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Chapter 13 Bankruptcy

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What Happens If The Trustee Moves to Dismiss My Bankruptcy Case?

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Under Chapter 7 bankruptcy law, the court may dismiss your case if it believes that relief is unwarranted based on your financial circumstances. 11 USC § 707(b)(1) reads:

After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, trustee (or bankruptcy administrator, if any), or any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor’s consent, convert such a case to a case under Chapter 11 or 13 of this title, if it finds that the granting of relief would be an abuse of the provisions of this chapter.

If the trustee or the judge moves for dismissal of your case, the court will inquire into your financial situation and choose one of three remedies:

1) you are entitled to Chapter 7 relief;

2) your case does not warrant Chapter 7 relief, but may be converted to a Chapter 13 case; or

3) you are not entitled to any bankruptcy relief.

SEE ALSO: Do I Qualify for chapter 7 bankruptcy in Ohio?

In re West

The case of In re West, 324 BR 45 (S.D. Ohio 2005) provides a nice example of what can happen when a trustee moves to dismiss a case. Here are the facts:

Mr. and Mrs. West earned almost $93,000 per year, or about $5700 monthly. The Wests were having difficulty keeping up with multiple mortgages and car payments and a luxurious lifestyle, so they filed for Chapter 7 bankruptcy. According to the Wests’ bankruptcy schedules, they had only $14 left over from their monthly income after expenses.

Because their debts were mostly consumer debts and because they maintained a relatively high income, their bankruptcy trustee moved to dismiss the Wests’ case under § 707(b)(1), claiming that relief would be an abuse of the bankruptcy system.

The “Substantial Abuse” Test

The court noted that dismissal of a case under §707(b)(1) requires evidence that allowing Chapter 7 relief would be a substantial abuse of the bankruptcy laws. To make that determination, courts examine the totality of the circumstances surrounding the debtors’ case.

Generally, a court can dismiss a Chapter 7 case for either of two reasons: 1) The debtors are guilty of fraud or misrepresentations relating to their bankruptcy schedules; or 2) Even if there has been no fraud, the debtors have been irresponsible with their spending, and thus bankruptcy can be avoided by changes in lifestyle.

The Decision

The court decided to allow the Wests to convert their case to a Chapter 13 bankruptcy. The court found that the Wests had been honest in creating their bankruptcy schedules but had been too careless with their spending. They spent far more than necessary on telephone service, food, and other expenses. The Wests could easily reduce their monthly spending by as much as $500 monthly and contribute those savings toward a Chapter 13 payment plan.

The Wests had a much higher income than most Chapter 7 filers. While a high income does not automatically constitute grounds for dismissal of the case, it does indicate that a more cautious use of financial resources could solve a financial dilemma, making bankruptcy unnecessary. Allowing Chapter 7 relief would amount to a substantial abuse of the bankruptcy laws in Wests’ case.

Practical Considerations

Both the bankruptcy trustee and the court have the power to move to dismiss a bankruptcy case for abusing the system. In order to qualify for bankruptcy, you must be both honest and sensible. Consult an experienced attorney to determine what type of bankruptcy, if any, is right for you.

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Chapter 13 Bankruptcy is Binding Once Approved

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The Binding Effect of Chapter 13 Confirmation

Under the legal doctrine of judicial estoppel, once a Chapter 13 bankruptcy plan has been confirmed, all issues relating to the confirmation of that plan have been resolved. 11 USC § 1327(a) states:

“The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.”

This means that if a party neglects to raise an argument or make an objection relating to the bankruptcy prior to confirmation, then that party has forfeited the ability to later raise such an argument or objection. The case of In re Crum presents a nice illustration of how this rule functions, and also the effect it can have on your bankruptcy case.

In re Crum

In the case of In re Crum, 479 BR 734 (S.D. Ohio 2012), Mr. and Mrs. Crum were a husband and wife involved in bankruptcy. The Crum’s were both named on the mortgage of their home, which was issued by CitiMortgage. The mortgage was for approximately $113,000, and the home was valued at approximately $105,000. A mortgage is a form of secured debt, meaning that the house acts as collateral in the event the debtor defaults on payments. Thus, even in bankruptcy, a creditor can still foreclose the home if the debtor is unable to make timely payments.

