June 25, 2018

Objection to Chapter 13 Confirmation or Motion to Dismiss? Now the Hard Work Starts

Last week, I was reminded about the importance of taking care of Chapter 13 business early.  I got stuck in court for 4 hours waiting to have a 45 second conversation with the Chapter 13 trustee.

My case involved a trustee motion to dismiss.  My client had filed Chapter 13 about 2 years ago and earlier this year he lost his job and thus fell behind on his trustee payments.  The trustee filed a motion to dismiss, with a hearing scheduled for mid-May.  A couple of days before the hearing my client called to say that he had landed a new job and could I buy him some time.  I called and emailed the trustee and she agreed to reset the motion to dismiss hearing to last week’s calendar.

I notified my client of the reset and asked him for detailed information about his new job including a salary breakdown.  He provided me most of what I needed but did not yet have an actual paycheck.  He also sent the trustee 3 of the 5 missing payments.  Finally, the weekend before the hearing I decided to file my amended budget with an estimated budget.

On the Monday before the Wednesday hearing I started calling and emailing the trustee.  No response.  I checked the trustee’s web site – my client’s personal check had not yet posted (although he did have a registered mail receipt signed by someone in the trustee’s office).  The day before the hearing I emailed and called.  No response.

Having no other choice, I trekked down to court only to discover that the judge’s hearing calendar was 15o pages with hundreds and hundreds of cases.  It took 3 1/2 hours to read the calendar.  After the call of the calendar I was able to talk to the trustee and she agreed to a consent order assuming the funds posted within 10 days – a 45 second conversation.

What could my client and I have done differently?

  1. I should have insisted on a paycheck breakdown 10 days earlier, even if we were working with estimates.  My client wanted to be accurate but in this case timeliness was more important.
  2. My client should have brought the trustee certified funds by personal delivery and obtained a receipt for same.  This should have been done at least 7 days prior to the hearing.

The good news here is that we saved his case.  This is especially important because I had filed a lien strip early on in the case and eliminated a $30,000+ second mortgage.  If the case had been dismissed that 2nd mortgage would have reattached to my client’s house.

IRS May Soon be Out of the Business of Seizing Income Tax Refunds for Benefit of Chapter 13 Trustee

As you probably know, there are two types of consumer bankruptcy cases available to you – a Chapter 7 which wipes out debt, and a Chapter 13 which creates a five year payment plan in which you pay back some or all of your debt with your “disposable income.”  When I prepare a Chapter 13 case, we work with you to create a liveable budget.  The money “left over” after you pay for housing, food, transportation, insurance, utilities and other necessities must be sent to the Chapter 13 trustee, who then disburses these funds to your creditors based on a plan of reorganization that we submit to the court.

What happens if you need to file a Chapter 13, you have not yet filed your tax return for last year, but you know that a refund will be coming your way.  The simple answer is that unless you are paying back your creditors at 100%, your Chapter 13 will demand that you turn over your tax refund check, and will use that money to pay your creditors.  If you know that a refund is headed your way, make sure to tell your lawyer before you file – there are some steps you can take to preserve some or all of your tax refund money.

Your Chapter 13 trustee will also want future refunds paid to the trustee.  This situation is easier to handle – you will want to adjust your payroll withholdings so that you do not have any refund coming.  As far as the Chapter 13 trustee is concerned, your tax refund is kind of like a savings account that artificially reduces your net pay amount.

All of the Chapter 13 trustees in the Northern District of Georgia require debtors who are paying less than 100% to creditors to include in their Chapter 13 plans a provision that authorizes the IRS to intercept any refund payable during the years that your plan is in effect and send this money to the Chapter 13 trustee.  And until now, the IRS has cooperated with the Chapter 13 trustees in redirecting refund money. [Read more…]

Trends in Mortgage Foreclosures

One component of the new bankruptcy law that gets little popular attention has to do with the limitations the new law places on re-filed Chapter 13 cases.  The Bankruptcy Code now provides that in a second case filed within one year of a first filing, the automatic stay terminates in 30 days unless the debtor files a Motion to Extend Stay.  For a third filing within a year, the automatic stay does not go into existence at all.

The intent of this new Code section is to stop so called “serial filers” – people who file and re-file to stop mortgage lenders from foreclosing.

Under the old law, by the way, bankruptcy judges could and frequently did exercise their power to dismiss a case “with prejudice” (pursuant to Section 109(g) of the Code) thereby barring a debtor from refiling for 180 days.

The problem from my perspective as a consumer debtor lawyer arises when a debtor has to file a  second or even third case because of circumstances beyond his control.  For example, in the Northern District of Georgia, where I practice, problems with Chapter 13 plan funding are the primary reason why Chapter 13 cases fail.  Often the funding is short because the employer fails to start the payroll deduction on time.  In our district every debtor who is employed must be subject to an automatic payroll deduction.

