November 25, 2017

What Are They Going to Ask Me at My 341 Hearing

No matter how much your lawyer tries to reassure you, there is a good chance that you will be nervous and anxious at your 341 hearing.  Even though the consumer bankruptcy process is generally not very adversarial, no one likes to be in the witness chair.

My colleague, Kansas bankruptcy attorney Jill Michaux, recently published a very helpful blog post on her Kansas bankruptcy blog in which she sets out the questions you will likely face at your 341 hearing.  Although our Atlanta area Chapter 7 and Chapter 13 trustees don’t always ask this exact set of question, I think that Jill’s post will be of great help to a nervous debtor.

You can read Jill Michaux’ post entitled What Will They Ask Me at My Bankruptcy Hearing by clicking on the link.

CCCS vs. Bankruptcy – What Makes the Most Sense?

I am sitting here wondering two things…am I qualify to file bankruptcy and should I file bankruptcy.
I have unsecured debts…c/Cards and student loans avg. 50,000.  I have a mortgage of 1.000 monthly.  I AM ENROLLED IN CCCS AND IS PAYING ABOUT 900.00 monthly.  I have high medical bills and child support payments avg. 600 monthly…after working many many hours of overtime my income last year was 54,000.  I am single/seperated…what should I do and how should I do it….HELP.
–Jeff

Jonathan Ginsberg responds:  Jeff, thanks for your question.  Here is how I would analyze your situation:

  1. Bankruptcy is always a last resort.  Whatever positive information you hear about bankruptcy (and there are some positives), you always run a risk when you file for bankruptcy.  Why?  Your financial future will be in the hands of others (trustees, judges).  Creditors can put you in the position of having to litigate (expensive) or give up bankruptcy protection.  While most bankruptcy cases process through the system without hassles, there is always the chance that your case could blow up.  Additionally, you will see your credit score destroyed (at least in the short term) if you file for bankruptcy.
  2. Given your income, I would think that you would be limited to filing Chapter 13.   Although the median income limit for a single individual changes once or twice a year, the current median income for an individual filing in Georgia will be in the $40,000 range.  Your income is significantly higher – therefore I suspect that you will be looking at a Chapter 13.
  3. Currently, you are paying $900 per month + your mortgage + high on-going medical expenses.  Chapter 13 might make sense if it could reduce that $900 payment to $600 or  $500.   The only way to know that would be to submit all of your financial information to a bankruptcy lawyer for a personalized review.  If you want me to review, I would direct you to a special download page of my Atlanta bankruptcy web site, where I identify exactly what I need to analyze your specific case for a possible bankruptcy.

 

Weakening of Consumer Bankruptcy Protections Based on Faulty Assumptions

One of the consequences of the new bankruptcy law (BAPCPA law) has to do with erosion of protections offered by bankruptcy in various situations.  For example, the automatic stay provisions, which previously offered a comprehensive, no-questions-asked protection from any creditor action, no longer provides absolute protection in all circumstances.  Under BAPCPA, the automatic stay terminates in 30 days (unless you go to Court to renew it) in certain repeat filing situations and it does not exist at all in the third case filed within a year.

While the policy considerations that underlie this erosion of the automatic stay may be valid, my concerns are (1) when you create complicated exceptions to core concepts, the system loses predictability and public confidence and (2) the stage is set to undermine the entire bankruptcy system with exceptions that swallow the rules, i.e. the “slippery slope” argument.

I find the reduction in bankruptcy protection that applies to repeat filers especially troublesome.  There seems to be an underlying assumption that a debtor who seeks bankruptcy protection  – usually under Chapter 13 – more than once within a year is acting with less than honorable purposes.  In my experience, at least half of the second filers I see have to file a second case because they did not fully understand the process and their obligations thereunder the first time around.

In most jurisdictions, one or two high volume consumer bankruptcy firms account for a majority of the Chapter 7 and Chapter 13 filings.  These high volume firms are a product of the Bankruptcy Courts’ paternalistic attitude towards debtors and consumer bankruptcy counsel.  In most jurisdictions, the Judges set out “no look fee” provisions for Chapter 13 that essentially set the market rate for legal fees in that jurisdiction.  Although the standing court orders that set out these provisions are careful to state that the judges are not setting a fee, the practical effect is, in fact, to set a fee for services.

Because it is hardly practical for a small firm to spend three or four hours of non-billable time to present a fee application, most consumer bankruptcy attorneys accept the no look fee as a flat fee for services.  In the northern district of Georgia, for example, the no-look fee for Chapter 13 is around $4,500.  If a Chapter 13 lasts five years, that amounts to $500 per year to prepare, file and manage a case. Until just a few years ago, that no look fee was $1,500 for five years’ worth of work (that amounted to $300 for five years’ worth of work).