See also: the automatic stay and corporations

The Crum’s Chapter 13 Payment Plan

Accordingly, as part of their Chapter 13 payment plan, the Crum’s agreed to surrender their home to the creditor, CitiMortgage. The Chapter 13 plan stated that the home would become the property of CitiMortgage, and that any remaining balance owed on the mortgage would become an unsecured claim. Secured claims take priority over unsecured claims, which means that the unsecured claims only get paid in bankruptcy if there is enough money left over after paying off the secured claims.

The Crum’s still owed $20,000 on the home. However, the Chapter 13 plan contemplated no money to be left over for unsecured claims. Thus, when the Chapter 13 plan was confirmed, the home became the property of CitiMortgage, and the $20,000 balance became an unsecured claim that CitiMortgage would be unable to recover. CitiMortgage then sold off the property with the intention of keeping the money as satisfaction of the debt owed.

The Trustee vs. CitiMortgage

Later, however, the trustee discovered that Mrs. Crum may not be a party to the mortgage after all. Yet, Mrs. Crum still held title to one-half interest of the property. Thus, the bankruptcy trustee hypothesized that Mrs. Crum’s one-half of the interest in the property was actually an unsecured debt that could not be taken by the creditor, CitiMortgage. Accordingly, the trustee initiated a lawsuit against CitiMortgage, arguing that because the home became a part of the bankruptcy estate upon confirmation, CitiMortgage is only entitled to one-half of the money raised by selling the home, with the other half remaining part of the bankruptcy estate. The half that remained with the estate could then be used to pay off other debts.

The Court’s Decision

The trustee, the Crum’s and CitiMortgage had already accepted the Chapter 13 payment plan, and the bankruptcy court had already confirmed the plan. Because confirmation of the Chapter 13 plan is binding on all parties, the only way that the trustee could now have Mrs. Crum’s one-half interest in the property reclassified as an unsecured debt would be to modify the Chapter 13 payment plan.

However, as the court noted, the Chapter 13 plan can only be modified in a limited number of situations, most of which involve redressing some form of fraud. In this case there was no such fraud. In looking to the above-mentioned doctrine of judicial estoppel, the court decided that once an issue has been determined, it cannot later be altered. The trustee sought to allege that Mrs. Crum’s debt was unsecured, but because the parties had failed to make such a demonstration prior to confirmation, they had lost their ability to make that claim now. Thus the plan in this case could not be modified because the parties had failed to object to the fact that Mrs. Crum was classified as a party to the mortgage.

See also: Ohio Foreclosure Laws: What You Need to Know

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Absent Bad Faith, Credit Card Debt Can be Discharged in Chapter 13 Bankruptcy

Do You Pay Back All of Your Credit Card Debt in Chapter 13 Bankruptcy?

Many bankruptcy filers have a significant amount of credit card debt on their hands. Accordingly, one thing many Chapter 13 filers want to know is whether their credit card debts can be eliminated in a similar manner to Chapter 7. In a lot of cases, much of your credit card debt can be forgiven if you follow your repayment plan, and thus you do not have to pay back the full amount. However, it all really depends on how much money you have available to pay off your debts after expenses, and also how much of your debts are dischargeable.

First a brief primer on types of debt.

Dischargeable vs. Non-Dischargeable Debts

Some forms of debt are non-dischargeable, meaning that you will have to pay them off in full. Dischargeable debts are debts that can be forgiven by bankruptcy. Credit card debt is considered a dischargeable debt. Non-dischargeable debts take priority over dischargeable debts, and in bankruptcy, whatever money you have left over after paying off your non-dischargeable debts (like a mortgage) is put toward your dischargeable debts. If you do not have enough money left to pay your dischargeable debts, then the remainder of those debts are forgiven. 11 USC § 507. In many cases, Chapter 13 filers only pay a small percentage of their credit card debts, but good faith is always required if you plan to eliminate debt in Chapter 13.

For Example: In the case of In re Collier, discussed more thoroughly below, Mr. Collier had two “secured debts.” Secured debts are debts collateralized by your personal property, in this case, one debt was secured Mr. Collier’s mobile home, and his car secured the other. Because secured debts are non-dischargeable, Mr. Collier was required to continue paying them as he had been. Mr. Collier then sought to have his credit card debt discharged because he could not afford to pay the full amount.

