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Client Notice Regarding Bankruptcy Rule Amendments and Objecting to Discharge by Motion

Published on December 1, 2010 in Federal Rules of Bankruptcy Procedure. 0 Comments

Effective December 1, 2010, several amendments to the Federal Rules of Bankruptcy Procedures will become effective.  Most of the amendments are procedural in nature and will only have a direct impact on the debtors.  However, one amendment that is worth noting is the change to Rule 4004 which pertains to objecting to discharge due to the debtor receiving a prior bankruptcy discharge.

Previously, Rule 4004 stated that you can only object to the Debtor’s discharge under 11 U.S.C. §727 by filing an adversary complaint within sixty (60) days of the first meeting of creditors in both Chapter 7 and Chapter 13 cases. The rule is being amended to read that debtor’s Chapter 7 discharge may be objected to by adversary complaint or by motion within sixty (60) days of the first meeting of creditors, if the debtor has been granted discharge already under Chapter 7 or Chapter 11 within eight (8) years of the filing of the bankruptcy petition. (11 U.S.C. §727(a)(8)). The rule has also been amended to read that debtor’s Chapter 7 discharge may be objected to by adversary complaint or by motion within sixty (60) days of the first meeting of creditors, if the debtor has been granted discharge already under Chapter 12 or Chapter 13 within six (6) years of the filing of the bankruptcy petition.  (11 U.S.C. §727(a)(9)).

Rule 4004 has also been amended to allow Chapter 13 objections to discharge.  A motion objecting to a Chapter 13 discharge may be filed within sixty (60) days of the first meeting of creditors if the debtor had received discharge in bankruptcy in a prior Chapter 7, 11, or 12 during the four (4) year period preceding the bankruptcy filing, or a discharge from a Chapter 13 two (2) years prior to the bankruptcy filing. (11 U.S.C. §1328(f)).

Amended Rule 4004 did not alter the requirements for objecting to discharge on other grounds.  Those objections must still be raised through the filing of an adversary complaint.

While objections to discharge based upon these grounds are not commonly filed by creditors, the rule amendments give creditors an option to file a motion instead of an adversary complaint to oppose debtor’s discharge in certain instances. Thus, creditors can save money by filing a simple motion rather than incurring the time and expense that goes into filing and prosecuting an adversary proceeding. In most cases, the United States Trustees’ Office or the Chapter 7 or Chapter 13 Trustee assigned to the case will likely file the adversary complaint or the motion. However, this is also a tool for the Creditor should the government not act.

Recap- Rule 4004 Revision:
 
- Adversary Complaint can be filed to oppose discharge in all Chapters of bankruptcy

- Adversary Complaint or Motion Opposing Discharge can be filed in Chapter 7 cases where:
     o Debtor granted discharge under Chapter 7 or Chapter 11 within eight (8) years §727(a)(8); or
     o Debtor granted discharge under Chapter 12 or Chapter 13 within six (6) years §727(a)(9).

- Adversary Complaint or Motion Opposing Discharge can filed in Chapter 13 cases where:
     o Debtor granted discharge under Chapter 7, 11, or 12 within four (4) years §1328(f); or
     o Debtor granted discharge under Chapter 13 within two (2) years §1328(f).

A brief summary of the other amendments are listed below.  As stated above, these amendments have no direct impact on creditors, but Weltman, Weinberg & Reis Co., LPA is providing a brief summary for your review.

Bankruptcy Rule 1007:  Amended to shorten the time for a debtor to file a list of creditors after the entry of an order for relief in an involuntary case and also extends the time for Chapter 7 debtor to file a statement of completion of course in personal financial management.

Bankruptcy Rule 1014:  Amended to include Chapter 15 cases in the rule that authorizes the court to determine where cases should go forward when multiple petitions involving the same debtor are pending.

Bankruptcy Rule 1015:  Amended to include Chapter 15 cases in the rule that authorizes the court to order consolidation or joint administration of cases

Bankruptcy Rule 1018:  Amended to reflect the enactment of Chapter 15 in 2005.

Bankruptcy Rule 1019:  Amended to impose a new time period to object to a claim of exemption when a case is converted to a Chapter 7 from Chapter 11, 12, or 13.

Bankruptcy Rule 4001:  Amended to conform the computation of time to prior amendments.

Bankruptcy Rule 5009:  Amended to require the clerk to provide notice to debtors in Chapter 7 and 13 cases that their cases may be closed if they fail to file a statement of completion of financial management course.

Bankruptcy Rule 5012:  New rule added to establish procedures in Chapter 15 cases for obtaining approval of an agreement regarding communications and coordinating of proceedings with cases involving the debtor pending in other countries.

Bankruptcy Rule 7001:  Amended to correspond to Rule 4004 allowing objections to discharge under §§ 727(a)(8), (a)(9), and § 1328(f) to be commenced by Motion.

Bankruptcy Rule 9001:  Amended to add § 1502 to the list of definitions.

If you have any questions on this issue, please contact Mr. Stephen F. Franks, Esq. or Mr. Milan Kubat, Esq. Stephen and Milan are both attorneys in the Bankruptcy department of Weltman, Weinberg & Reis Co, LPA (WWR). Stephen can be reached directly at 216.739.5645 or via email at . Milan can be reached directly at 216.739.5647 or via email at .

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

Published 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 . 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 .