Chapter 13 – Page 9 – Rochester Bankruptcy and Debt Relief

Chapter 7 and 13 Bankruptcy and Inheritances

When a debtor files for bankruptcy under Chapter 7 or Chapter 13, all of the debtor’s assets pass under control of the bankruptcy trustee. The reason for this transfer of control is so the debtor will be able to discharge their debts and receive the benefit of automatic stay. As I discussed previously, once a bankruptcy is filed, a bankruptcy estate is created by operation of the Bankruptcy Code which states that the bankruptcy estate is “comprised of all the following property, wherever located and by whomever held: (1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1) (2008). Under the definition of the property of the estate, it also includes any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date. This particular provision dealing with assets acquired within 180 days addresses inheritances and bequests. Therefore, if the debtor receives an inheritance, or a bequest, within 180 days of the filing for bankruptcy, that inheritance or bequest, become property of the bankruptcy estate.

Since a typical Chapter 7 or Chapter 13 bankruptcy runs its course within less than 180 days, a bequest or an inheritance may come within 180 days of the filing, but after the debtor receives his or her discharge or a confirmed plan. Under those circumstances, the debtor has an absolute obligation to notify the bankruptcy trustee of the bequest or inheritance. Once the money is actually received, the debtor must turn over the funds to the trustee. Here in Rochester, Chapter 7 and 13 trustee specifically tell debtors during 341 meetings that any inheritance or bequest received within 180 days of the filing must be disclosed to the bankruptcy trustee. While most of the time, debtors can protect their personal or real property through the use of exemptions and pre-filing planning, inheritances or bequests do not provide this opportunity.

If you are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a bankruptcy lawyer.

Bankruptcy and Utility Bills

In many bankruptcy cases, the debtors are not just behind on their mortgages, credit cards and other debt, but also behind on their utilities, including gas and electric, cable and telephone bills. If the debtor is filing a Chapter 13 bankruptcy, the remedy is simple – any outstanding bills incurred prior to the filing, will be paid over the term of the plan. Things are less simple in Chapter 7 bankruptcy.

The utility company cannot shut off bankruptcy debtors’ utilities services if there are outstanding debts owed prior to the bankruptcy filing since that would violate automatic stay. In most circumstances, the services will continue, but the utility may request a security deposit. If the utility company turned off service prior to the bankruptcy filing, the debtor should provide proof of filing to the utility and request that the services be turned back on. The utility company must turn the debtor’s utilities back on since it is obligated to do so under the state law. Here is Rochester, before doing so, companies may require bankruptcy debtors to submit an initial deposit.

If the debtor fails to pay utility bills that come due after the filing, the utility provider generally can terminate service for nonpayment of post-petition utility bills. This applies to both Chapter 7 and Chapter 13 bankruptcies.

Refiling Chapter 13 Bankruptcy After Dismissal

As I have previously written, Chapter 13 bankruptcies involve many different issues. Once thing that bankruptcy lawyers point out to all debtors entering Chapter 13 bankruptcy is that the debtor has to make payments to the trustee, prior to the confirmation of the plan, and, of course, after the plan is confirmed. Sometimes, the debtor is unable to make payments, and, rather than asking his/her bankruptcy attorney to seek modification of the plan, does nothing. Under those circumstances, the Chapter 13 bankruptcy trustee will move to have the bankruptcy dismissed. Once the motion to dismiss is granted, and creditors resume collections activities, such as foreclosure, can the debtor refile?

The debtor can refile Chapter 13 bankruptcy, if it has been dismissed, at any time. However, changes to the Bankruptcy Code that were in Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) can limit the relief that the debtor receives when he/she refiles. If the Chapter 13 bankruptcy is refiled within one year of the dismissal, the automatic stay is in effect only for 30 days. This is a critical difference between a refiled Chapter 13 bankruptcy and the original filing. It means that within 30 days of the filing, the debtor’s attorney must file a motion in bankruptcy court seeking to extend the automatic stay. If the motion is not made, or granted by the bankruptcy court, creditors can resume collection activity.

In general, before a motion to dismiss is filed, or granted, the debtor should contact his/her bankruptcy lawyer to discuss all available options, including converting Chapter 13 to Chapter 7 bankruptcy, or amending the plan.

