Continuing Responsibilities of Homeowners Surrendering Property in Bankruptcy

Continuing Responsibilities of Homeowners Surrendering Property in Bankruptcy

A chapter 7 Statement of Intention or chapter 13 Plan may provide that a debtor’s homestead or other real property will be surrendered. The bankruptcy court may enter an order abandoning the property or granting relief from the automatic stay regarding the property. The bankruptcy court may enter a discharge order and a final decree closing the bankruptcy case. None of those things mean that the debtor automatically stops being the owner.

The debtor does stop being the owner until the sheriff sells the property, the state foreclosure court enters an order confirming the sale, and the sheriff executes and delivers a sheriff’s deed to the buyer. Those things do not always happen right away, and sometimes they take years or even never happen at all. The bankruptcy does not itself accomplish those things.

Continued ownership can have consequences. If the building becomes dilapidated or the grounds become overgrown, the city might fine the debtor. If a mailman, neighbor, vagrant, etc. is injured on the property, the debtor might be sued. If there is a homeowners’ association, the debtor is responsible for all fresh dues that accrue after his bankruptcy is filed, even after he moves out, until he ceases to be the owner.

In view of these considerations, many debtors decide to continue residing in their homes until they cease being the owner, allowing them to continue insurance coverage (or at least liability coverage) and to monitor and maintain the physical condition of the property.

A bonus benefit of that decision is that the rent is free.

Child Support Income and Retirement Loan Repayments On the Means Test

Child Support Income and Retirement Loan Repayments On the Means Test

Child support (but not alimony) income is deducted on Form 122 in chapter 13 but not in chapter 7.  The same is true of contributions to a retirement plan and of payments on a loan against a retirement plan.

This difference raises the question whether a debtor can achieve budget eligibility for chapter 7 on grounds that his retirement contribution or loan repayment, or his child support, would cause his chapter 13 plan payment to be zero.

Judge Cornish answered this question in In re Johns, 342 B.R. 626 (Bankr.E.D.Okla., 2006), in which he held that an over-abuse debtor cannot avoid dismissal of his chapter 7 case by arguing that his 401k loan payment is a “special circumstance” under Section 707(b) because the loan repayment would be deductible in chapter 13 and reduce his plan payment to zero. A Florida bankruptcy court agreed in In re Tauter, 402 B.R. 903 (Bankr.M.D.Fla., 2009), as did an Ohio district court in Eisen v. Thompson, 370 B.R. 762 (N.D. Ohio, 2007). On the other hand, in In re Delbecq, 368 B.R. 754 (Bankr. S.D. Ind., 2007), the court disagreed with the Johns holding and concluded that a student loan was a “special circumstance” that could be deducted under 707(b).

A slightly more recent list of decisions on the subject appears at footnote 16 in In re Harmon (Bankr. E.D. Pa., 2011): “Compare Delbecq, 368 B.R. at 760 (“there is simply no logic to essentially forcing a debtor into a Chapter 13 case if the distribution in that case will yield nothing to unsecured creditors”); In re Skvorecz, 369 B.R. 638, 644 (Bankr. D. Colo. 2007) (“If part of the intent of Congress in tying Chapter 7 relief to a means test, was to require a debtor to repay his creditors if he is able to, then it would be nonsensical that the very payments or expenses which tip the calculation so as to create the presumption of abuse, an indication of an ability to repay, are the same payments or expenses that are excepted from “disposable income” in a Chapter 13″) with Lightsey, 374 B.R. at 382; In re Johns, 342 B.R. 626, 629 (Bankr. E.D.Okla. 2006); In re Castle, 362 B.R. 846, 850-51 (Bankr. N.D. Ohio 2006).”

Applicable statutes: 11 U.S.C. Sections 101(10A)(defining “current monthly income”); 11 U.S.C. Section 707(b)(2)(A)(utilizing “current monthly income”); 11 U.S.C. Section 1325(b)(2)(utilizing “disposable income” and defining it as “current monthly income” less certain things such as child support); 11 U.S.C. Section 541(b)(7)(A) and (B) (providing that certain employment-related retirement payments and withholdings  “shall not constitute disposable income, as defined in section 1325 (b)(2)”).

In order to be deductible in chapter 13, must the retirement plan loan repayment be wage-deducted, or will a draft on the debtor’s bank account suffice? 11 U.S.C. Section 541(b)(7)(B) refers to an amount “received” by an employer from employees for payment as contributions, not “withheld”. Therefore the answer to that question is yes.

Reinstatement of Driver’s License in Bankruptcy

Reinstatement of Driver’s License in Bankruptcy

The Oklahoma Department of Public Safety sometimes revokes the driver’s license of an individual who causes an accident, was uninsured, and fails to pay a judgment in a lawsuit arising from the accident. In most situations, the filing of a bankruptcy case entitles the judgment debtor to reinstatement of the license.

11 U.S.C. Section 525(a) provides, “[A] governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.”

On application, DPS will reinstate the license as soon as a bankruptcy case is filed. The debtor must list DPS on Schedule F as well as the judgment creditor. DPS will require the debtor to pay the normal reinstatement fee. DPS does not wait until the discharge is entered, because the statute says “dischargeable”, not “discharged”.

