Sacramento Bankruptcy Lawyer Blog

In Chapter 13, after the debtor attends a 341 hearing, and the bankruptcy plan is filed, the next event is the confirmation hearing where the court approves the discharge of debts if there are no creditor oppositions.

The debtor is required to attend the confirmation hearing as the bankruptcy plan is reviewed by the court and Chapter 13 Trustee. If the debtor fails to appear for the hearing, the judge can prevent or delay the confirmation.

The bankruptcy lawyer for the debtor needs to present a plan that protects debtor interests by making payments manageable, that ensures the plan will be confirmed by the court. When attending confirmation hearings, review the calendars prior to entering the courtroom to stay on track with whether a case is on the dismissal, uncontested, or contested calendar. The lawyer analyzes the parties' income and expenses, and makes certain the budget is not excessive or has frivolous expenses.

When an objection to confirmation is filed, the objecting party, or its attorney, attends the confirmation hearing. The views of the objecting parties and the Trustee are heard by the judge. The judge confirms the plan, denies confirmation, or sets an evidentiary hearing on the disputed matter (e.g. a valuation issue, a bad faith objection, a disposable income objection). Often objects relate to payments offered under the plan being less than creditors would receive if the debtor's assets are liquidated or the debtor's plan does not commit all of the debtor's projected disposable income for the commitment period.

The provisions of a confirmed plan bind the debtor and each creditor. If the court confirms the plan, the Chapter 13 Trustee will distribute funds received under the plan "as soon as is practicable." 11 U.S.C. § 1326(a)(2). If the court declines to confirm, the debtor may file a modified plan, or convert to a liquidation case under chapter 7. 11 U.S.C. § 1323. 11 U.S.C. § 1307(a). If the court declines to confirm the plan or the modified plan and dismisses the case, the court may authorize the Trustee to keep funds for costs, and return remaining funds to the debtor 11 U.S.C. § 1326(a)(2).

A discharge is provided under Chapter 13 when the debtor completely performs under the plan. The discharge releases the debtor from all debts provided for by the plan or disallowed. Creditors provided for in full or in part under the Chapter 13 plan may no longer initiate or continue any legal against the debtor to collect discharged obligations.

Continue reading "Confirmation Hearing" »

As expected, the final 2009 numbers showed a spike in bankruptcy filings. There were 1.43 million bankruptcy filings in 2009, a 32 percent increase from 2008. Consistently, every month in 2009 reported bankruptcies in excess of the same month in 2008. Last month, there were 22 percent more bankruptcies than in December 2008.

The recession has caused bankruptcies to reach a level that has not been approached since 2005, when Congress rewrote the Bankruptcy Code to discourage consumers from filing bankruptcy. This year's 1.43 million filings was the seventh-highest year on record, behind 1998 and 2001-2005.

Some experts contend that the 2005 Bankruptcy Code reform has been ineffective. They attribute the decline in bankruptcies after 2005 to the healthy economy, the surge of people filing bankruptcy in 2005 to avoid the new rules, and the new rules making bankruptcy more expensive and time-consuming. The reform had intended to prevent filers from abusing the system. But, those safeguards are now costing filers more money and delaying relief to families that need protection from creditors or need to save their homes.

This year does not project much, if any, reduction in bankruptcies. Foreclosures and subprime mortgages going bust will likely continue. And many more families may be under financial stress due to unemployment and underemployment in 2009.

Under 11 U.S.C. § 547(b)(4)(A), transfers made from the debtor's estate up to 90 days prior to filing of the bankruptcy petition are avoidable by the trustee as preferential transfers. In other words, the bankruptcy trustee can undo any such transfers because they are deemed to improperly favor the recipient over other creditors.

However, under § 547(c)(4), those transfers are not preferential if the creditor made a new loan after the borrower paid off the old loan. This exception is designed to protect revolving credit arrangements. Typically, a credit card provides a borrower with a debt limit that cannot be exceeded. If the borrower pays the full balance one month, then the next month the borrower has the full credit limit at his disposal. If the borrower has not paid the full balance, then the following month he has a correspondingly less amount at his disposal to borrow.

Hence, it is unfair for the lender if payments made prior to a new loan are undone. The lender would not have offered the new loan unless it received those payments.

An illustration: John has a $1000 credit limit. He uses $600 to make purchases in Month 1 and pays off the full balance at the end of the month. In Month 2, he makes total purchases of $800 and pays off the full balance at the end of the month. In Month 3, he makes $1000 in total purchases, but does not pay off the balance and files bankruptcy. Under section 547(c)(4), John's payments at the end of Months 1 and 2 are not preferential transfers, and the lender does not have to return the payments to John's bankruptcy estate.