Confirmation Hearing in Chapter 13 Bankruptcy

As I have previously written about the procedural steps involved in a Chapter 13 bankruptcy, once the debtor attends 341 hearing, and the bankruptcy plan is filed, the next important event is the confirmation hearing.

The date set for the confirmation of Chapter 13 plans varies depending on where the case is filed. Here in Rochester, the date for the confirmation hearing is typically set between 30 and 60 days after the 341 hearing. The debtor(s) is required to attend it as the proposed plan is reviewied by the court and Chapter 13 Trustee. If the debtor fails to appear for the hearing, the judge can prevent or delay the confirmation. In other Courts, such as those in the Northern District of New York, confirmation hearings are usually scheduled approximately 60 days after the proposed Chapter 13 plan is filed with the Court.

Unlike other jurisdictions, here in Rochester, Judge Ninfo reviews each Chapter 13 bankruptcy case and the circumstances that led the debtor to file for bankruptcy. In addition, Judge Ninfo requires that a debtor file a checklist specifying the reasons that led to the filing. In addition, if the amount of unsecured debt exceeds $75,000, the debtor will be also required to file with the court a detailed letter of explanation, describing how the debt was accumulated. Also, approximately one week before the hearing, the Chapter 13 Trustee will file his report analyzing the case and either recommending confirmation of the plan or giving reasons why confirmation should be denied.

In cases where an objection to confirmation is filed, a confirmation hearing is held on the scheduled date and the objecting party, or its attorney, typically attends. The views of the debtor’s attorney, the objecting parties’ attorney and the Trustee are heard by the judge, who either confirms the plan, denies confirmation, or sets an evidentiary hearing on the disputed matter (which could be a valuation issue, a bad faith objection, a disposable income objection, etc.). Often the confirmation hearing is simply adjourned to allow the parties some time to try to resolve their differences.

The confirmation hearing is the critical step in any Chapter 13 bankruptcy. It is the responsibility of the bankruptcy lawyer to present a plan that not only protects his/her client(s) interests by making the payments manageable, but also to make sure that the plan will be confirmed by the court. That usually involves analyzing the parties’ income and expenses, and make certain that the budget is not excessive or has any frivolous expenses.

Converting From Chapter 7 to Chapter 13 Bankruptcy

What happens if you’re in a Chapter 7 bankruptcy, and fall behind in your payments on secured loan, such as your home mortgage or car loan? Under those circumstances, it is possible to covert to Chapter 13 bankruptcy where you can make payments though the plan and to stop a foreclosure or car repossession. While it is not as simple as it is to convert from a Chapter 13 bankruptcy to a Chapter 7 bankruptcy, it can be done by filing a motion with the court and placing your creditors on notice.

The bankruptcy court will require a good reason for granting your motion, and if one is provided, the court will convert the case. There are rules about converting for “bad faith” or if you have already converted the case before, but generally, requests for conversions are granted. Once the motion is granted, your bankruptcy lawyer can file a Chapter 13 plan which will allow you to cure any arrears and to give you time to repay house or car payments, and stop the foreclosure or repossession.

Similarly to converting from Chapter 13 to Chapter 7 bankruptcy, your petition will need to be updated. Also, some of the debts might be treated differently in Chapter 13. You will need to prepare a plan, and there will be a new trustee appointed and a new 341 hearing held. Eventually, your plan will need to be confirmed by the court. Overall, the process isn’t too difficult and you are likely to be able to save your home or car. For many debtors, the benefits of converting their case are worth it. A bankruptcy attorney will be able to guide you through the process.

Converting From Chapter 13 to Chapter 7 Bankruptcy

While debtors who file Chapter 13 to protect certain assets are usually diligent in making their payments, sometimes the circumstances have a way of interfering with their ability to meet the plan’s requirements. It is possible that the debtor loses his/her job, missed a few payments, and creditors lifted stay, or the debtor decided that the assets were not worth preserving. One option that is always available in Chapter 13 is to dismiss the case, which the debtor has a right to do at any time in a Chapter 13. But this may leave you with credit card or other debt, or you may be worried that the house or car will be sold at foreclosure or repossession, or that the lender will go after you for a deficiency. In these cases, the best option is to covert your case to a Chapter 7.

