November 20, 2017

Unfiled Tax Returns and Chapter 13

Recently I have had problems with several of my Chapter 13 cases where the Chapter 13 trustee has objected to confirmation on the grounds that the debtor (my client) has one or more years of unfiled tax returns.

Because Chapter 13 cases must pay out in five years, unknown tax debt is a big problem.  If your tax debt is unknown, it is impossible to create a repayment plan that pays out in five years since we don’t know exactly how much debt is involved in the case.

My client intake questionnaire specifically asks if there are any years where tax returns have not been filed.  In each of these cases, my clients (three cases total) did not reveal any information about unfiled tax returns.,

If you have not filed tax returns, your Chapter 13 case can never be confirmed.  Rather than misleading your lawyer, a better option is to acknowledge this issue and get working immediately on solving the problem.   The IRS will provide you with W-2’s and 1099’s that you can use to prepare tax returns from previous years.  IRS and Georgia DOR forms for previous years are widely available on the Interent and most tax preparers can prepare tax returns for previous years.

[tags] unfiled tax returns, tax returns and bankruptcy, tax returns and Chapter 13 [/tags]

 

Five Years is a Long Time for Rice and Beans

The October, 2005 changes to the Bankruptcy Law have forced many debtors into five year Chapter 13 plans. Chapter 13 trustees are demanding that every penny not specifically accounted for in your budget be paid to the trustee, resulting in "rice and beans" budgets for five years.

Get the Flash Player to see this player.

Chapter 13 Case Requires Documentation for Claimed Expenses

In recent months, I have noticed that the Chapter 13 trustees in the Northern District of Georgia are requiring back-up documentation on many expense items set out in a debtor’s budget.  I am now telling my clients to save receipts for the following expense categories:

  • food
  • charitable contributions
  • non-reimbursed medical expenses
  • gasoline and automobile related expenses
  • child care
  • after school program costs
  • child education related expenses

The best evidence to prove that you actually spend what is set out in your budget are payment receipts of vendor invoices.  If those are not available, I have had some success using a debtor’s affidavit swearing that you actually spend what you say you do.

About a year ago, I wrote a blog post identifying the information I need to start a bankruptcy representation.  Add "receipts and documentation"  to that list.  Your best guess is no longer good enough for the Chapter 13 trustee.  You can save yourself a lot of time and aggrevation by saving receipts and invoices.

[tags] schedule I & J, bankruptcy budget, chapter 13, proof of what I spend, proof of expenses [/tags]

 

What Are My Rights if I Loan Money to a Friend and the Friend Files Bankruptcy?

If I loaned money to a friend who committed bank fraud (I had to wire the money within minutes of having received the call from the friend directly to the Bank’s fraud recovery department) and that friend subsequently files Chapter 13, is it safe to assume that I have no recourse but to wait in line with other unsecured creditors?

Of course, I did not want the person to go to jail and did not obtain any promissory note or security agreement at the time the funds were wired to the bank’s fraud recovery department.

I have not yet obtained a promissory note and mortgage as I assume it could now be disallowed by the trustee because the money was disbursed in mid-February and I’ll bet there’s a "consideration" issue now.

What do you recommend?  Is it too late to get a note and/or secure the debt.  The friend has yet to file Chapter XIII yet.

Would there be any priority in my payment becuase I kept the person out of jail?

–Michael

Jonathan Ginsberg responds:  Michael, as you said in your email – "no good deed goes unpunished."   I do not represent creditors so I would advise you to find a lawyer who regularly represents creditors in Chapter 13 claims.  Typically lawyers who represent used car dealers or high risk vehicle finance companies would have a lot of experience regarding possible objections to Chapter 13 cases since they file objections all the time .

I have no doubt that creditor lawyers and Chapter 13 trustee attorneys read this blog – perhaps one of my colleagues at the bar could post a comment or email me with more insight.

Your predicament serves as an important lesson to anyone who ever considers loaning money to friends or family.  If you make these loans, especially in an emergency situation, be prepared to lose the money, your friends or both.

[tags] treatment of personal loans in bankruptcy, objections to chapter 13 confirmation [/tags]

 

Chapter 13 Case Dismissed Because of Funding Problem

Yesterday, one of my Chapter 13 cases was dismissed at the confirmation hearing for one reason and one reason only. I had cured all of the trustee's objections and the case was viable. My clients had the income to make the case work and there was no reason at all that this case should not have worked.

The reason for the dismissal – funding.