By contrast, in Chapter 11 cases, where the financial stakes may be in the millions of dollars, bankruptcy attorneys may bill at $500 or $600 per hour without any significant judicial interference.

Is it any wonder, therefore, that high volume consumer bankruptcy firms spend so little time with their clients to walk them through the filing and case management process.  Actually face to face attorney time in a high volume firm may amount to 30 minutes or less.  Further, because the business model dictates that costs must be kept down, the high volume firms have no choice but to rely on inexperienced, young lawyers who stay for a year or two then move on.

In simple consumer cases, a paralegal driven model may be fine and I personally have no issue with operating a law firm according to a profitable business model, especially when that model is driven by judicial control of attorney compensation.  In more complex cases, however, it may take a second or third filing for the debtor to find a lawyer who is equipped to deal with that debtor’s complicated problem.

The automatic stay issue discussed above is but one of the many erosions and exceptions to full relief now contained in the Code.  A 2005 article in the ABA Journal entitled “Debts that Will Follow You to the Grave” by Marc S. Stern and Larry B. Feinstein offers an excellent summary of other exceptions to bankruptcy relief.

The prevalence of high volume, limited service bankruptcy mill firms in every large jurisdiction is clearly the product of judicial control of bankruptcy fee payments in Chapter 13 cases.  Yet BAPCPA incorporates a simplistic formula to punish repeat filers, even those who have to seek repeat protection because they ended up in the wrong attorney’s office for their particular case.

Chapter 13 after Chapter 7

I received an email today from a potential client asking about the rules for filing a Chapter 13 after a Chapter 7 that has been discharged.

Section 1328 of the Code says that a Chapter 13 debtor my not be granted a discharge if he received a discharge in a Chapter 7, 11 or 12 filed within four years of the filing of the pending Chapter 13 case.

Interestingly, this Code section does not appear to bar the filing of a Chapter 13 case within four years of a Chapter 7 discharge, but a case filed within this four year period would not result in a discharge.  My colleague, Scott Riddle, has written in his Georgia Bankruptcy Law blog about two Southern District cases where the Judge found the debtors to be eligible for Chapter 13, despite their ineligibility for a discharge.  One of the factors in the two cases Scott writes about is the proposed 100% dividend to unsecured creditors.

What does this mean?  Would cases that propose less than a 100% dividend face more judicial scrutiny?  Does it mean that a plan that proposes a 10% dividend to unsecureds would pay the 10% dividend in the plan, but not discharge the remaining 90%, which would survive the bankruptcy?  What about a 100% dividend plan – would accruing interest survive the close of the Chapter 13 estate?  I suspect that we will find out the answers to these questions within the next few years.

Now, what about the percentage dividend to unsecureds in a Chapter 13 filed after a Chapter 7 discharge?  I have always used the “best efforts” and “good faith” requirements of the Kitchens case (In re Kitchens, 702 F .2d 885 (11th Cir . 1983).

The Kitchens case sets out a list of factors to be considered in determining good faith:

(1) the amount of the debtor’s income from all sources;

(2) the living expenses of the debtor and his dependents 411 U .S .C . §1325(x)

(3) the amount of attorney’s fees

(4) the probable or expected duration of the debtor’s chapter 13 plan
(5) the motivations of the debtor and his sincerity in seeking relief under the provisions of chapter 13
(6) the debtor’s degree of effort
(7) the debtor’s ability to earn and the likelihood of fluctuation in his earnings
(8) special circumstances such as inordinate medical expense
(9) the frequency with which the debtor has sought relief under the Bankruptcy Reform Act and its predecessors
(10) the circumstances under which the debtor has contracted his debts and his demonstrated bona fides, or lack of same, in dealings with his creditors
(11) the burden which the plan’s administration would place on the trustee
It is my position that the Kitchens case is still good law in the 11th Circuit (includes Georgia Bankruptcy Courts). So, as a rule, I do not think that Chapter 13 debtors who have recently received a Chapter 7 discharge must pay back their unsecureds at 100% but I will warn them that the Chapter 13 trustee is more likely to demand a higher dividend to unsecureds in one of these cases than in a first case.

Behind on Mortgage and Vehicles – is Chapter 13 an Option?

My mortgage is about to go into foreclosure–as we are two months behind right now and we also owe for June…The mortgage company will not accept a partial payment…and will initiate foreclosure proceedings very soon..we are also in trouble with our car notes and timeshare payments… should we consider bankruptcy if we cannot work out something with our lender???
–Mark

Jonathan Ginsberg responds: Mark, if your mortgage company will not work with you, then your only real option is Chapter 13.  I think you are smart to consider this option early – which is preferable to waiting until a few days before foreclosure to look into the process.  At a minimum, you should do the following now:

1) request copies of all 3 credit reports (both you and your wife) – credit reports are free in Georgia but will take a few days to arrive in the mail (by contrast if you need them immediately, I can get them for $45 per person).  This is another advantage of starting early

2) get your credit counseling certificate.  Credit counseling is now mandatory and if you wait until the last minute, you may not be able to get an appointment.  I have a section about credit counseling on my Atlanta Bankruptcy web siteConsumer Credit Counseling of Atlanta and Hummingbird Credit Counseling are two organizations that my clients have used.