In those situations, the debtor may still seek relief from the bankruptcy court, and convert the case from Chapter 13 to Chapter 7 bankruptcy, provided that the means test can be met. When converting the case from a Chapter 13 to a Chapter 7, there is still some paperwork that needs to be taken care of. The petition and schedules need to be updated with respect to the property, whether or not it is kept by the debtor. With respect to any property securing the debt, arrangements must be made with the creditor in order to keep it.

Schedules I and J for your income and budget along with the Means Test have to be updated to reflect that you no longer have the money to make payments in a Chapter 13 case . Once all of the paperwork has been revised, then the debtor must sign the amended schedules, so that they can be filed with the court.

Once the attorney files a Notice of Conversion with the Court and pays the $25 conversion fee, the Court will convert your case to a Chapter 7. There are also other consequences associated with the conversion. Initially, any money that the Chapter 13 Trustee is holding, less any administrative fees that the Trustee is due, will be returned to to the debtor. Any plan payments that are withheld from the debtor’s paycheck will be returned as well. A new Chapter 7 Trustee will be appointed and a new 341 hearing (meeting of the creditors) will be held. The debtor will also have to file a Statement of Intention with respect to any assets subject to creditors’ claims, and also file amended schedules listing any additional debt incurred between the filing of the Chapter 13 and the date of conversion.

Debtor and Bank’s Right of Setoff

One of the common issues that may arise in a bankruptcy, is that the debtor may have one or more accounts at a bank to which the debtor owes money. In those situations, the bank may assert its right of setoff.

The right of setoff in New York is available to a lending institution pursuant to Section 9-g of the Banking Law. Under that section, banking institutions have a long established right of setoff where a borrower is indebted to the institution and also has money on deposit with the institution. This right of setoff is preserved in bankruptcy by Section 553(a), which provides that,

“Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case[.]”

At a first glance, the setoff appears to require a motion to lift the automatic stay since Section 362(a)(7) specifically covers “the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor[.]”. Thus, under the statute, in order to exercise that right, the bank must make a motion to lift automatic stay. However, here in Rochester, in In re Catalano, Judge Ninfo has ruled that under some circumstances, the bankruptcy court will not require the motion to lift stay and set the following policy.

If a banking institution has a clear right of setoff under New York law and the debtor has funds on deposit with it in the amount of $750.00 or less, and also owes the institution a debt in excess of the funds on deposit, the institution may setoff the amount on deposit without obtaining formal relief from the automatic stay, provided that it gives the written notice described herein, and the trustee or debtor does not demand a hearing because there is a genuine dispute as to the asserted right of setoff.

As stated in the decision, the banking institution shall give written notice to the trustee, debtor and debtor’s attorney, if there is one, that: (1) asserts its right of setoff; (2) is accompanied by copies of the debtor’s schedules or other documentation that demonstrates the right of setoff; (3) sets forth a “contact person” at the institution, along with that individual’s address, direct telephone number and a fax number; and (4) advises that unless the trustee or debtor has a genuine dispute as to the validity of the asserted right of setoff, it will be effected ten (10) days after the date of the mailing of the notice. In the event that the trustee or debtor notifies the contact person of a genuine dispute as to the asserted right of setoff, the banking institution shall be required to bring a formal motion to terminate the automatic stay under Section 362(d).

This policy makes it extremely important that the debtor fully discloses his/her financial situation to the bankruptcy lawyer and also allow the bankruptcy attorney to engage in prefiling planning to protect the debtor’s assets from the potential right of setoff.

Student Loans Guaranteed By Parent and Bankruptcy

Recently I have been seeing a lot of debtors who have guaranteed their children’s student loans. When I am asked whether I can do something about those loans in Chapter 7 or Chapter 13 bankruptcy, my usual answer is no. The reason for this is that the government guaranteed student loans are not dischargeable in bankruptcy, except in extreme hardship situations, regardless of whether the borrower is the student or the parent who guaranteed the loan. Unfortunately, it is not uncommon for the student to default on the loan. In those situations, the full weight of the loan will have to be carried by the parent who guaranteed the loan. If the parent is already having difficulties paying his/her bills, this may be the final straw to push the debtor into bankruptcy.