Chapter 13 functions as a payment plan. It allows debtors to modify the rights of creditors by changing (reducing) monthly payments and sometimes total balances. In some cases it allows us to reduce interest rates. In some cases it allows us to pay back less than 100% to credit cards. It allows debtors who are delinquent on a house or car note to cure that delinquency over time. All in all, Chapter 13 is a very powerful tool.

If a debtor forgets that Chapter 13 is a payment plan, however, it cannot do any of these wonderful things. If you file a Chapter 13 case, you absolutely, 100% must pay the Chapter 13 trustee. Your obligation to pay starts immediately. And if the payroll deduction order does not kick in for a month, the debtor must make up the difference.

In at least 70% of my cases, the Chapter 13 plan payroll deduction does not kick in right away. For most employers a month's delay is what we see. For federal employees, we may have to wait 2 months. Until that payroll deduction kicks in, the debtor has the sole responsibility for sending trustee payments to the Chapter 13 trustee.

In yesterday's case, I had originally filed the case as an emergency filing. The debtor was facing an emergency situation and I filed an incomplete petition to stop a foreclosure. Because funding is so important, I always file a prelimnary payroll deduction order at the same time as my emergency filing. Since I did not have all the debtor's information on hand, I filed a payroll deduction in the amount of $600 per month just to get some money coming in. I told my client that this figure would likely change and that when we filed the actual plan, they would have to keep their plan current.

After putting all of the case information together, I determined that the plan payment needed to be $1,200 per month. I filed a new payroll deduction order. I also advised my clients of their new payment obligation.

At the 341 hearing, I saw that my client's employer had just started the Chapter 13 deductions – the first month's payments had not been made. As we approached confirmation, I noted that the employer was still deducting $600 and had not started the $1,200 deduction. My client, unfortunatley, failed to make up the difference and was $1,200 behind. As my client had no way to come up with $1,200 I had no choice but to allow the case to be dismissed.

What are the lessons here?

  • do not assume that your Chapter 13 payroll deduction will kick in immediately. In most cases you will have to pay at least one or two trustee payments directly. Prepare for this.
  • if your plan payment changes, assume that there will be a 30 to 60 day delay in the processing of your new payroll deduction order
  • funding of your plan is your responsibility. You cannot put the responsibility on anyone else – not your lawyer, your employer or your trustee
  • funding of your plan is the most important factor in determining whether your case will work. If your case is funded, we can get a reset hearing to cure the other problems. If there is no funding the trustees will not be very cooperative.

Chapter 13 cases are becoming more and more difficult to get approved. If funding is not an issue all of the other problems are that much easier to solve.

[tags] chapter 13 plan, funding of Chapter 13, EDO, employer deduction order, bankruptcy northern district of Georgia [/tags]

Are Debtors Stuck With their Form B22 Means Test Budget?

Here is an issue about Chapter 13 calculations.  I don't have the answer so I would appreciate any opinions, especially from any Chapter 13 trustee attorney who reads this blog.

The B22 Means Test looks to the debtor's average income calculated by looking at the debtor's income over the 6 month period preceding the month of filing.  The B22 budget is a pro forma budget that uses IRS approved expense figures.  We know that Judge Massey and Judge Mullins draw a distinction between the "projected disposable income" of a B22 form and actual disposable income that we see on the Schedule I & J budget. As I read their opinions, the actual budget as shown on Schedules I & J is the appropriate budget from which to evaluate whether a Chapter 13 should be confirmed.

Nevertheless, Chapter 13 trustees routinely file objections to confirmation on the grounds that the B22 showed X in disposable income and X x 60 months = Y which equals Z percentage dividend to unsecured creditors.  If the plan as filed does not propose a payment of Z percent to unsecureds, the trustee objects.

In many of my Chapter 13 cases, the B22 does show disposable income, whereas the I & J schedules show none.  Why?  The allowable expenses per the IRS are incredibly stingy.  For example, the IRS budget "allows" a Dekalb County family of 4 a whopping $1,176 for housing and utilities per month.  If you assume that utilities are $250, that leaves $926 for a mortgage payment.  That translates into roughly a $120,000 house.

Many honest, hardworking debtors live in $200,000 or $250,000 houses with mortgage payments –  perhaps both a first and a second mortgage –  of $1,800 to $2,000.  Under the old law, this level of mortgage payment rarely if ever drew an objection. 

Since the B22 Means Test in this example only recognizes the first $926 of our hypothetical $2,000 mortgage, the means test tells us that $1,074 is left over.  At the same time, our debtors may have to stretch to find $200 or $250 in their Schedule I & J real life budget.