DPS would not be required to reinstate the license when the debt arising from the accident is not dischargeable in the bankruptcy case that is being filed. One example would be a bankruptcy case in which the debtor is not entitled to a discharge because he received a discharge in a previous bankruptcy case filed too recently (see my separate post that subject). Another example would be where the debtor is not entitled to discharge the debt because it is for “death or personal injury caused by the debtor’s operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug or other substance.” 11 U.S.C. Section 523(a)(9).

Bankruptcy Forms Changes December 1, 2015

Bankruptcy Forms Changes Effective December 1, 2015

New Forms. Most Official Bankruptcy Forms have been replaced with substantially revised, reformatted and renumbered versions effective December 1, 2015. The Judicial Conference approved the revised forms on September 17, 2015. These changes are the third installment in the Bankruptcy Rules Advisory Committee’s multi-year forms modernization project. Some forms are entirely new, some are replaced, and some have been changed only as to format and numbering. This year’s changes are by far the most extensive since BAPCPA.

Headline 1 – Forms I and J, Means Test, and Reaffirmation are Mostly Unchanged. These forms were revised in previous years. Forms I and J were “modernized” effective December 1, 2013, along with the appellate, fee waiver and fee installment forms. Forms 22A, 22B, and 22C (“means test”) were “modernized” December 1, 2014. Schedule J-2 is a new form to be completed for a separated spouse who is debtor 2; that form is discussed below.

Headline 2 – No National Chapter 13 Plan Form (Yet). CIN (Best Case publisher) reports that it expects a national plan form in December 2016.

Headline 3 – Mortgage Proof of Claim Requires Payment History. A creditor that claims a security interest in property that is the debtor’s principal residence must file Form 410A with its proof of claim. That form requires the claimant to provide a loan history that reveals when payments were received, how they were applied, when fees and charges were incurred, and when escrow charges were satisfied, including all transactions on the claim from the first date of default to the petition date. The first date of default is the first date on which the borrower failed to make a payment in accordance with the terms of the note and mortgage, unless the note was subsequently brought current with no principal, interest, fees, escrow payments, or other charges immediately payable.

Form 410A contains so many columns that they are lettered up to Q. The columns are divided into three groups.

The first group reports account activity. It includes column A date, B contractual payment amount, C funds received, D amount incurred, E description, and F contractual due date.

The second group reports how funds were applied/amount incurred. It includes column G principal interest and past due balance, H amount to principal, I amount to interest, J amount to escrow, K amount to fees or charges, and L unapplied funds.

The third group reports balance after amount received/incurred. It includes column M principal balance, N accrued interest balance, O escrow balance, P fees/charges balance, and Q unapplied funds balance.

Form 410A replaces Form 10A, which was revolutionary when it appeared in 2011. 10A required specific information about principal and interest due as of the petition date; prepetition fees, expenses, and charges; and amount necessary to cure default as of the petition date. However, 10A presented information in the form of summaries and conclusions. If 10A reported that one payment was delinquent, that payment may have been missed last month or a year ago. By contrast, Form 410 requires a detailed payment history.

The standardization of payment histories required by Form 410A will provide many benefits. In the past, every mortgage servicer used a different format, most of which contained indecipherable codes and were inscrutable to debtors’ attorneys and even more so to clients. The inability of debtors to understand the histories was particularly problematic, because they were the ones who needed to identify the payments that they thought they had made that did not appear on the histories.

Judging from how long creditors’ counsel have usually taken to obtain payment histories when requested (often weeks), it is assumed that substantial human effort was required for the servicers to produce them. Presumably, now that servicers will be required to produce these histories for every proof of claim, they will develop automated procedures to create them. With that automation implemented, it is hoped that servicers can provide payment histories more easily and quickly in non-proof-of-claim situations.

Quicker, standardized payment histories will improve chapter 13 practice. If debtors’ attorneys can obtain them pre-confirmation, then fewer plans will need to be modified post-confirmation. If they are available more quickly after the filing of motions for relief from the automatic stay, then fewer hearings will need to be continued. If they are available more quickly after a creditor files a response disputing a notice of final cure payment, then fewer debtors will need to file a motion to determine that the mortgage is current.

Form 410A raises issues for parties other than just mortgage servicers. Must the form be filed with a mortgage proof of claim filed by a debtor’s attorney when the servicer fails to file? In the past, when even Form 10A required more information than was available to the debtor, some debtors’ attorneys just wrote a note on the form stating “data unavailable.” The form refers to security interests, not just mortgages. Must it be filed by homeowner associations and country treasurers, even though they do not have the data processing ability to create the form automatically?

Common Elements. Many of Committee Notes state that the forms are “revised as part of the forms modernization project, making [them] easier to read and, as a result, likely to generate more complete and accurate responses. Because the goals of the forms modernization project include improving the interface between technology and the forms so as to increase efficiency and reduce the need to produce the same information in multiple formats, many of the open-ended questions and multiple part instructions have been replaced with more specific questions,” in other words, to reduce false answers by disassembling questions.

