cannot afford the current mortgage payments?  If not, the debtor must file a budget and plan that are unfeasible or based on a future unknown payment.  With either option, creditors have grounds for denial of confirmation, dismissal of the case or relief from stay. Will courts delay or deny creditors this relief while a debtor is waiting for a loan modification?  Again, more delay.

Or would debtor’s counsel seek and obtain an extension of time to file a plan and budget while waiting for a HAMP decision?  In cases where a loan modification gets approved, confirmation will be extended to at least 5 ½ months after filing.  In cases where modification is not successful, the case will either have to be dismissed or converted to a Chapter 7.  Again, the creditor is delayed from exercising its state court rights because the automatic stay has been in effect during the Chapter 13 case.

While a HAMP modification plan could be a win-win for both creditor and debtor in certain cases even with the delay it would cause, chances are that the creditor will be frustrated with the process.  Creditors must move aggressively and quickly if a Chapter 13 case is filed that is dependant upon a HAMP modification.

If you have any questions concerning this matter, please contact Ms. Monette W. Cope, Esq. Monette is a Junior Partner in the Bankruptcy department located in the Chicago office. She can be reached directly at (312) 253-9614 or via email at mcope@weltman.com.

Pandora’s Box Opens: Chapter 13 Plans May Be Final Even If Contrary to the Bankruptcy Code

Published
by
Beth Schenz
on March 24, 2010
in Bankruptcy Filings, Chapter 13 and Federal Rules of Bankruptcy Procedure
. 0 Comments

By Beth Ann Schenz, Esq. and Milan Kubat, Esq.

The Supreme Court admits that its decision from March 23, 2010, “is potential for bad-faith litigation tactics” by debtors. 

The Facts
A Chapter 13 debtor listed his student loan debt in his plan.  In the Chapter 13 plan, the debtor proposed to repay only the principal while the remainder (accrued interest) would be discharged.  The United States Department of Education (the “Government”) did not object to the plan or appeal the order confirming the plan.  During the bankruptcy case, the Government filed a proof of claim and received the principal on the debt.  When the Government proceeded to collect on the debt after the debtor received a discharge in the Chapter 13, the debtor filed a motion to enforce the discharge order and direct the Government to cease all collection efforts.  The Government responded to the debtor’s motion to enforce and filed a motion under Federal Rule 60(b)(4) to set aside the confirmation order as void. 

The Court’s Ruling
Whether the confirmation order is void was the focus of the Supreme Court’s ruling.  For a judgment to be void, there must be some jurisdictional issue (the court does not have the power to hear the matter) or a due process issues (the creditor did not receive sufficient notice to defend the matter).  The Supreme Court states that there was no jurisdictional error or due process violation so the confirmation order providing for a discharge on student loans is binding on the creditor. 

Normally, a Chapter 13 debtor receives a discharge for all his or her debts except in some situations.  One example where a Chapter 13 debtor would not receive a discharge is under 11 U.S.C. §523(a)(8) – the student loan exception.  Some student loans are excepted from discharge and such exception is self-executing.  The caveat is that the Court can find that such non-dischargeable student loans create an undue hardship for the debtor and can be discharged.  According to the Bankruptcy Rules, such action requesting a finding of undue hardship is brought by the debtor in an adversary proceeding upon summons and complaint. 

The Supreme Court found that the undue hardship provision in the Bankruptcy Code is not a limitation on the bankruptcy court’s jurisdiction but only a precondition to obtaining a discharge order.  Also, the Court stated that the Bankruptcy Rules that require a complaint to be brought to determine undue hardship are only procedural rules and not jurisdictional rules.  Therefore the confirmation order was well within the jurisdictional authority of the Bankruptcy Court and can not be determined as void. 

On the positive side, the Court found that, “[g]iven the Code’s clear and self-executing requirement for an undue hardship determination, the Bankruptcy Court’s failure to find undue hardship before confirming the plan was a legal error.”  Unfortunately for the Government, a legal error does not make an order void.

Going further, the Supreme Court stated that the Government’s due process rights were not violated as they had ample time to either object to the Chapter 13 plan or appeal the confirmation order.  A finding of due process by the Supreme Court means that the confirmation order can not be found as void.

Where the Supreme Court said that the lower court’s ruling went too far is when they considered that any plan can be confirmed if it provides for a discharge of a non-dischargeable debt.  “Failure to comply with the self-executing requirement should prevent confirmation of the plan even if the creditor fails to object, or to appear in the proceeding at all.”

What This Means To You
A debtor can put any provision in his or her plan, which may be contrary to the code (i.e. discharging a debt that is otherwise non-dischargeable).  This provision should prevent confirmation.  However, the creditor may be bound under the order if the Chapter 13 plan confirms.  If the creditor fails to object to the plan or appeal the confirmation order in a timely manner, the confirmation order whether contrary to the Bankruptcy Code or not will be binding on the creditor.

As a creditor, you will need to make a business decision whether to object or not. WWR can help guide you through the decision making process.

If you have any questions concerning this matter, please contact Ms. Beth Ann Schenz, Esq. or Mr. Milan Kubat, Esq.  Beth is an associate in the Bankruptcy department located in the Brooklyn Heights office. She can be reached directly at 216-739-5645 or via email at bschenz@weltman.com. Milan is also an associate in the Bankruptcy department located in the Brooklyn Heights office. He can be reached directly at 216-739-5647 or via email at mkubat@weltman.com.