When the debtor tells about this situation, I, as a bankruptcy lawyer cannot offer much help. Since the bankruptcy court here in Rochester has taken a position that in Chapter 13 bankruptcy the student loans will be paid, along with other unsecured creditors, pro rata, even a five year repayment plan might not reduce the loan significantly. In Chapter 7, the student loan would not be dischargeable.

As much as it pains me to say it, it is a bad idea for a parent to cosign a government guaranteed student loan. Further, parents guaranteeing the loans of their children face having student loans risk as they approach retirement. If the repayment of the loan is deferred by the student, this will keep the parents exposed to the debt until it is repaid, sometimes decades later. It entwines the two generations financially long after the student is an adult. If the parent is approaching retirement, it is not likely that the parent would have the money to pay off student loans.

Chapter 7 Bankruptcy, Student Loans and Hardship Discharge

Almost everyone who has student loans knows that student loans are not dischargeable in bankruptcy. So why would a debtor meet with a bankruptcy lawyer regarding student loans? There are several good reasons to discuss your particular situation with a bankruptcy lawyer.

Sometimes a bankruptcy, either Chapter 7 or Chapter 13, can eliminate or reduce other debt, freeing up income to make the student loan payments more affordable. A Chapter 13 bankruptcy can pay some, if not all, of the student loan debt. If a Chapter 13 payment plan does not pay the student loans in full, it may be possible to propose a plan that will pay enough to reduce principal and make the debt more manageable. If you have a loan that will be forgiven, a Chapter 13 may help you deal with the payments until you have the opportunity to take advantage of debt forgiveness programs.

There are also provisions which allow a bankruptcy court to determine that the student loan debt creates an undue hardship. Section 523(a)(8) of the bankruptcy code says that student loans cannot be discharged in either chapter 7 or chapter 13, unless repaying the student loans would be an undue hardship on you or your dependents. Unlike some other exceptions to dischargeability, this section contains no deadline for either you or the student loan creditor to bring the matter before the bankruptcy court. Although the courts have interpreted that provisions very narrowly, and it is very difficult to litigate these issues for various reasons, you and your bankruptcy lawyer may be in a position to take advantage of those provisions.

Here in Rochester, Judge Ninfo addressed dischargeability of student loans and the so-called “hardship discharge” in In re Martin, holding that in order to obtain a discharge, the debtor must meet the three-part test established in Brunner v. New York State Higher Education, 831 F.2d 395 (2nd Cir. 1987). This test has been summarized in In re Kraft, 161 B.R. 82 (Bankr. W.D.N.Y. 1993) as:

[A] Debtor seeking to discharge an education loan must show:

1. That the Debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself (and any dependents) if forced to repay the loans;

2. That additional, exceptional circumstances exist, strongly suggestive of continuing inability to repay over an extended period of time, or indicating a likelihood that her current inability will extend for a significant portion of the loan repayment period; and

3. That the Debtor has made good faith efforts to repay the loans.

In Martin, the debtor received a hardship discharge based on the following set of facts: “(1) the Debtor did receive an Associate’s Degree in Liberal Arts from Monroe Community College in May, 1988; (2) since her graduation, the Debtor has been unemployed and for a number of years has been receiving Social Security Disability, Medicaid, food stamps and Section 8 housing assistance; (3) the Debtor is a counseling client of the University of the State of New York/Office of Vocational and Educat ion Services for Individuals with Disabilities (“VESID”) where she has been counseled to set a vocational goal of “homemaker;” (4) the Debtor is in individual therapy at the Steuben County Community Health Center; (5) the Debtor suffers from several ongoing medical problems, including degenerative arthritis in her knees, morbid obesity, chronic asthma, hypoactive thyroidism and fibromyalgia; (6) VESID reports that its evaluation revealed the Debtor suffers from chronic depressive feelings and has suicidal thoughts; (7) the Debtor has no present employment prospects because of her physical and psychological conditions; and (8) there exists no indication of any likely change in the Debtor’s state of affairs.” Thus, a rather extreme set of circumstances must be present in order to receive a bankruptcy discharge. At the same time, each case should be judged on its own merits and carefully evaluated by a bankruptcy lawyer to determine how the debtor could benefit by filing bankruptcy.