New Terms. The new forms create some useful new terms. On the Schedules, “Debtor 1” and “Debtor 2” replace “Debtor” and “Joint Debtor”. “Individuals”, meaning people, are separated from “Non-Individuals”, meaning corporations and other fictional entities. In the verifications, “true and correct” replaces “to the best of my knowledge, information and belief”; this plainer language removes the implication that a wrong answer, especially an answer of “none”, is acceptable if the debtor is unsure.

Numbering. All forms have been renumbered. New official form numbers generally follow this pattern: 1XX for individual debtor case-opening forms, 2XX for non-individual debtor case-opening forms, 3XX for court notices and orders, and 4XX for other official forms. In most case, the “XX” is identical to the original form number. Director’s Bankruptcy Forms are in a separate collection. They are issued by the Director of the Administrative Office of the U.S. Courts. Their use may be required by local court rules or general orders, but otherwise they exist for the convenience of the parties. They have been changed from three- to four-digit numbers (sometimes followed by a letter), usually by adding a zero to the original form number. Officially, there is a B prefixed to all form number, as was true of previous versions.

Expanded Instructions. Official Instructions for Voluntary Petition for individual debtors (including schedules) are expanded from 14 to 42 pages. They are so long that they refer to themselves as a “booklet”.

There is a separate version of the petition/schedules instructions for non-individual debtors.

Maybe clients should now be directed to read the petition/schedules instructions. Besides being far more readable for non-attorneys, the instructions themselves suggest, “The instructions are designed to accompany the forms and are intended to help you understand what information is required to properly file.”

The instructions appearing on the most of the forms themselves have been shortened by moving parts to the general instructions, such as warnings to omit children’s names. However, the instructions incorporated into most of the forms are more comprehensive.

The new forms are simpler. Checkboxes, multiple-choice, and short blanks replace long narrative blanks. They use far plainer words. The sentences are shorter. They give more examples. They disassemble complex questions into their separate components.

Consolidation. Some forms and schedules are consolidated, reducing the number of signatures. Schedules A and B (real and personal property) are consolidated into Schedule A/B. Schedules E and F (priority and general unsecured are consolidated into Schedule E/F. Exhibits A (Securities and Exchange Commission), C (hazardous property), and D (credit counseling certification) are incorporated into the Petition.

Individual vs. Non-Individual Versions. Some forms are separated into individual and non-individual versions. This is true of the Voluntary Petition and Schedules. It is also true of the Statement of Financial Affairs. The effect is to eliminate whole sections for each group, easing the client reading process. The forms eliminate the corporate questions and many of the business questions from the individual forms. They remove the individual and consumer questions from the non-individual versions. Each version removes inapplicable verification sections. The non-individual forms parallel how businesses actually keep their financial records.

Readability. The forms will make it easier for attorneys to notice mistakes and omissions. They will be far easier for debtors to proof-read meaningfully. As a result, debtors can take a bigger role in identifying wrong answers and alerting the attorney.

The forms will reduce the burden on court personnel. Better understanding by debtors and attorneys will mean fewer wrong answers. That will help panel trustees, standing trustees, United States Trustee staff, court clerk staff, and judges and chambers staff. The biggest benefit will occur in pro se cases. The work product will also improve in cases filed by attorneys who rely heavily on forms filled out by clients. The forms may also help some debtors avoid nasty post-petition surprises by educating them not to file their cases to begin with.

Concerns. The new forms are longer, which will mean more printer ink. It will also mean longer sessions for clients to read and sign. Debtors’ attorneys may need to send schedules home with the clients to read overnight. By replacing narrative blanks with short blanks and checkboxes, the forms will make it harder for attorneys to explain and qualify answers, which will necessitate attachment pages. Checkboxes and multiple choices will prevent leaving answers blank, even if answered in another column. How to answer “unknown” is unknown. The revisions will make pro se filing more attractive; in fact sometimes it feels like that is the point.

Attorney Added Value. The new forms have eliminated some of debtors’ attorneys’ value. The forms explain questions to debtors, use plain wording, give examples, ask questions in multiple ways, and in effect cross-examine the debtor, making it harder for him to hide facts and double-talk answers. Our remaining added value lies in what have always been our most valuable services. We make sure that our issue-spotting is systematic instead of random. We conduct thorough and multiple client interviews. We examine extensive documents. We have judgment and experience to apply to decision-making. We do not let marketing considerations get in the way of warning clients about dangers. We manage our clients’ anxiety by being sympathetic, by explaining the process thoroughly, and by letting our experience give them confidence.

Whether to Use as Intake Forms. The forms are so readable that they might be used as intake forms, especially if accompanied by the new official instructions. However, the length will intimidate most debtors. Also, a debtor filling out by hand would miss the benefit of blanks that cross-populate forms. Those of us who have been resisting our preparation software’s online client-input service, on grounds of it being too self-service, may have to consider it for more sophisticated clients.

Alteration. Rule 9009 provides: “Except as otherwise provided in Rule 3016(d), the Official Forms prescribed by the Judicial Conference of the United States shall be observed and used with alterations as may be appropriate.” If Rule 9009 were amended to restrict alteration, that would end the practice of photo-shopping forms as a last resort to express an exception or explanation that refuses to fit in the blanks.

