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Can I “Cancel” a Chapter 13 Bankruptcy if I Changed My Mind?

By Jonathan on October 13, 2006

Here is an interesting question I received this morning from one of my former clients. She raises several important points so I thought I would answer it on the blog rather than simply by email.

"My friend signed bankruptcy papers yesterday…she was in a rush. She's filing Ch. 13 with 100% payback because she makes too much money to do anything else, allegedly. Later she found some errors that is making it where what she will pay out on the debts plus regular monthly bills, she pays out more than she's bringing in. Called her lawyer at 6:30 this morning, left a message — DON'T FILE IT, IT'S NOT RIGHT. Called all day and couldn't get anyone. Messages at the lawyer's office weren't listened to until 3 PM — AFTER FILING. Is here a 3-day right of recission for this, or an amendment/revision possibility, or is this something that would be addressed at the hearing? "

My response: There is no "right of recission." once a case is filed it is filed. She can voluntarily dismiss the case but if she does so any subsequent filing within the next year would be slightly more difficult. In a second case filed within a year, the automatic stay, which is the core protection of bankruptcy, expires after 30 days unless the debtor and her lawyer file a Motion to Extend Stay and convince the Judge to extend the stay because of changed circumstances.

Further, if she is going to dismiss, she should do so soon, before any creditor files a Motion for Relief from Stay. If she was to dismiss after a creditor files a Motion for Relief from Stay, she would be barred from refiling for 180 days. She can and should sit down with her lawyer and discuss the budget tosee if it can be fixed. Budgets and plans are amended all the time.

By the way, if your friend had filed a Chapter 7, she would not have the right to voluntarily dismiss. Chapter 7 cases can only be dismissed if the Court permits. Chapter 13 cases can be dismissed as of right (unless the Court orders otherwise).

You have highlighted a couple of very important points. First, every bankruptcy debtor needs to carefully review each page of his or her petition to check for accuracy. I think it is also the responsibility of the bankruptcy lawyer to explain exactly what is going to happen and what the debtor must do, but ultimately, the debtor is the one who has to live with the Chapter 13 for the next five years.

Second, when one is sitting in a bankruptcy lawyer's office discussing Chapter 7 or Chapter 13, everything needs to be on the table. Cars, houses, time shares, furniture – everything. I have noticed a significant change in the way both the courts and the trustees approach bankruptcy.

Under the old law, bankruptcy was a kind of financial tool. Chapter 13 was sort of like Consumer Credit Counseling on steriods – you had the power of the Court in your corner to force creditors to accept a reasonable repayment plan. Now, bankruptcy is more about pain. What does it take for you to survive? Luxuries – and by luxuries I am referring to a car payment of $500 or a house payment of $2000 – may not be acceptable.

The trustees in bankruptcy now expect you to change your lifestyle and to live under a very basic budget. Bankruptcy consultations now remind me of tax problem consultations. I am not the reassuring, optimistic counselor that I used to be because I would be misleading my clients if I took that attitude. Although bankruptcy remains a very powerful tool, the issue is not what you want to do, but can we structure a plan that lets you keep your house or car or furniture.

An Exemption Trap?

By Jonathan on October 12, 2006

One of the less well known components of the BAPCA bankruptcy law changes has to do with exemptions. Exemptions, as you may know, refer to those assets that are sheltered from seizure by the trustee. You can read more about the Georgia exemptions on my Georgia bankruptcy law web site.

For example, in Georgia, you can shelter $5,000 in household goods, as long as no individual item is worth more than $300. Therefore, for practical purposes, your television, stereo, clothing, clock radio, etc. is not at risk.

One of the most important exemptions has to do with your home. In Georgia, you can shelter $10,000 of equity in your home ($20,000 of equity if you file jointly with your spouse). In other States, however, the “homestead exemption” may be much larger. For example, in Florida, your can declare as exempt 100% of your equity.

Thus, two identical debtors, one who lives in Georgia and one who lives in Florida, could have very different bankruptcy experiences. The Florida debtor could own a $250,000 house free and clear and still qualify for Chapter 7 without risking his house, whereas the Georgia debtor would lose his house to the trustee.

Because of this disparity in exemption rules, Congress changed the Code to provide that a debtor who moves from one State to another must use the first State’s exemption laws for two years. After he has been a resident of the new State for two years, he must use the new State’s laws. The purpose of this change was to stop people from moving to States like Florida to shelter their assets in real estate.

Florida attorney Jonathan Alper raises an interesting question in his blog about what happens if an individual moves to Florida, buys a house then encumbers his new homestead with a home equity line of credit in his spouse’s name. Jonathan has one opinion about the repercussions and I have another, but the point here is that when new rules are created, there are always going to be fact patterns that no one expected and that may result in unexpected or undesirable results. My sense is that there are going to be a lot of these unknowns in the new law and we are just starting to see some of them work their way up the appellate system. My colleague Scott Riddle publishes a blog that looks at some of these new developments in the law and I read it regularly to keep up to speed.

Random Bankruptcy Case Audits Coming Soon

By Jonathan on October 10, 2006

Illinois bankruptcy attorney Mazyar Hedayat reminds us in his DuPage County Bankruptcy blog that random bankruptcy case audits will start on October 17, 2006. October 17 is, of course, the one-year anniversary of the effective date of the BAPCA change to the nation's bankruptcy laws.

One out of every 250 cases will be audited. Debtors and their counsel will have 21 days to provide:

six months of pay advices
six to twelve months of bank statements
a copy of your divorce decree (if applicable)
two to four years of tax returns
copies of titles or deeds to real estate
other financial information

if this information is not provided or if it is incomplete, your discharge may be denied.