Denial of Discharge for Credit Fraud

11 USC § 523(a)(2)(A) states that a debtor can be denied a discharge for:

“false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition”

Under bankruptcy law, if you have committed fraud or made any false representations relating to your credit card debt, then you can be denied a discharge, and you will be responsible for the full amount of your debt.

Example: In re Collier

In the bankruptcy case of In re Collier, after filing for bankruptcy, Mr. Collier’s credit card company, Citibank, filed a complaint with the bankruptcy court asking that the court deny him a discharge of his credit card debt. Mr. Collier held two credit cards with Citibank, both of which had balances owed of over $10,000. Almost all of the $20,000 in charges were made during a four-month span before the bankruptcy. Furthermore, many of these charges were from cash advances. Citibank intended to prove that Mr. Collier made false representations to his credit card company in the sense that he racked up his bills knowing that he would never pay them off.

In order to prove false representation, the court required that Citibank prove that Mr. Collier: (1) Made a representation; (2) that he knew was false; (3) that he intended to deceive Citibank; (4) that Citibank actually relied on Mr. Collier’s representation; and (5) that Citibank lost money as a result.

Obviously, Mr. Collier was unable to pay off his credit cards. The court decided that because Mr. Collier racked up these charges in such a short period of time, and made only small payments on his cards during that time, it appeared that Mr. Collier had made false representations because knew he would not be able to pay off his credit cards when he incurred the charges.

Every time a person uses a credit card they are essentially making a representation that they intend to pay off that credit card. Mr. Collier’s representation was false because each time he used his card; he knew that he would not be able to pay it off.

Understand Your Debt

What you can learn from Mr. Collier’s case is that things like fraud and false pretenses do not always take the form of elaborate heists designed to scam money from your credit card company. Mr. Collier was found to have committed fraud merely because he continued to rack up his credit card debt with no ability to pay it off.

Moreover, knowing what forms of debt take priority over others, and what forms can be discharged is not always easy and clear-cut. To understand your Chapter 13 bankruptcy case, and figure out how much debt you are fully responsible for, you should consult an experienced bankruptcy attorney.

See also: Ohio foreclosure laws, what you need to know, My Visa bills are piling up, can bankruptcy help?

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Does the Automatic Stay Protect Non-Filing Corporations?

In re Saleh (OH) – In re Saleh, 427 B.R. 415 (S.D. Ohio, 2010)

Ali owned and operated a grocery store in Dayton, Ohio, and enjoyed reasonable success. The business was profitable and supported him and his family for many years. Looking to supplement his income from the grocery store, Ali decided to take out a loan and start a new business. Unfortunately, the new project never took off. Even more unfortunately, this failure coincided with the failure of the global financial markets. At the end of 2008, unable to keep up with their bills, Ali and his wife declared Chapter 13 bankruptcy. In re Saleh, 427 B.R. 415 (S.D. Ohio, 2010).

The Automatic Stay

Bankruptcy brings with it an automatic stay; this prevents creditors from pursuing action against debtors during the bankruptcy process. For Ali, this meant that his home and vehicles were safe from foreclosure.

When Ali and his wife filed for bankruptcy, their bank started to pursue the grocery store for loan collection. Ali sued the bank, claiming that the automatic stay from his bankruptcy extended to his business, not just his home and car. The store was his only source of income and he was the guarantor on all of the business’s loans. He was the sole owner. He believed that the grocery store should be considered a part of his estate in bankruptcy, enjoying all the protections of the automatic stay. The court disagreed.

Corporations are separate legal entities

A corporation is a complicated entity and the law treats it differently than an individual. There are two main types of corporations: S corporations and C corporations. A C corp is what you typically think of as a corporation; it’s an entity unto itself that pays its own taxes at the corporate rate. An S corp differs in one major respect: the owner(s) of the S corp treats the business’s profit as personal income, paying personal taxes on it, and the business itself pays no taxes. In either case, the law treats corporations as entities separate from their owners. Ali’s store was an S corp, meaning that Ali reported the business’s profit on his personal income tax statement and paid taxes at his personal rate on that income.