Bankruptcy Information Sheet Form 2010. This is the form given pursuant to 11 U.S.C. Sec. 342(b). It is expanded and is now actually informative to clients. Exceptions to discharge are clearly listed. The perjury warning is happily conspicuous. This is normally delivered to the client in the first attorney meeting, so it must be revise immediately.

Voluntary Petition for Individuals Form 101. The form separates first, middle, and last names. It specifies “write the name on your driver’s license”. Instead of “venue”, it asks “Why are you choosing this district?” It reminds debtor to bring a picture ID to the meeting with the trustee. It calls the meeting of creditors a “meeting with trustee”, which reduces anxiety. There are conspicuous check boxes such as, “I have not used any business names.” There are questions about hazardous property and situations requiring immediate attention. More details are collected regarding related cases. A debtor who checks the small business debtor/chapter 11 box must attach recent financial statements. Exhibits A, C, and D are now part of the Petition, not separate. Finally we can explain that debts are not primarily consumer but not primarily business either (e.g. tax) .

Eviction Judgments Forms 101A and B. These forms use far more words and questions to explain a confusing multi-level procedure that formerly was initiated by the debtor checking a short statement in the Petition. Filers (often pro se) are informed what they are getting into by checking the box, which presumably will discourage frivolous cases and benefit landlords.

Real and Personal Property Form 106A/B. Schedules A and B are combined into 7 categories that are intended to be more familiar to non-lawyers: real estate, vehicles, personal household items, financial assets, business-related property, farm and commercial fishing-related property, and other. Sub-categories and examples guard against omissions. However, short blanks and checkboxes do not leave room for legal descriptions, much less for explaining the basis of valuations (cf. non-individual Form 206, which asks valuation basis). If a debtor attorney needs to explain that a property was awarded to her former spouse in a divorce case but is being scheduled because she has not yet signed a quit-claim deed, then she will have to attach an explanation page. The form now asks vehicle mileages, but an approximation is allowed. Full value is separated from the value of the portion that the debtor owns.

The new property forms still miss some examples. The United States Trustee’s office asks us not to forget bitcoins, Pay Pal accounts, and gift cards.

Exemptions Form 106C. The form explicitly states the federal homestead exemption cap. It also describes the 1215-day exception. It provides checkboxes for 100% or stated amount, in accordance with Schwab vs. Reilly.

Secured Claims Form 106D. Questions about which debtor or both are liable, contingent or not, disputed or not, etc., are now checkboxes, so debtors’ attorneys accustomed to not answering those questions in routine cases will have to start. “Others to be notified”, such as attorneys and collection agencies, are separated into Part 2. Part 2 requires each collector to be matched with its creditor. This requirement will mean extra work for debtors’ attorneys but will benefit trustees, who must screen proofs of claim for duplicates.

Unsecured Claims Form 106E/F. As mentioned, this form combines priority and general unsecured debts. It provides a checkbox for whether a claim relates to a community debt. Like the secured debt schedule, it contains a separate Part 2 for collectors.

Executory Contracts and Unexpired Leases Form 106G. The new form omits some details that were required by its predecessor.

Co-Debtors Form 106 H. The form asks about community property, which will raise debtors’ attorneys’ awareness of issues that could arise when former spouses are liable on debtor’s debts by operation of law. Unfortunately, it does not call specific attention to debts incurred in Oklahoma by current or former spouses for necessities under 43 O.S. Section 209.1, so debtors’ attorneys need to probe for those during intake.

Expenses for Separated Debtor Form 106J-2. This new form will be used if debtors 1 and 2 have separate households. If debtors 1 and 2 have common dependents, they should report them on both J-1 and J-2. We are instructed not repeat on J-2 expenses that are reported on J-1. Income and expense schedules have their own declaration page. J-1 and J-2 ask whether each dependent lives with you.

Statement of Financial Affairs Form 107. The checkboxes and short blanks create challenges to giving full and accurate descriptions. However, Debtors no longer have to guess that “past 2 years” means “this year and the two full previous years”. Previous address information moves to the beginning. Part 3 asks whether the debts are primarily consumer, which will be a trap in non-consumer chapter 7 cases if the software does not automatically coordinate that with the Petition. Part 7 clarifies that payments on debts guaranteed or cosigned by an insider must be reported. Part 8 asks about storage units. Part 11 reduces from 6 to 4 years the period for reporting businesses. “What-for” checkboxes are provided for preference payments. There is a “reason for payment” blank for insider preferences. Addresses are required for courts in which actions are pending (more busywork). It is unknown whether date blanks will allow approximate date. The form eliminates the instruction that a married chapter 12 or 13 debtor must include answers as to her non-filing spouse. The gift threshold is changed to $600 per person and the gift look-back period is reduced from 2 years to 1. There are fewer business questions on this form, because the ones pertaining to non-individual debtors (such as withdrawals by officers) are eliminated.

Statement of Intention Form 108. 4 creditors now fit on the first page, so the form will often be one page only, as was the case when the form originally appeared. The form instructs debtors to send a copy of the form to all creditors and lessors listed on the form.