The American Bankruptcy Institute (ABI) reported encouraging numbers for November. Consumer bankruptcy filings dropped 18 percent from October, as there were 112,152 filings as compared to 135,913 the previous month. Chapter 13 filings held steady at 29 percent of all consumer cases.

The November numbers still represented a 12 percent increase from the previous November. Samuel J. Gerdano, ABI's Executive Director, attributes the rise to the persistently high unemployment figures and still beleaguered housing market. National unemployment remains high and many consumers are still struggling with housing debt in excess of their homes' values. Negative equity prevents homeowners from being able to refinance to lower monthly payments and to use any equity to pay down debt.

Many subprime, adjustable-rate mortgages (ARM) have yet to reset. Banks wrote an avalanche of five-year ARMs into 2007 before the credit crisis began. Bankruptcies may remain high as these mortgages switch from their low initial interest rates, and the monthly payments adjust upwards accordingly. Chapter 13 bankruptcies will also remain high, as homeowners are more likely than non-homeowners to have income and assets that preclude them from filing Chapter 7.

If you are a homeowner struggling with an ARM, then you may benefit from consulting with an experienced bankruptcy attorney.

On November 6, 2009, the New York Times reported Jason Rodriguez opened fired at his former workplace in downtown Orlando, FL. The engineer gave his life away when he randomly shot 6 people, injuring 5 and 1 dying at the scene. The shooting resulted from anger in being terminated in 2007 at an architectural firm. Rodriguez filed for bankruptcy and was working at a Subway shop.

It seemed difficult for his former employer to understand why he would still be angry at the termination, but those who have jobs, are not in debt, or are otherwise productive, may not realize angry thoughts continue to play over and over when someone is stuck at the same place for a long period of time. The unemployed today have taken much longer to find new positions, with some taking possibly over a year to land only a part-time or temporary job. It seems Rodriguez allowed an injury to go beyond its original scope, defining his self-image based on one company, but compassion is what separates a bankruptcy attorney who is an ally from one who advises only on legal proceedings. Bankruptcy is not a sign of imperfection, but an unburdening of the past, and a test in courage to face whatever comes.

Bankruptcy proceedings are governed by federal law - the Bankruptcy Code, found at Title 11 of the United States Code. Title 11 contains numbered chapters that define eligibility to Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13 and Chapter 15.

Chapter 7 can be used by both businesses and consumers to liquidate assets to pay creditors. A Chapter 7 debtor cannot reorganize, emerging from bankruptcy with restructured debt. In Chapter 7, upon the filing of the proceeding a trustee oversees the liquidation of the debtor's assets. The trustee is chosen randomly from eligible panel trustees in the district where the case is filed. For a business, the trustee takes over control and oversight from an entity's board and leadership team. For a voluntary bankruptcy, there is little chance for payment of creditors.

Chapter 9 provides for reorganization of a municipality like Vallejo, CA and perhaps Pacific Grove, CA.

Chapter 11 refers to the business reorganization chapter of the Bankruptcy Code. Unlike Chapter 7, in a Chapter 11, the company's management and board remain in control of the process. A company continues to operate post-filing. No trustee is appointed in most Chapter 11 proceedings, but bankruptcy court approval is necessary for many operational decisions. Chapter 11 by a business does not necessarily mean that it will reorganize. Many Chapter 11 cases begin with an immediate sale of substantially all of the debtor's assets (a liquidation), commonly known as 363 sales. After substantially all of the assets are sold, Chapter 11 proceedings may end with court approval of a reorganization plan.

A reorganization plan is provides for payment of creditors and interest holders in accordance with the Bankruptcy Code. The plan may involve distributing proceeds to creditors after a liquidation sale, restructuring debts, and continued operations. The plan offers creditors an opportunity to review and take a position as to property distribution and future operations of the debtor.

Chapter 12 is limited to family farmers and fisherman, Chapter 13 is limited to consumers, requiring the consumer debtor to repay some amount to creditors. A business is not eligible for Chapter 13. Chapter 15 deals with cross-border insolvencies.

Continue reading "Bankruptcy Reorganization or Liquidation" »

On Tuesday, the Supreme Court heard two cases that could significantly impact bankruptcy law. Besides hearing arguments about the dischargeability of student loan debt in bankruptcy, the U.S. Supreme Court heard a second case challenging the validity of provisions of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). One rule prohibits lawyers from recommending that assisted persons, who are individuals with primarirly non-exempt consumer debts, take on additional debt. Another requires that attorneys who offer bankruptcy advice must advertise as debt relief agencies.