Nevertheless, the Chapter 13 trustees are using the $1,074 to determine what percentage the debtors need to be paying back to their unsecured creditors. 

What is the basis of this objection?  Does the Bankruptcy Code require a Chapter 13 debtor to pay a dividend to unsecureds equal to  the B22 projected disposable income?  If so, what the applicable Code section?

I have always taken the position that the B22 Means Test is a qualification – it tells you if you can file a Chapter 7 without a presumption of abuse, or a 36 month Chapter 13 or a 60 month Chapter 13.  Beyond that, I don't see how any of the B22 numbers mean anything.

Is not Chapter 13 still controlled by the Kitchens criteria, where for years no one said "boo" abot a $2,000 mortgage obligation for a family of 4.

Thoughts?  Comments? 

[tags] means test, Schedule I & J, bankruptcy disposable income, projected disposable income [/tags] 

Most Common Objections in Chapter 13 Cases – objection 4 – no proof of tax escrow

This is the fourth installment of a series discussing the most common objections filed by Chapter 13 trustees in Chapter 13 cases.  Thanks to Susan Gantt, a contract lawyer who handles Chapter 13 341 hearings for various Atlanta area lawyers on a contract basis.

4) No proof of tax escrow account.  Although most creditors are paid through your Chapter 13 plan, there are some on-going creditors who are paid directly.  These include your mortgage lender or your landlord, your electric utilities, your phone service and your garbage collection.

If you are self employed, you need to account for future income tax payments.  If you do not, and you end up with a tax debt next year, the Chapter 13 budget you have filed with your case will not work. 

If you are self employed, your Chapter 13 trustee will want to see proof of a self-employment tax escrow account.  This can be a savings or checking account but you will have to have something to show the trustee.

Similarly, if your mortgage company is not escrowing taxes or insurance, you will have to set aside  money each month to prepare for tax payments and insurance premiums.

I have found that a good vehicle for tax escrow accounts is a savings account.  Since you may have trouble opening a savings or checking account after you file for bankruptcy, you should set up your banking arrangments before you file.

The trustee will want to see proof of this account and proof that you are funding this account each month – a bank statement showing $10 is not going to satisfy the trustee.

[tags] self-employment tax escrow, property tax escrow, taxes and Chapter 13, chapter 13 budgets [/tags] 

Most Common Objections in Chapter 13 Cases – objection 3 – no affidavit confirming family financial support

My colleague, Susan Gantt, works as a contract attorney who handles Meeting of Creditor hearings for several Atlanta area bankruptcy lawyers.  Because she attends 341 hearings all day long and associates with several law firms, she can offer all of us a valuable perspective about the practical issues that arise in Chapter 13 cases.

I asked Susan to identify the most common trustee objections.  In previous posts I discusssed to very common objections:

failure to have a payroll deduction in place for Chapter 13 funding; and

failure to provide proof of post-petition mortgage payments

3) Proof of supplemental income.  In this post, I will discuss a third common objection – failure to provide proof of financial support from friends or family.

The premise behind a Chapter 13 case provides that a debtor must submit all of his "disposable income" to the Chapter 13 trustee for distribution to creditors.  At the same time, there are mathematical constraints to Chapter 13 – you have to have enough money to pay debts such as car notes, mortgage arrearange and past due taxes, all within a maximum five year plan.

For example, if you owe $25,000 on a car note and $15,000 in taxes, but you only show $100 a month left over after paying household expenses, your plan cannot provide for a 60 month payout of your car and tax debt.

Sometimes, clients come to me for the purpose of saving a house or a car but because of limited income we run into this cash flow dilemma.  Often the solution to this problem can be found by including in the income schedules financial support from a parent, sibling, roommate or friend. 

It has been my experience that Chapter 13 trustees don't necessarily have a problem with a family/friend contribution to income but they will want to see proof.  An affidavit, or sworn statement, from the family member or friend can serve as acceptable proof of income.

Susan notes that many debtors and their attorneys fail to bring this affidavit of support to the 341 hearing.  Even worse, debtors and their counsel often forget that they had used support from family or friend as a source of income.  I have witnessed several 341 hearings in which the truste asked if the debtor was still receiving financial support and the debtor answered "no" and did not seem to recall ever getting such support!

So, if you and your attorney include support from family or friend as an income item, make sure to ask that family member or friend to sign an affidavit setting out the details abot that support.  Your lawyer should be able to provide you with an affidavit form.