Voluntary Petition for Non-Individuals Form 201. This form requests the debtor’s website. References to Exhibits B, C, and D are eliminated, because they do not pertain to non-individuals. Questions that would pertain only to individuals are eliminated, such as the option of chapter 13, whether debts are primarily consumer, and references to spouse. Property requiring immediate attention asks for more information, such as insurance. The form requires the North American Industry Classification code for the debtor’s type of business; that code is familiar from corporate tax returns.

Property Form 206A/B. The form is divided into 11 parts. The parts are cash and cash equivalents, prepayments, accounts receivable, investments, inventory, farming and fishing assets, office furniture, fixtures and equipment, plus collectibles; machinery, equipment and vehicles; real property, general intangibles, and all other property. As mentioned, the form is designed to parallel how businesses actually keep their financial records.

Form 206A/B requires more details. Receivables are divided into face amount, doubtful and uncollectible. Inventory is divided into finished goods, raw material, and work in progress. The form asks whether property was purchased within 20 days, which is relevant to creditors’ reclamation rights. It asks for collectibles, including antiques and artwork. It asks for intangibles including websites and licenses. With regard to real estate, it asks the valuation method. The form asks about appraisals within 1 year. Depreciation and amortization schedules are requested; this addition will make it harder for debtors to believe they do not own property that they have depreciated on tax returns.

Secured Debts Form 206D. This form now requests each secured creditor’s website, email address, and lien priority.

Executory Contracts Form 206G. The form requests government contract number and term remaining.

SOFA Form 207. There are more questions about healthcare businesses. Freeing up the form from individual debtors, particularly consumer debtors, allows it to ask for more information.

Notice of Bankruptcy Case Forms 309A through I. This form contains similar information to the “341 notice” with which we are familiar, bit it is more spread out, and its formatting is completely different. Information is stated more clearly. A creditor unfamiliar with bankruptcy fundamentals will be more likely to notice and comprehend the automatic stay, procedures, and deadlines.

Notice of Final Cure Payment and Response of Creditor Forms 4100N and 4100R. These chapter 13 forms implement Rule 3002.1(f) and (g). They were effective in October 2015.

Chapter 11 Forms Not Changing. Chapter 11 Order and Notice for Hearing on Disclosure Statement, Order approving Disclosure Statement and Fixing time for Acceptance or Rejections, Ballot, Order Confirming Plan (Forms 312, 313, 314,315) were changed only as to numbering and style. According to the U.S. Courts website, Forms 25A (small business plan of reorganization), 25B (small business disclosure statement, 25C (small business monthly operating report, and 26 (report re entities in which estate holds an interest) are not changing this year but will likely do so in December, 2016 or later.

Other Forms Not Changing. The same is true of Forms 20A (notice of motion or objection) and 20B (notice of objection to claim).

Grace Period. This information will be out of date by the date it is presented. As of November 24, the situation in the Northern District is as follows: The judges will make the final call as we cross the December 1 threshold. If someone uses an old form after December 1, the clerk’s office will send out a standard notice for the first 30 days saying that they should use the new forms. After 30 days, the clerk’s office will issue deficiencies. If a new form is not used after the 30 days and a deficiency is not cured, the clerk’s office will let the judge know. If the judge wants the new form filed, there will be additional action; if not, there will probably be no action taken. The judges’ focus is to make sure that they have the information needed for the case to proceed. They could never force a new form or could require it on December 2, depending on the form, the information, etc.

Internet Links. The Official Forms with Committee Notes in one large .pdf are available at http://www.uscourts.gov/file/18166/download. A forms number conversion chart is available at http://www.uscourts.gov/file/18167/download. The individual instructions are available at www.uscourts.gov/file/18169/download. The non-individual instructions are available at www.uscourts.gov/file/18168/download. Single new forms can be reached by browsing to http://www.uscourts.gov/forms/bankruptcy-forms, then clicking on the old form, then clicking on the notification that effective December 1, 2015, this form is replaced by [new form number], and then downloading the new form from the resulting page. More direct access to single new forms will likely be installed by the time this paper is presented on December 3, 2015.

 

Unscheduled Debts in Bankruptcy

Unscheduled Debts in Bankruptcy

11 U.S.C. Section 523 provides an exception to discharge for a debt:

(3) neither listed nor scheduled under section 521(a)(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit—
(A)
if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for such timely filing; or
(B)
if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim and timely request for a determination of dis¬chargeability of such debt under one of such paragraphs, unless such creditor had notice or actual knowledge of the case in time for such timely filing and request;

In a chapter 7 bankruptcy case, a debtor’s failure to list a debt on the schedules does not prevent it from being discharged, unless (1) a deadline was set for creditors to file proofs of claim and the creditor did not have actual knowledge of the bankruptcy case in time to file a proof of claim by the deadline or (2) the creditor had grounds (for example fraud) to object to the dischargeability of the debt and did not have actual knowledge of the bankruptcy case in time to file the objection by the deadline to do so. Whether the creditor was listed in the schedules or received formal notice of the bankruptcy is not the determining factor. In re Cerrudo, 214 B.R. 500 (Bkcy.N.Dist .Okl. 1997).