A Minnesota law firm challenged the provisions as violating lawyers' First Amendment rights, ethical duties to provide legal advice, and responsibility to not provide misleading advertising. The firm's stance is that 11 U.S.C. section 526(a)(4) is overbroad and wrongfully prevents attorneys from providing sound legal advice to clients. For instance, the law, which prohibits advising assisted persons to incur more debt, may prevent an attorney from advising a potential bankruptcy filer to sell his overly expensive home and rent an apartment because the lease would be additional debt.

The firm also argued that Congress did not intend for 11 U.S.C. section 528, which requires that debt relief agencies disclose in advertisements that they are debt relief agencies, to apply to bankruptcy attorneys because Congress designed the law to regulate behavior by non-attorney bankruptcy providers. The firm's attorney made the point that If Congress wanted the law to apply to attorneys the law's language would explicitly include attorneys.

The justices appeared to view section 526(a)(4) unfavorably and Justice Scalia even repeatedly referred to it as "a stupid law." On the other hand, a few justices treated the firm's position on section 528 skeptically. The Supreme Court will likely hand down a decision towards the beginning of 2010.

On Tuesday, the Supreme Court heard oral arguments in a case that could provide more clarity to what circumstances qualify as "undue hardship." Finding undue hardship is a requirement to permitting a bankruptcy filer to discharge student loan debt.

Over two decades ago, Francisco Espinosa took out $13,000 in student loans to go to an Arizona trade school to learn computer drafting. After four years, he graduated but could not find a job. He wanted to get married but first wanted to make sure his finances were in order. Without little recourse to pay back the debt, he called a lawyer. The attorney filed a Chapter 13 bankruptcy and drafted a plan that would pay back the original student loan principal but not repay the $4,000 in accrued interest. Although the lender, United Student Aid Funds, Inc., was notified about the bankruptcy, it did not object, and a bankruptcy judge approved the plan.

Espinosa made payments on the Chapter 13 plan, and after five years in 1997 the bankruptcy court declared the debt paid in full. Espinosa thought that was the end of the story, but two years later United started demanding that Espinosa pay the interest. Then, in 2003, eleven years after the bankruptcy court confirmed the original payment plan, United claimed that the original plan was illegal and void because the bankruptcy code only allows discharge of student loan debt if the borrower shows undue hardship.

The Ninth Circuit Court of Appeals in San Francisco ruled against United because of the multiple notifications it received and its failure to object to Espinosa's plan. United appealed and the U.S. Supreme Court took the case.

In front of the Supreme Court, the Justice Department, siding with United, argued that the "undue hardship" requirement ensures that student loan debt is not routinely discharged. This policy helps ensure that lenders continue to offer student loans, even to those with weak credit.

In rendering their decision sometime in the next few months, the justices must rule on Espinosa's fact-specific scenario and also indicate to lower courts how to approach undue hardship arguments. The decision may have significant ramifications for the lending industry and the millions who hold student loan debt.

The Center for Responsible Lending is advocating a change to bankruptcy laws that would allow bankruptcy judges the ability to rewrite mortgage terms. The Center's position appears even more necessary in light of loan servicers' inability to permanently modify mortgages under the federal Home Affordable Modification Program.

Rewriting bankruptcy law to provide bankruptcy judges discretion to unilaterally impose revised mortgage terms is not a revolutionary idea. Bankruptcy judges can rewrite debtors' terms on many secured loans, most notably car loans. Due to lenders' powerful lobbying efforts, when Congress enacted the Bankruptcy Code in 1978, an exception was inserted into 11 U.S.C. section 1322(b)(2) that prevented bankruptcy judges from modifying first mortgages. Thus, even if a home is worth significantly less than the mortgage amount, the bankruptcy judge cannot revise the principle to the fair market value. The judge cannot affect the monthly payment either.

Ideally, providing bankruptcy judges the power to revise mortgage principal and montly payments would be unnecessary. The Home Affordable Modification Program was supposed to make it substantially easier for borrowers to work out loan modifications with lenders. However, while the Program has spurred 650,000 trial modifications, few have been converted into new permanent mortgages.

Extending bankruptcy judges' powers would provide borrowers a last, but potentially very effective, resort to stay in their homes if their lenders and servicers are unresponsive. Unless the Home Affordable Modification Program is more successful, Congress should take a look at following the Center for Responsible Lending's recommendation.