Ali Observed Necessary Formalities

Creating a corporation requires a lot of paperwork; running it requires even more. All of your t’s must be crossed and your i’s dotted or you might find yourself without the protection that a corporation lends its owners. Ali observed all of the necessary formalities in the creation and operation of his grocery store; it was an official corporate entity. Id. at 423. He followed the rules right down to accounting procedures; he was listed as an owner of equity in the grocery store but the store had its own assets and liabilities. The liquor license and the land were in the store’s name. Ali treated his business as a separate entity, so the court did, too.

Ali argued that his and the business’s affairs were so intertwined that they should be considered one and the same entity. He pointed to his tax returns, where the business’s income was listed on his personal return, but his accountant pointed out that such a listing is standard procedure for an S corp. Id. at 419. He argued that he had guarantied all of the store’s loans. That, according to the court, is also standard procedure. Id. at 424. Business owners commonly corporate loans, especially if the business is new. Ownership of a corporation is not ownership of the corporation’s property, and the automatic stay did not extend to Ali’s business. Under certain very limited circumstances, the automatic stay may apply to another person beside the primary debtor, but never to a corporation. In the words of the court, the law “cannot be read to extend the protections of the co-debtor stay to corporations and other non-individuals or non-consumer debts.” Id. at 420.

The Corporation must file in order to be protected by the stay

The grocery store was Ali’s sole source of income and the bank was pursuing judgment against it for a large loan. If he couldn’t include it in his personal bankruptcy, what were his options?

Filing bankruptcy on behalf of a corporation that has gone out of business is often unnecessary for a few reasons. First, only individuals are eligible for discharge. Next, the cost of filing a bankruptcy for the corporation can be high, it’s often better to wind down operations and file for dissolution.

As long as Ali’s personal liability was extinguished by his discharge, the threat of a judgment against his business entity was illusory.

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Do I Qualify for Chapter 7 Bankruptcy in Ohio?

Janice Didn’t Choose Chapter 13, Chapter 13 Chose Janice

Janice, an Ohio resident and a thirty-year employee of the US Postal Service, was in a bind. She had more than $115,000 in secured debt and more than $70,000 in unsecured debt; her credit card had gotten the better of her. She surrendered her house to the mortgage company and moved into an apartment. She was approaching retirement age with a mountain of debt. In re Phillips, 417 B.R. 30, 34 (Bankr. S.D. Ohio, 2009).

What could she do? She filed for Chapter 7 bankruptcy

As part of the bankruptcy process, the court examined Janice’s finances. She was making both mandatory and voluntary contributions to her retirement plan. She was also working to pay back two retirement account loans. Between the payments toward her mortgage (which she was still contractually obligated to make when she filed), the payments to her retirement plan, and her living expenses, Janice believed she qualified for Chapter 7 Bankruptcy. Her bankruptcy trustee disagreed.

See also: do I qualify for chapter 7 bankruptcy if I don’t have a job?, What Happens If the Trustee Moves to Dismiss the Case?

The trustee objected claiming Janice’s income was too high to file for chapter 7 in Ohio

If your income is less than the median for a household of similar size in your state, you automatically qualify for Chapter 7 bankruptcy. The median income in Ohio for a single person is $42,814, or $3,568 per month. Janice made more than $4,000 each month, so she could not automatically qualify. If, like Janice, your income is above the median, you must pass the means test to qualify for Chapter 7.  The means test is reminiscent of a high school math test, so sharpen your pencil. Take your monthly income, take out the allowable deductions, and multiply that amount by 60. Generally, if the result is greater than 25% of the non-priority unsecured claims or more than $10,950, you fail the means test. Unfortunately for Janet, she failed. Failing the means test results in a presumption of abuse; that means the court will assume that you have sufficient funds to pay something back to unsecured creditors. 11 U.S.C.A. § 707(b)(2). A presumption of abuse is not the end of the road for your Chapter 7 hopes; the court will then evaluate your case based on the “totality of the circumstances” test.

Mortgage payments as a deduction

First, the trustee objected to Janice counting her mortgage payments as a deduction since she had surrendered the property. The court said that the payments were allowable expenses because her contractual obligation to pay her mortgage had not yet been extinguished as of the date she filed. In other words, she had surrendered her house but she and the mortgage company had not yet leveled. So, Janice’s case went forward.

Totality of the circumstances argument

Then, the trustee argued that Janice’s Chapter 7 case was abusive under the “totality of the circumstances” test. This is the second hurdle an above-median-income filer must clear to go forward under Chapter 7. For this test, the court examines whether a debtor will be able to pay debts going forward, whether she has a stable source of income, what other remedies are available to her, and whether her expenses are reasonable. It basically amounts to a calculation of whether a debtor would be able to make substantial payments toward a Chapter 13 plan.