[tags] Schedule I, affidavit of support, disposable income Chapter 13, Chapter 13 trustee objections [/tags] 

Most Common Objections in Chapter 13 Cases – objection 2 – no proof of post-petition mortgage payment

As all Chapter 13 debtor attorneys know, trustee objections in Chapter 13 cases are much more common and much more extensive.  Recently, I sat down with Susan Gantt, a contract attorney who appears at Section 341 creditor meetings on behalf of several law firms in the Atlanta area.

In my last post, I discussed a very common objection – the failure of debtor's counsel and the debtor to file a payroll deduction Order to fund the Chapter 13 case.

Today, I continue the series by discussing another more common objection having to do with documentary proof.

2) Proof of post-petition mortgage payments – if you are buying a house, your Chapter 13 case will most likely provide that your on-going mortgage payments are to be made directly starting with the first payment that comes due after you file.

For example, if you file your case on March 28, you will be due for the April 1 payment.  However, if you file on April 1 or 2, then your next payment is due on May 1.  Often times, it makes sense to file on the 1st or 2nd day of the month so you don't have to come up with the cash to pay your mortgage payment immediately.

Recognize, however, that if you include another month of mortgage arrearage in your Chapter 13 plan, your plan payment will likely be slightly higher.

Also be aware that not every mortgage payment is due on the 1st of the month.  Second mortgages or home equity lines of credit – HELOCs – may have a due date of the 15th or a different date.  Realize, as well, that I am speaking about the due date, not the "late" due date.

In any case, you will need to bring proof of your post petition mortgage payments to your 341 hearing.  Proof can be in the form of a canceled check, a copy of your check or even a copy of your online bank statement with the mortgage payment circled.

If you do not have proof of your post petition mortgage payment, the trustee will object and demand proof before  your case can be confirmed.

[tags] proof of post petition mortgage payments, HELOC, Nancy Whaley, Mary Ida Townson, Adam Goodman, Chapter 13 objections [/tags]

Most Common Trustee Objections in Chapter 13 Cases – objection 1 – no payroll deduction

What are the most common trustee objections in Chapter 13 cases?  Who better to tell us than Susan Gantt.  Susan serves the consumer bankruptcy bar in Atlanta by attending 341 hearings on a contract basis for a number of debtors' lawyers.  She attends 10 to 20 341 hearings a day, every day and has done so for several years.

I asked Susan to identify the most common issues in Chapter 13 case.  These are problems that occur over and over.  If you have filed a Chapter 13 or if you are about to file one, I urge you to pay attention to this list.  The most common Chapter 13 objections – in no particular order – are as follows:

1) No payroll deduction Order filed in the case.  Chapter 13 cases are payment plans.  Chapter 13 debtors are required to submit their disposable income to the Chapter 13 trustee where it will be distributed to creditors according to the Bankruptcy laws and the Chapter 13 plan.  Under local procedure, all Chapter 13 cases are required to include a payroll deduction Order.  This Order directs the debtor's employer to withhold a designated amount of money from the employee's paycheck and to send it to the Chapter 13 trustee.

Statistically, cases filed with a payroll deduction Order are two to three times as likely to be confirmed.  Chapter 13 debtors, quite understandably, would prefer to pay the trustee directly.  No one wants his employer or co-workers to know that he has filed bankruptcy.  Debtors who work on commission or as 1099 contractors want to avoid payroll deduction.  Chapter 13 filers are concerned that their job could be jeopardized if the employer finds out about the bankruptcy.  

If you file your case without a payroll deduction, however, your Chapter 13 trustee will file an objection to confirmation and ask the judge to dismiss your case.  In years past, Chapter 13 trustees were sometimes willing to consider direct pay cases.  Now, however, they are much less likely to be agreeable to a direct pay plan.  You can expect that both you and your lawyer will have to attend your confirmation hearing and you will have to explain to the judge why your case cannot be a payroll deduction case.  If you argue this issue, be prepared to submit evidence in the form of an employee handbook or testimony from a co-worker or supervisor.

Realize as well that the time spent by your lawyer waiting for your case to be called at the confirmation hearing is billable time.  Although your attorney's fees will be paid through your plan, you are paying nonetheless.  Since confirmation calendars can sometimes run 50 to 75 pages, you and your lawyer may be sitting in court waiting for your case to be called for several hours.

To be continued… 

[tags] chapter 13 objections, payroll deduction order in Chapter 13 cases, EDO, bankruptcy northern district of Georgia, Susan Gantt, Susan Irwin [/tags]

 

Page optimized by WP Minify WordPress Plugin