As a result of a bankruptcy filing, an automatic stay prohibits creditors from seeking to take certain actions outside the bankruptcy proceedings to collect amounts due to them from the debtor which arose prior to the filing of the bankruptcy petition. Notwithstanding, a creditor may be entitled to take certain legal action to obtain relief from automatic stay.

For example, if a creditor is a supplier who shipped products received by the debtor within forty-five (45) days prior to the bankruptcy filing, a creditor might submit a timely written reclamation demand to recover possession of goods, or at the debtor's option, receive a higher priority administrative claim as to the products when opposing an unsecured claimant, thus increasing payment.

Another example is for a creditor to file a motion with the court to obtain relief from automatic stay by explaining the asset as a depreciating asset that will lose its value if the court does not allow the creditor to take back the asset to resell. The Bankruptcy Code allows the court to grant relief from automatic stay for cause when there is lack of adequate protection of an interest in property, if a debtor does not have any equity in the property, or if the property is not necessary for an effective reorganization of debtor. This usually occurs in the event of assets like cars where a debtor is no longer able to pay loan payments towards the car purchase.

In a recent case decision, Dumont v. Ford Motor Credit Company, 581 F.3d 1104 (9th Cir. (Cal.) Sep. 15, 2009), the Ninth Circuit Court of Appeals confirms the Bankruptcy ode does not protect a debtor's personal property if the debtor fails to commit to redeem, reaffirm or assume the underlying loan. According to Bankruptcy Code Section 362(h)(1)(A), a debtor has to file a Statement of Intention and indicate whether debtor will surrender or retain the property. If the debtor retains, the debtor is required to elect to redeem, reaffirm or assume the underlying loan. Otherwise, the automatic stay is terminated and the vehicle is no longer property of the bankruptcy estate, allowing the creditor to attempt repossession of the vehicle.

When doing business, a company should be wary of customers' credit to prevent becoming a potential creditor of a bankrupt estate. A company should watch out for publications on bankruptcy filings to ensure that it timely files any claims and meets deadlines for relief from automatic stays.

Continue reading "Relief from Automatic Stay" »

After someone files a Chapter 7 or a Chapter 13 bankruptcy, the person will be required to attend a brief hearing called a Section 341 Meeting of Creditors. Bankruptcy professionals refer to this hearing as a "341 hearing." Consult with a bankruptcy attorney for help.

The 341 hearing is held between 30 and 45 days after a debtor files and it will last about 5 to 10 minutes. At the hearing, the trustee asks a series of questions on any updates to the debtor's petition, such as whether the debtor has lost his job, whether he has filed any lawsuits, whether he has married. The trustee will ask the debtor to raise his/her right hand and take an oath stating that what he/she are about to say is the truth, the whole truth, and nothing but the truth under the penalty of perjury. Failing to tell the truth is a criminal offense. Perjury is investigated and prosecuted by the FBI and the U.S. Attorney. If the debtor does not speak English, he/she should make arrangements for a translator ahead of time.

At the hearing, the debtor has to bring a social security card and photo ID to prove that he/she is the debtor and that his/her information matches what is on the petition. If the person forgets to bring the identification, he/she may be required to return in person with the information.

The hearing is recorded. Nothing final happens at the 341 hearing. Sometimes, there maybe missing information requested from the trustee, such as a review of tax filings or proof on wages earned. The debtor is required to read an information sheet on bankruptcy proceedings, and given instructions on a required education course on finances.

After the 341 hearing, the trustee determines whether there are assets that may be liquidated to pay the debtor's creditors. If there are assets to be liquidated to pay creditors, the creditors are paid based upon their priority established by the Bankruptcy Code on a pro rata basis. If there are no assets, the trustee files what is called a "no asset report" and no creditors receive payments.

Find a bankruptcy attorney who will be an ally in counseling on bankruptcy proceedings to make the process less intimidating.

Today I'd like to clear up a common misconception relating to non-exempt property. As you may recall from previous posts, exempt property is property you're entitled to keep upon filing for bankruptcy; non-exempt property is property which the trustee will be entitled to sell for the benefit of your creditors once your case is filed.

As a Sacramento bankruptcy attorney I often encounter people who think that if an item of property doesn't fit into an exemption category then they'll definitely have to give it up. In fact, in many instances debtors will not have to surrender their non-exempt property.

The reason why some non-exempt property may be retained by the debtor has to do with the nature of property and how it's valued for purposes of bankruptcy.