Failure to Disclose Assets in Bankruptcy, Confirmation of Chapter 13 Plan and Revocation of Confirmation Order

What happens if the debtors fail to disclose certain assets in their Chapter 13 bankruptcy and those assets come to light after the confirmation of their Chapter 13 plan? This situation was recently addressed by Judge Ninfo of the United States Bankruptcy Court for the Western District of New York in In re Cram.

On March 24, 2004, Richard and Pamela S. Cram filed a petition in Rochester, in the United States Bankruptcy Court for the Western District of New York, initiating a Chapter 13 case. A Chapter 13 trustee was appointed. On their Schedule B of Personal Property, the debtors stated that they had no “[o]ther contingent and unliquidated claims of [any] nature….”. On April 30, 2004, the court orally confirmed their Chapter 13 Plan, and on October 5, 2004 an order confirming the plan was entered.

At the time the bankruptcy was filed, the debtors had a pending medical malpractice claim which resulted a subsequent lawsuit. On June 14, 2005, the debtors’ lawyer filed an amendment to their Schedule B of Personal Property, which amended the answer to question No. 20 regarding contingent and unliquidated claims, but did not amend their Schedule C to claim any proceeds that might be received from the malpractice claim as exempt.

Between June 14, 2005 and April 7, 2008 the debtors or their attorneys did not notify the court of the existence of the pre-petition medical malpractice claim set forth in the amendment, which was a Section 541 asset of the estate at the time the court confirmed their plan, even though in confirming their plan pursuant to Section 1325(a), the court believed that the requirement of Section 1325(a)(4), that the creditors would receive at least as much under the plan that they would in a Chapter 7 liquidation.

Section 1325(a)(4) provides that:

(a) Except as provided in subsection (b), the court shall confirm a plan if—
(4) the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date[.] 11 U.S.C. § 1325 (2009).

This section is known as “the best interests test”.

Once the trustee learned of the settlement, he moved to revoke the discharge, as well as for other relief. He asserted that on April 28, 2008, after the discharge order had been entered on April 7, 2008, the trustee learned that the claim had been settled on or about February 20, 2008 for $125,000 and that neither the debtors, their bankruptcy attorneys nor their personal injury attorney ever notified the trustee of the settlement or any prior settlement offers. The trustee argued, inter alia, that in view of the settlement, the debtors’ confirmed plan did not meet the best interests test.

Unlike in Chapter 7 cases, the court, in confirming a plan in a Chapter 13 case, makes an affirmative determination, as required by Section 1325(a), that, among other things, the plan meets the best interests test. Judge Ninfo held that because of the debtors’ failure to disclose the malpractice claim, which was a Section 541 pre-petition asset of the estate, either at the time of the oral confirmation of their plan or when the confirmation order was entered, the plan did not meet the best interests test, and neither the debtors, nor the trustee, ever corrected that failure by taking the necessary steps to insure that the plan was amended to include the proceeds of any recovery on the malpractice claim, either before or after the settlement. Thus, the confirmation order had to be vacated, and with no confirmed plan completed, the debtors would not be entitled to a Section 1328 discharge and the court vacated the confirmation order pursuant to Section 105(a).

Judge Ninfo further held that when the debtors filed the amendment to include the malpractice claim, they, as debtors, and their bankruptcy attorneys, as officers of the court, had an affirmative obligation to advise the court, not simply the trustee or their creditors, of the undisclosed asset, so that the court would be aware that its confirmation of the plan was improper and its confirmation order incorrectly entered, and could insure that the confirmation order was vacated or a proper modification to the plan filed to include any recovery.

The court further granted trustee’s motion to dismiss the bankruptcy, unless prior to July 6, 2009, the debtors: (a) pay to the trustee the amount necessary for the trustee to make a distribution to their unsecured creditors of 100% plus 9%; or (b) otherwise make arrangements with the trustee for the payment of the necessary amount within a reasonable period of time that is acceptable to the trustee and the trustee files with the court the details of such an acceptable arrangement.

The lesson of this case is that the debtors and their bankruptcy lawyers have an affirmative obligation to disclose any and all assets of the debtors, including any contingent or unliquidated claims. In this case, the consequences to the debtors could have been much more severe.