3) complete my bankruptcy intake form.  Please pay special attention to the budget portion.  Chapter 13 will not help you if you do not have enough stable income to pay your mortgage on-going and contribute to your Ch. 13 plan.  If you have fallen behind on your house and your car because you are not making enough money, you may need to consider surrendering one of these secured items to make a Chapter 13 plan feasible.  I can tell you that in almost every case, the Chapter 13 trustee will insist that you give up your time share.  If you fell behind because of an unusual circumstance (i.e., an unexpected job layoff, an illness, a pregnancy, etc.) then a 13 will catch you up.

As part of the questionnaire I would need copies of all pay stubs for income earned by you and your wife (regardless of whether she would be filing with you) for the period December, 2005-May, 2006.

I also think that during this process you should continue negotiating with your creditors.  And if you have numbers and knowledge about how Chapter 13 would work for you, you will be in a better position to evaluate your options.

I am happy to spend 30 minutes with you at no charge to review your completed questionnaire.  Let me know by phone or email if you would like to talk.

Please share your experiences with bankruptcy

This morning, I came across an interesting blog by a gentleman who is currently going through a Chapter 13 and is describing his experiences preparing as he goes through his case.  It appears that he tried a debt counseling program that did not work and now has made the decision to go through Chapter 13.

I am not sure where he lives, but his Chapter 13 diary blog warrants a look.  And if you have your own experiences to share, please leave a comment or send me an email.

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.

Top Ten Consumer Bankruptcy Law Mistakes in post-October 17 World

Legal publisher Lexis/Nexus has released its list of the top ten mistakes made by consumer bankruptcy lawyers in the post-October 17, 2005 era.  Topping the list is failing to insure that the debtor has received pre-bankruptcy credit counseling.  As discussed elsewhere on this blog, bankruptcy judges have been unwilling to waive the credit counseling requirement under most circumstances.  A case filing without the certificate will be dismissed.  For debtors filing on the eve of foreclosure, when credit counseling organizations have no space, this requirement can be a real problem.

The remainder of the problems discussed in the Lexis/Nexus report all deal with the burdensome filing and paperwork requirements of the new law.  In reality, cases that are otherwise workable are being dismissed because debtors are having problems collecting necessary paperwork.

In my practice, I will not file a case until I have all the necessary paperwork in hand.  This is causing delays in filing and I may be losing some business.  But, given the aggressive posture of the U.S. Trustee on these document requirements, that is the way things must be.

Thanks to my colleague Milton Jones of College Park for noting this Lexis/Nexus report on his Paperless Law Office blog.

Means Test Musings

Over the past few weeks, I have received objections in two Chapter 7 cases from the U.S. Trustee having to do with the median income/means test Form 22A.

Under the new law, debtors must fit within these tests in order to qualify for Chapter 7. The first part of the test is called the “median income” test. Under this (simple) test, if your household income is below the average income for a similarly sized family in your State, then you qualify for Chapter 7. The average income figures are built into my bankruptcy preparation program, but if you want to see these figures, you can look at them on the U.S. Trustee’s web site.

If your income exceeds the average, you can still qualify for Chapter 7 if you pass the “means test.” This is where we compare your monthly income (generated from an averaging of your gross income over the past 6 months) to a pro-forma budget using IRS derived budget numbers.

If your real life expense numbers are higher than the means test numbers, you are most likely out of luck. The means test does contain a small window where a Bankruptcy Judge can find that a particular expense is “reasonable.” The problem, of course, is that the U.S. Trustee is taking a very conservative approach and most debtors do not have the money to pay for research and litigation.

Two issues have come up recently – be aware of these if you are a lawyer or a debtor planning to file:

1. Reasonableness of supporting a college aged child – the U.S. Trustee will object if you include food, housing and transportation expenses for a college aged child. According to the trustee, these expenses are not necessary.

2. Vehicle leases – the U.S. Trustee contends that leased vehicles are not secured debts therefore the lease cost may not be an allowable expense in the pro forma budget. It seems to me that both leases and purchases are “ownership costs” such that it would be absurd to disallow lease payments, but it appears that is exactly what the trustee is doing.

I have a meeting scheduled for later this week to discuss these issues with an attorney in the trustee’s office – perhaps I will get some clarification.

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