In my office I plan to ask my clients for this information at the time the case is filed.

[tags] random case audits in bankruptcy, denial of discharge, united states trustee, random audit [/tags]

Most Common Objections in Chapter 13 Cases – objection 4 – no proof of tax escrow

By Jonathan on October 9, 2006

This is the fourth installment of a series discussing the most common objections filed by Chapter 13 trustees in Chapter 13 cases. Thanks to Susan Gantt, a contract lawyer who handles Chapter 13 341 hearings for various Atlanta area lawyers on a contract basis.

4) No proof of tax escrow account. Although most creditors are paid through your Chapter 13 plan, there are some on-going creditors who are paid directly. These include your mortgage lender or your landlord, your electric utilities, your phone service and your garbage collection.

If you are self employed, you need to account for future income tax payments. If you do not, and you end up with a tax debt next year, the Chapter 13 budget you have filed with your case will not work.

If you are self employed, your Chapter 13 trustee will want to see proof of a self-employment tax escrow account. This can be a savings or checking account but you will have to have something to show the trustee.

Similarly, if your mortgage company is not escrowing taxes or insurance, you will have to set aside money each month to prepare for tax payments and insurance premiums.

I have found that a good vehicle for tax escrow accounts is a savings account. Since you may have trouble opening a savings or checking account after you file for bankruptcy, you should set up your banking arrangments before you file.

The trustee will want to see proof of this account and proof that you are funding this account each month – a bank statement showing $10 is not going to satisfy the trustee.

[tags] self-employment tax escrow, property tax escrow, taxes and Chapter 13, chapter 13 budgets [/tags]

Most Common Objections in Chapter 13 Cases – objection 3 – no affidavit confirming family financial support

By Jonathan on October 8, 2006

My colleague, Susan Gantt, works as a contract attorney who handles Meeting of Creditor hearings for several Atlanta area bankruptcy lawyers. Because she attends 341 hearings all day long and associates with several law firms, she can offer all of us a valuable perspective about the practical issues that arise in Chapter 13 cases.

I asked Susan to identify the most common trustee objections. In previous posts I discusssed to very common objections:

– failure to have a payroll deduction in place for Chapter 13 funding; and

– failure to provide proof of post-petition mortgage payments

3) Proof of supplemental income. In this post, I will discuss a third common objection – failure to provide proof of financial support from friends or family.

The premise behind a Chapter 13 case provides that a debtor must submit all of his “disposable income” to the Chapter 13 trustee for distribution to creditors. At the same time, there are mathematical constraints to Chapter 13 – you have to have enough money to pay debts such as car notes, mortgage arrearage and past due taxes, all within a maximum five year plan.

For example, if you owe $25,000 on a car note and $15,000 in taxes, but you only show $100 a month left over after paying household expenses, your plan cannot provide for a 60 month payout of your car and tax debt.

Sometimes, clients come to me for the purpose of saving a house or a car but because of limited income we run into this cash flow dilemma. Often the solution to this problem can be found by including in the income schedules financial support from a parent, sibling, roommate or friend.

It has been my experience that Chapter 13 trustees don’t necessarily have a problem with a family/friend contribution to income but they will want to see proof. An affidavit, or sworn statement, from the family member or friend can serve as acceptable proof of income.

Susan notes that many debtors and their attorneys fail to bring this affidavit of support to the 341 hearing. Even worse, debtors and their counsel often forget that they had used support from family or friend as a source of income. I have witnessed several 341 hearings in which the truste asked if the debtor was still receiving financial support and the debtor answered “no” and did not seem to recall ever getting such support!

So, if you and your attorney include support from family or friend as an income item, make sure to ask that family member or friend to sign an affidavit setting out the details abot that support. Your lawyer should be able to provide you with an affidavit form.

Most Common Objections in Chapter 13 Cases – objection 2 – no proof of post-petition mortgage payment

By Jonathan on October 2, 2006

As all Chapter 13 debtor attorneys know, trustee objections in Chapter 13 cases are much more common and much more extensive. Recently, I sat down with Susan Gantt, a contract attorney who appears at Section 341 creditor meetings on behalf of several law firms in the Atlanta area.

In my last post, I discussed a very common objection – the failure of debtor's counsel and the debtor to file a payroll deduction Order to fund the Chapter 13 case.

Today, I continue the series by discussing another more common objection having to do with documentary proof.

2) Proof of post-petition mortgage payments – if you are buying a house, your Chapter 13 case will most likely provide that your on-going mortgage payments are to be made directly starting with the first payment that comes due after you file.

For example, if you file your case on March 28, you will be due for the April 1 payment. However, if you file on April 1 or 2, then your next payment is due on May 1. Often times, it makes sense to file on the 1st or 2nd day of the month so you don't have to come up with the cash to pay your mortgage payment immediately.

Recognize, however, that if you include another month of mortgage arrearage in your Chapter 13 plan, your plan payment will likely be slightly higher.

Also be aware that not every mortgage payment is due on the 1st of the month. Second mortgages or home equity lines of credit – HELOCs – may have a due date of the 15th or a different date. Realize, as well, that I am speaking about the due date, not the "late" due date.

In any case, you will need to bring proof of your post petition mortgage payments to your 341 hearing. Proof can be in the form of a canceled check, a copy of your check or even a copy of your online bank statement with the mortgage payment circled.

If you do not have proof of your post petition mortgage payment, the trustee will object and demand proof before your case can be confirmed.

[tags] proof of post petition mortgage payments, HELOC, Nancy Whaley, Mary Ida Townson, Adam Goodman, Chapter 13 objections [/tags]