Why Janice’s case was converted to chapter 13

Sharpen your pencils again, and let’s look at what happened to Janice. The trustee pointed to her payments into her retirement account as an unnecessary expense, but current bankruptcy law allows such payments in order to encourage the use of retirement plans. However, both of Janice’s retirement account loans would be paid off within the span of a Chapter 13 plan – one in 7 months and one in 36 months. Additionally, Janice’s payments to her life insurance plans were ending and she admitted to overestimating her medical expenses by $50. That gave her a disposable income of $132 per month; the expiration of her retirement account loans could result in total payments of more than $13,000 to creditors. With the two combined, Janice would have been able to pay more than $21,000, which is about 30% of her debt. Does that qualify as “substantial”? In other cases, filers who could pay around 10% of their debts have been considered abusive. At 30%, Janice was well past that mark. She had to convert her case to Chapter 13 or be dismissed. In re Phillips, 417 B.R. 30, 44 (Bankr. S.D. Ohio, 2009).

Lessons from In re Phillips

Janice’s case teaches us a few useful things. Retirement plan contributions and repayments of retirement account loans are allowable deductions in Ohio. Id. at 43. Even voluntary contributions to retirement plans are allowable deductions. Id. In addition, mortgage payments (or payments for other secured loans) are deductible even if the property was surrendered prior to filing for bankruptcy. Id. at 37-8. Even though Janice surrendered her house, she was still contractually obligated to pay her mortgage. The court will allow deductions for payments as long as the contract is still in effect at the time of filing. Id. These deductions may help you pass the means test and qualify for Chapter 7.

Be sure to meet with a qualified bankruptcy lawyer who can help you crunch the numbers and pass the means test.

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Chapter 13 Bankruptcy: More Affordable Than You Think

Chapter 13 Bankruptcy is Complex, But Can You Afford a Lawyer?

Chapter 13 bankruptcy is a complicated process which usually requires the help of an attorney. A recent study out of the Central District of California found that just 1 in 2,500 pro se chapter 13 cases in that district were successful. Why?

The forms and rules are complex and small mistakes have big consequences. An experienced attorney can help smooth the difficult process and minimize your stress. Of course, attorneys also have costs, and when you’re filing for bankruptcy you probably think that another bill is the last thing you need. Many folks we talk to don’t believe they’ll be able to afford bankruptcy, but they’re usually wrong. Bankruptcy attorneys understand that their clients are facing financial hardship, so does the court.

Chapter 13 is More Affordable Than You Think

It turns out that when filing for Chapter 13 bankruptcy, an attorney might be more affordable than you think. Instead of paying the entire fee upfront or in a balloon payment at the end of the bankruptcy process, you can include attorney fees in your Chapter 13 repayment plan and pay lawyer’s fees in installments as part of your bankruptcy.

When filing for Chapter 7 bankruptcy, attorneys will likely require full payment of fees prior to filing a case. This is not the case in chapter 13 bankruptcy, which allows the bankruptcy trustee to pay the attorney’s fees out of the bankruptcy estate each month. That means that not only can you pay your bill over time but you don’t have to deal with it separately at all. By default, the plan payments are subtracted from your paychecks (you may be able to set up a different method of payment with your trustee) and deposited into the bankruptcy estate. The trustee then makes distributions to creditors, including your attorney, every month.

Fee Structures Vary Based on Locale and Case

The “no-look” fee in Dayton for chapter 13 bankruptcy is $3,500. Your attorney may implement several different fee structures to pay this bill. For example, you may need to pay a small part of the fee up front. On the other hand, you may only be responsible for filing fees to initiate a case. The length of time over which the fees are repaid will vary based as well, but in the vast majority of cases, lawyer’s fees are paid as part of the Chapter 13 plan.

The way you pay your fees will depend on several factors, including the lawyer’s, judge’s, and trustee’s policies, the feasibility of your case, and local custom. If you feel that your attorney fees have been assessed incorrectly, you may have them reviewed by a judge.

Ask your attorney about fee structure and repayment plans. Legal help for the Chapter 13 process is more affordable than you think.