An initial Chapter 13 case may fail because the debtor’s lawyer was inexperienced or got in over his head.  Chapter 13 now requires numerous document disclosures and fast response to trustee objections.  Many times over the past twenty years, I have received a frantic call from a debtor whose case had been filed by a lawyer who “dabbled” in bankruptcy and who failed to respond properly to the trustee objections.  And there are also those cases that debtors filed pro se and  two or three months into the case decided (usually on advice from their trustee) to get a lawyer. Under the old law trustees and judges frequently recommended re-filing. Now, that option is much less appealing or practical.

A case may fail because a debtor has not yet wrapped his mind around the idea that his lifestyle and spending habits must change.

When a debtor wants or needs to refile, he will find that it has become much more difficult and expensive to find a  lawyer to take his case.  In my office, I will take a second filing within a year sometimes, but the up front cost will be higher that it would be for an initial filer. Why?  I know that at a minimum I will be making an additional court appearance to extend the stay and because the trustees tend to be much more demanding in a refiled case.

As a rule I will not take third filings and many of the more experienced, capable bankruptcy lawyers I know will not take third filings either.  The risk of getting stuck in litigation and hours of unpaid time loom too large.  I routinely refer third cases to one of the high volume filers.

No doubt the debtors themselves are partially to blame.  In my office I advise my clients orally, in memo form and by letter and email that the debtor is responsible for making all trustee payments until the payroll deduction kicks in and that all mortgage payments must be paid directly as on-going mortgage payments are not part of the plan.  And every month or so I have a debtor insist that “nobody told me” to make my mortgage payments or trustee payments.

However, without minimizing the debtor’s responsibility, I can see how a debtor would be confused by the process.  Bankruptcy is confusing and a bit terrifying.  Debtors are almost always very stressed and overwhelmed by months of financial pressure.  And, often, a main reason that a debtor is in bankruptcy relates to that debtor’s poor financial management skills and practical budget know-how.  This lack of know how, in my view, extends to the debtor’s decision making in choosing a bankruptcy lawyer and evaluating his bankruptcy and non-bankruptcy options.

Often the choice of a bankruptcy lawyer is made at the last minute.  Cash strapped debtors often choose a lawyer based on up front price.  Usually a law firm offers a low up front cost because (a) it is a volume filer or (b) it is a new or inexperienced lawyer trying to get cases to learn the practice area.  In both these scenarios, despite the good intentions of the lawyer, there is an increased risk that the first filing will not work.

The bottom line, in my view – there are many reasons why an initial filing may not work and more often than not the dismissal is for a reason other than a serial filing mindset by the debtor.

Now I am reading that teaser rates and adjustable rates are rising, especially in the subprime lending market.  In the Bankruptcy Litigation blog, Illinois bankruptcy attorney Steve Jakubowski cites a Wall Street Journal article as stating that subprime loan originations have increased from $150 billion in 2000 to $650 billion in 2005.  Further, about 25% of all mortgage debt in the United States is coming up for interest rate resets in 2006 and 2007.  Many of these resets will result in substantially higher monthly mortgage payments.

This all means that there are going to be a lot of first time filers looking at Chapter 13 to stop a foreclosure.  How many of those debtors will be affected by the new restrictions on refiling Chapter 13?

 

Chapter 13 and County Property Taxes

I recently worked on a case that demonstrated the need for Chapter 13 attorneys to remain alert when dealing with county property taxes and Chapter 13 debtors.

In this case, my client was both delinquent in his payment of county property taxes and his taxes were not being escrowed by the mortgage company.  Because of the delinquency, I included the county tax commissioner as a creditor in the case.  Because my client’s county property taxes were not being escrowed, I allocated approximately $300 per month as a monthly tax escrow so that he would be able to pay the tax bill later this year.

The county tax commissioner filed a proof of claim that included the delinquent tax debt for 2005 as well as anticipated property tax debt for 2006.  I filed a Motion to Disallow Claim on the grounds that the 2006 tax debt had not yet come due and because we were already allocating for this tax obligation in the budget.

The county attorney called me and explained that under Georgia law, your county property tax debt comes due on January 1 in the exact amount of the previous year’s tax.  This tax obligation is subject to change based on updated tax rolls but it exists as of January 1.  So, in my case, his position is that the county acted correctly in filing a proof of claim for both 2005 and 2006.

I discussed this issue with my client and we decided to withdraw our objection to the county’s proof of claim, and we will amend our budget to get rid of the 2006 monthly allocation.  On January 1, 2007, however, I will need to re-amend the budget to add a monthly tax escrow allocation as he will have to pay 2007 directly.

Interestingly, this issue would not have arisen if there had been no delinquency for 2005 as I would not have listed the county as a creditor, although arguably every property owner is automatically delinquent as of January 1.  My sense is that the mortgage company escrow departments as well as county tax commissioner’s offices are probably fine with the existing escrow system as it would be a logistical nightmare to convince escrow departments not to escrow for the current calendar year.  However, if you pay your property taxes directly or if you do list the county tax commissioner as a creditor be aware of this proof of claim issue so that you do not double pay.

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