The rationale of the Cerrudo holding is that, in a chapter 7 bankruptcy case, no deadline is initially set for creditors to file proofs of claim, and, unless a deadline is later set at the request of the trustee because he has decided to administer some assets, no deadline is ever set. Therefore, in a “no-asset” chapter 7 case, it never becomes too late for a creditor to file a “timely” proof of claim.

The Cerrudo decision holds that a bankruptcy court therefore will not reopen a chapter 7 bankruptcy case for the purpose of amending the schedules to add a debt. Whether the debt is scheduled is not relevant.

The result would be different in a chapter 13 case, because a deadline to file proofs of claim is set at the beginning of every chapter 13 case. In a chapter 13 case, if the creditor does not have actual knowledge of the bankruptcy case in time to file a timely proof of claim, then the debt is excluded from the discharge.

The “actual knowledge of the case” required by Section 523(a)(3)(B) does not require actual receipt of the official bankruptcy notice, and it does not require knowledge of the deadline to file. The key word is “case”. Actual knowledge that the debtor has filed bankruptcy is all that this section requires, as long as the knowledge is received in time for the creditor to have a chance to check the bankruptcy court for deadlines and to file a dischargeability objection within the deadline. In re Walker, 927 F.2d 1138, 1144-45 (10th Cir. 1991).

Creditors who prove that they did not receive timely knowledge of the bankruptcy case under 11 U.S.C. Section 523(a)(3)(B) do not receive an automatic exception to discharge; rather, they receive an opportunity to file their objection to dischargeability after the original deadline. In re Schicke, 290 B.R. 792, 799 (10th Circuit B.A.P. 2003).

Effect of Closing of Bankruptcy Case

Effect of Closing of Bankruptcy Case

When a bankruptcy case is finished, the court enters a Final Decree stating that the case is closed. In the U.S. Bankruptcy Court for the Northern District of Oklahoma, the Final Decree is not a document; it is just words on the court’s docket sheet.

After the case is closed, nothing more will happen in the case. It is officially ended.

That order is different from the “discharge” order that the debtor received earlier, which stated that his dischargeable debts were discharged (wiped out).

The closing of the case means that the trustee has finished his work in the case. In bankruptcy jargon, the case has been “fully administered.” 11 U.S.C. Section 350. If the trustee sold any of the debtor’s assets, then he filed a report explaining how he distributed the money, and the court approved the report. If he did not sell any assets, then he filed a “no-asset” report.

Unless the court orders otherwise, the closing of the case causes all assets that the debtor listed on his bankruptcy schedules to revert to being owned by the debtor, even if those assets were not scheduled as “exempt”. 11 U.S.C. Section 554(c). For example, if the debtor owned an old boat and listed it on the schedules and the trustee did not sell it even though he had a right to do so, then the debtor now owns it again and is free to do with it as he pleases.

Very occasionally, bankruptcy cases have to be “reopened”.  Bankruptcy Rule 5010. The most common reason for reopening is that the debtor failed to list an asset in the bankruptcy schedules. The most common asset that a debtor omits is real estate that someone (usually parents) had deeded into the debtor’s name before the bankruptcy was filed without telling the debtor.

If the debtor later discovers a debt that he forgot to list in his bankruptcy schedules, that does not mean that his bankruptcy case will be reopened. If he discover such a debt, he should immediately contact his attorney to discuss what needs to be done. In some situations, he will be stuck with the omitted debt. In most situations, he will not be, although he might need some minor legal services to convince the creditor.

 

Social Security Benefits Held in Bank Accounts are Exempt

Social Security Benefits Held in Bank Accounts are Exempt from Creditors and Bankruptcy Estate

In Finberg vs. Sullivan, 634 F.2d 50 (3rd Cir. 1980), the Court of Appeals for the Third Circuit held,  “The money in these accounts was entirely exempt from attachment and garnishment. The Social Security Act provides an exemption for moneys paid as benefits. 42 U.S.C. § 407 (1976). See Philpott v. Essex County Welfare Board, 409 U.S. 413, 93 S.Ct. 590, 34 L.Ed.2d 608 (1973) (exemption protects benefits held in checking and savings accounts).”

SSA Cannot Offset Social Security Benefits to Recoup Overpayment Debt Discharged in Bankruptcy

SSA Cannot Offset Social Security Benefits to Recoup Overpayment Debt Discharged in Bankruptcy

When the Social Security Administration discovers that it has overpaid benefits, it is required to offset future benefits to recoup the overpayment. An interesting question is whether this situation is in the nature of a debt, which would mean that it is dischargeable in bankruptcy, or whether the reduction is simply part of the definition of future benefits.