The fact is some items of property, while perhaps valuable, are simply cumbersome. For example, say you have an antique mahogany bed whose value exceeds the dollar amount allowed for household goods. Will you have to give it up? Not necessarily.

In assigning a value to property we use what's called the replacement value of the item. If you were to go out and buy this bed new it might cost $2500. However, if the trustee takes custody of your bed and sells it at an auction he may only get $800 for it. Throw in the expense and trouble of moving and storing the bed and you can see why a trustee may be reluctant to take the item even though it's technically considered non-exempt property.

To further this week's discussion of exemptions and how they impact your bankruptcy, today I'd like to outline the first step you need to take once you decide to file - creating an inventory of your property.

Exemptions are important when you file for bankruptcy.

Figuring out just what you own is highly important. It will help you gain an idea of what property you'll be able to hang on to and the list will come in handy when it comes to filling out the forms that supplement your bankruptcy petition.

Your inventory should include cash on hand, bank and brokerage accounts, household goods (such as furniture and kitchen appliances), hobby-related items (such as books and DVDs), clothing, jewelry, equipment of all kind, and non-tangible goods (such as insurance policies, pensions, stock options, and an accounts-receivable balance).

The list should also include vehicles, recreational craft, office equipment, and tools of your trade.

This is just a partial list of the items you'll need to categorize, but it provides an idea of the amount of detail that must go into your inventory. Remember, all this work will pay off in the long run and make the process of filing for bankruptcy go much smoother.

This post is part of our series dealing with Chapter 13 bankruptcy issues.

Today we'll look at the filing process and what you'll need to complete the transaction.

The forms used for Chapter 13 are the same as those used for Chapter 7. There is a lot of information that must be provided and it is very important that it be completely accurate. Along with this packet you'll have to file your last tax return and show that you're up to date with your taxes going back four years.

The heart of Chapter 13 is the repayment plan. You'll submit this plan along with your forms and also serve a copy on your creditors.

Each month you'll make payments toward your repayment plan. These payments will go to the trustee assigned to your case. He or she will then distribute these funds to your unsecured creditors. But you'll most likely continue to make monthly payments to your secured creditors, such as your mortgage lender.

The great thing about Chapter 13 is that you won't have to pay down all of your debts completely in order to finish your plan. Certain debts must be paid in full, however. These include family obligations, such as child support and alimony, and back taxes. But debts incurred from credit cards and medical expenses

This post is part of our series dealing with Chapter 13 bankruptcy issues.

If you've been following these posts you now know that Chapter 13 calls for debtors to enter into a repayment plan in order to pay down their debts over time. But how much will you actually have to pay into your plan? We'll address this issue in today's post.

In order to calculate how much you'll have to contribute each month toward your plan you'll have to analyze your income and compare it to your state's median family income. Once you know how your income compares to the state average, you'll know how much you'll be required to pay each month.

If your income exceeds your state's median family income you'll have to pay all of your disposable income into your repayment plan over a five-year time period. But here's the catch: if your income exceeds the state average your expenses will be determined by the IRS for purposes of figuring out your disposable income. Your actual expenses are will not be taken into account if you fall into this category; rather, the IRS will determine just how much you should be spending on everyday items and necessities.

If, on the other hand, you make less than your state's median family income you can enter into a three-year plan to repay your debts. And here you can use your actual monthly expenses to determine your disposable income - not the IRS norm.

In this post we'll continue our look at Chapter 13 bankruptcy.

Yesterday I gave a brief overview of how Chapter 13 works. The gist of Chapter 13 is that you agree to pay down your debts over time using a repayment plan approved by the court. Today, we'll look at the issue of who can file a Chapter 13 plan.
In order to qualify for a Chapter 13 repayment plan you must meet three basic requirements.

First, you must file as an individual person. Corporations or other business organizations are not eligible for Chapter 13 relief.

Second, your total debt must be below certain limits. Your debt is divided into secured and unsecured debt. (Secured debt is debt which is guaranteed by collateral: if you fail to make payments this property can be repossessed). For Chapter 13 purposes, your total secured debt must be below $1,010,650. Your total unsecured (regular) debt must be below $336,900.

Third, your repayment plan must actually be possible. Your repayment plan hinges on how much disposable income you have. In order to calculate your disposable income you add your secured debt payments (such as mortgage and car payments), and your priority debt payments (such as tax and family obligations). If you have enough money left over to devote to paying back your unsecured creditors, you'll probably be able to qualify for a Chapter 13 plan.

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