The Court of Appeals for the Seventh Circuit answered this question in In re Neavear, 674 F.2d 1201 (7th Cir. 1982). The 2013 opinion of the United States Bankruptcy Court for the Southern District of Illinois in Zimmerman vs. Social Security Administration (In re Zimmerman), Case No. 11-41386, Adversary No. 12-4076, describes the Neavear decision as follows:

In that case, the debtor received disability benefits for approximately eleven years without informing SSA that during the latter three years, he was self employed as a real estate broker. When he later became disabled and entitled to receive benefits again, SSA commenced a proceeding to offset the earlier payments (that were improperly received) against Neavear’s future benefits. An administrative law judge found that Neavear had been overpaid $19,818.10 in disability benefits, and that his future benefits must be reduced in satisfaction of the overpayment debt. The debtor subsequently filed a chapter 7 bankruptcy proceeding, listing on his schedule of debts a $19,818.10 overpayment debt owed to SSA. After receiving a discharge, SSA continued to reduce his disability benefits in an attempt to recover the debt. Neavear filed a complaint in the bankruptcy court seeking a declaration that the overpayment debt had been discharged.

The issue in Neavear was “whether § 207 of the Social Security Act, 42 U.S.C. § 407 (1976), confers on the Social Security Administration … a blanket exemption from the operation of the bankruptcy laws, so that a debt owing to the SSA because of an overpayment of benefits cannot be discharged in bankruptcy.” Id. The court held that “SSA enjoys no such immunity from the bankruptcy laws and that the overpayment debt is dischargeable….” Id.

The Court of Appeals for the Third Circuit addressed the issue in Lee v. Schweiker, 739 F.2d 870 (3d Cir. 1984). It held:

We conclude that, in spite of statutory or contractual provisions providing for “recoupment” of previous overpayments, the primary purpose of these [social-welfare] statutes is to provide income security to the recipients. Once a bankruptcy petition is filed, the income provided by Social Security benefits should be protected by the automatic stay. The right of SSA to recover pre-petition debts should be subject to the limitations on setoff, just as it is limited by the provisions for exemption and discharge, In re Neavear, 674 F.2d 1201 (7th Cir. 1982), rather than treated as part of a “contract” between the government and the debtor. Accordingly, we hold that SSA may not recoup previous overpayments from benefits payable after a bankruptcy petition is filed.

Based on these authorities, it appears that the Social Security Administration cannot offset post-petition social security benefits to recoup pre-petition overpayments.

An obvious exception to this rule would exist when the debtor does not receive a discharge or when the Social Security Administration files and prevails in an adversary proceeding under 11 U.S.C. Section 523(a) to determine that the overpayment resulted from the debtor’s fraud.

Another exception, or more accurately distinguishable situation, was identified in the Zimmerman opinion cited above. There, the debtor had received a lump-sum workers compensation settlement pre-petition. The Social Security Act requires the Social Security Administration to allocate a lump-sum workers compensation benefit across a longer period of time and to reduce future social security benefits until that time elapses. The Social Security Administration continued that reduction after the debtor filed bankruptcy, and the debtor sued for violations of the automatic stay and discharge injunction. The court, granting summary judgment for the Social Security Administration, acknowledged that any pre-petition obligation to the SSA was discharged but held that the reduction was part of the formula defining future benefits and was not affected by the discharge.

Chapter 7 Debtor Cannot Strip Underwater Second Homestead Mortgage

Chapter 7 Debtor Cannot Strip Underwater Second Homestead Mortgage

On June 1, 2015, the United States Supreme Court delivered its decision in Bank of America, N.A. vs. Caulkett . The decision was unanimous. The Court held that a chapter 7 debtor cannot utilize Section 506(d) of the U.S. Bankruptcy Code to avoid (“strip”) a second mortgage from his homestead even when the value of the homestead is less than the balance of the first mortgage, i.e., when the second mortgage is, in the vernacular, “entirely underwater”. The Court stated that Section 1322(b)(2) of the Bankruptcy Code might allow a different result in a chapter 13 case.

Chapter 13 and Divorce: When Does Automatic Stay Terminate as to Property Division

Chapter 13 Bankruptcy and Divorce: When Does Automatic Stay Terminate as to Property Division

Most chapter 13 bankruptcy plans last five years. That is time for major changes to happen in a debtor’s personal life, including divorce. The pendency of a chapter 13 case interferes with filing and maintaining a divorce case. In that situation, some debtors dismiss their chapter 13 cases, and some file motions to terminate the bankruptcy interference. Others choose to wait until the interference terminates towards the end of the bankruptcy case. For those debtors, it is important to know exactly when the interference, in the form of the “automatic stay”, ends. Answering that question requires the examination and coordination of many authorities.

Automatic Stay. 11 U.S.C. Section 362(a) provides: “Except as provided in subsection (b) of this section, a petition filed under section 301, 302 or 303 of this title [a bankruptcy petition] operates as a stay, applicable to all entities”. This section prohibits acts against the debtor, against the property (assets) of the debtor, and against property (assets) of the bankruptcy estate.

An order of a divorce court awarding possession or ownership of property involved in the bankruptcy, or a petition or motion requesting such an order, would be within the purview of Section 362(a).

Property. Property for bankruptcy purposes includes (1) all property owned by the debtor when he filed bankruptcy, (2) certain inheritances and other property acquired by the debtor due to a death occurring within 180 days after he filed his bankruptcy (11 U.S.C. Section 541(a)(5), all property that the debtor acquires before his chapter 13 case is closed (11 U.S.C. Section 1306(a)(1), and (3) debtor’s personal services earnings during his chapter 13 case. A few other things are included as assets in special situations that are not discussed here, for example conversion of cases from one chapter to another.

Assets are either “property of the estate” (meaning the bankruptcy estate) or “property of the debtor”.

Property of the Debtor. Property of the debtor includes (1) assets that are “exempt”, such as household furnishings, clothing, some vehicles, etc., (there are many categories of exempt assets), (2) assets that have been “abandoned” (which is explained below), even if they were once property of the estate, and (3) once the bankruptcy court enters an order of discharge (which wipes out debts), all assets, even if they were property of the estate. The last of these items is demonstrated in detail below.

Property of the Estate. Property of the estate is all property (as defined above) that is not property of the debtor.

Abandonment. Abandonment is the event of property of the bankruptcy estate reverting to being property of the debtor. An asset is abandoned when (1) a creditor (usually a mortgagee needing to foreclose or a vehicle lienholder needing to repossess) has filed a motion and the bankruptcy court has entered an order abandoning the asset (11 U.S.C. Section 554(b), (2) the trustee assigned to the bankruptcy case has filed a motion and the bankruptcy court has entered an order abandoning the asset (often a business or high-maintenance asset that is burdensome) (11 U.S.C. Section 554(a), (3) the debtor has listed the asset in the schedules filed in his bankruptcy and the bankruptcy case has been closed (11  U.S.C. Section 554(c)), (4) the debtor or his spouse, wanting to act against the asset in a divorce case before the bankruptcy law normally allows it, has filed a motion and the bankruptcy court has entered an order abandoning the asset (11 U .S.C. Section 554(b).

Termination of the Automatic Stay. Termination of the automatic stay occurs automatically in some special situations, e.g. when a chapter 7 debtor delays reaffirming a secured debt and when a previous chapter 13 case of a chapter 13 debtor has been dismissed too recently.

More commonly, termination of the automatic stay occurs when a party files a motion and the court enters an order granting relief from the automatic stay regarding an asset. Such a motion is normally utilized by a creditor to allow mortgage foreclosure or vehicle repossession. However, if a debtor or his spouse cannot wait to proceed with divorce until the automatic stay terminates automatically, one of them can file a motion for relief from the automatic stay in the bankruptcy court in order to obtain permission for a divorce court to award possession or ownership of assets.

Termination of the Automatic as to Property of the Debtor. As to property of the debtor (as opposed to property of the estate – see the definition above), the automatic stay terminates automatically when the court enters the discharge order (the order wiping out debt), even if the case has not yet been closed. 11 U.S.C. Section 362(c) provides,  “(1) [T]he stay of an act against property of the estate continues until such property is no longer property of the estate; (2) the stay of any other act under [Section 362(a)] continues until the earliest of – . . . (C) if the case is a case under chapter 7 of this title concerning an individual or a case under chapter 9, 11, or 13 of this title, the time a discharge is granted or denied”.  An act against property of the debtor, as stated earlier, is an act under Section 362(a), and it is an act that is other than an act against property of the estate. Therefore, the automatic stay as to acts against property of the debtor terminates upon the entry of discharge.

Termination of the Automatic Stay as to Property of the Estate. As to property of the estate (as opposed to property of the debtor), it is more complicated to determine when the automatic stay terminates automatically. It is necessary to examine several authorities and to tie them together.

11 U.S.C. Section 362(c)(1) provides that “the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate”. This means that the stay terminates as to property of the estate when the property ceases to be property of the estate.

11 U.S.C. Section 1327(b) states, “Except as otherwise provided in the plan or the order confirming the plan, the confirmation of the plan vests all the property of the estate in the debtor”.

The standard plan confirmation order in a Northern District of Oklahoma chapter 13 case (other districts are beyond the scope of this memorandum) provides that property of the estate does not vest in the debtor until discharge is entered:  “Notwithstanding confirmation of the Plan, all property of the estate defined by 11 U.S.C. Section 1306 shall remain property of the estate and shall not revest in the Debtor until a discharge is entered or the case is dismissed.”

11 U.S.C. Section 1306(b) states, “Except as provided in a confirmed plan or order confirming a plan, the debtor shall remain in possession of all property of the estate.” My belief is that the drafters of the standard confirmation order probably intended to refer to Section 1327(b) instead of Section 1306, but, whether or not that is true, it is clear that the order means that the debtors do not recover ownership of property of the estate until the discharge is entered.

When all of these provisions are connected, it becomes apparent when it is that the automatic stay terminates regarding property of the estate.  The automatic stay terminates as to property of the estate when it ceases being property of the estate. It ceases being property of the estate when it vests in the debtor. It revests in the debtor when the discharge is entered in a chapter 13 case. Therefore, the automatic stay terminates as to property of the estate when the discharge is entered in a chapter 13 case.

Conclusion. As demonstrated, the automatic stay terminates both as to property of the debtor and as to property of the estate when the discharge is entered in a chapter 13 case. Therefore, when the discharge is entered in a chapter 13 case, the automatic stay ceases to prohibit a divorce court from entering, or a party from filing a motion or petition requesting, an order awarding possession or ownership of any assets of the bankruptcy debtor.