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Most Common Trustee Objections in Chapter 13 Cases – objection 1 – no payroll deduction

By Jonathan on September 29, 2006

What are the most common trustee objections in Chapter 13 cases? Who better to tell us than Susan Gantt. Susan serves the consumer bankruptcy bar in Atlanta by attending 341 hearings on a contract basis for a number of debtors' lawyers. She attends 10 to 20 341 hearings a day, every day and has done so for several years.

I asked Susan to identify the most common issues in Chapter 13 case. These are problems that occur over and over. If you have filed a Chapter 13 or if you are about to file one, I urge you to pay attention to this list. The most common Chapter 13 objections – in no particular order – are as follows:

1) No payroll deduction Order filed in the case. Chapter 13 cases are payment plans. Chapter 13 debtors are required to submit their disposable income to the Chapter 13 trustee where it will be distributed to creditors according to the Bankruptcy laws and the Chapter 13 plan. Under local procedure, all Chapter 13 cases are required to include a payroll deduction Order. This Order directs the debtor's employer to withhold a designated amount of money from the employee's paycheck and to send it to the Chapter 13 trustee.

Statistically, cases filed with a payroll deduction Order are two to three times as likely to be confirmed. Chapter 13 debtors, quite understandably, would prefer to pay the trustee directly. No one wants his employer or co-workers to know that he has filed bankruptcy. Debtors who work on commission or as 1099 contractors want to avoid payroll deduction. Chapter 13 filers are concerned that their job could be jeopardized if the employer finds out about the bankruptcy.

If you file your case without a payroll deduction, however, your Chapter 13 trustee will file an objection to confirmation and ask the judge to dismiss your case. In years past, Chapter 13 trustees were sometimes willing to consider direct pay cases. Now, however, they are much less likely to be agreeable to a direct pay plan. You can expect that both you and your lawyer will have to attend your confirmation hearing and you will have to explain to the judge why your case cannot be a payroll deduction case. If you argue this issue, be prepared to submit evidence in the form of an employee handbook or testimony from a co-worker or supervisor.

Realize as well that the time spent by your lawyer waiting for your case to be called at the confirmation hearing is billable time. Although your attorney's fees will be paid through your plan, you are paying nonetheless. Since confirmation calendars can sometimes run 50 to 75 pages, you and your lawyer may be sitting in court waiting for your case to be called for several hours.

To be continued…

[tags] chapter 13 objections, payroll deduction order in Chapter 13 cases, EDO, bankruptcy northern district of Georgia, Susan Gantt, Susan Irwin [/tags]

Debtor Uses Threat of Bankruptcy to Negotiate an 83% Reduction in Tax Debt

By Jonathan on September 27, 2006

Tax problem attorney Darrin Mish of Tampa has recently begun publication of his “IRS Problem Solver blog.” As you might imagine bankruptcy filings are often driven by tax problems. If you have tax problems in the form of unpaid taxes, huge penalties and imminent collection, it might make sense to speak to both a bankruptcy lawyer and a tax problem lawyer like Darren to review all of your options.

Darrin recently wrote about a case where he used the “bankruptcy card” in his negotiations with the IRS to negotiate favorable terms in an Offer in Compromise. The case involved a debtor who had not filed tax returns for ten years and owed an estimated $145,000. Darrin was able to negotiate a Offer in Compromise in the amount of $24,000 with the IRS Appeals Division by pointing out that the Internal Revenue Manual says that if a taxpayer threatens bankruptcy, then the IRS must calculate what the IRS would likely receive after the bankruptcy was over.

Obviously, not every $145,000 tax liability will settle for 17 cents on the dollar, but this is an example of how even the threat of bankruptcy can make a difference.

Student Loan in Your Chapter 13 – Congratulations, You are Officially in Limbo!

By Jonathan on September 26, 2006

We have run across a confusing predicament for Chapter 13 cases filed in the Northern District of Georgia that involve student loans. According to one of the assistant trustees whose identity we will protect, the judges in the Northern District have not yet decided how debtors should treat student loans in Chapter 13 case.

Pre-October 17, we could either pay the principal balances in full within the Chapter 13 plan, with accrued interest surviving, or we could pay student loans directly and not include principal in the plan.

Under the new law, however, we have been advised that the trustee will object to either treatment – we can't pay the student loans in the plan nor can we pay them directly. What should we do? "See if you can get the student loan into deferment status" was the reply.

On the other hand, an assistant trustee assigned to another judge takes a different, more reasonable perspective. In cases assigned to her judge, we can pay student loans directly, outside the plan, or we can pay them in full as a special class in the plan, or we can pay them as general unsecured creditors, with the balance surviving the bankruptcy. This approach gives me, as the debtor's lawyer, the most flexibility in crafting a repayment plan that might actually work.

Unfortunately there is a lack of consistency among the trustees. Presumably this student loan purgatory will come to an end at some point, but for now, the cases will just be reset.

[tags] student loan in Chapter 13, special class [/tags]

Credit Counseling on the Day of Your Bankruptcy Filing May be Invalid

By Jonathan on September 25, 2006

Consumer Bankruptcy News recently published an article discussing the holding of a Tennessee Chapter 13 case called In re Cole in which the Bankruptcy Judge dismissed a case because the debtor filed his consumer bankruptcy case the same day as he received his credit counseling.

Judge Richard Stair held that Section 109(h)(1) of the Bankruptcy Code provides that a debtor must obtain credit counseling “during the 180 day period preceeding the date of filing of the petition.” Judge Stair interpreted the phrase “preceding the date of filing” to not include the actual day of the filing. If Congress had meant to include the date of filing, the statute would have said “on or within the 180 day period.” Judge Stair further observed that the credit counseling requirement was intended to give debtors a chance to think about their actions and that filing bankruptcy that same day gave little time for such contemplation.

Judge Stair’s decision is yet another example of the absurd application of our new bankruptcy laws. Bankruptcy Court statistics show that less than 5% of potential bankruptcy filers end up not filing because of the mandatory credit counseling. As a practical matter, therefore, the credit counseling requirement simply serves as a $30 to $50 tax on debtors and provides limited if any benefit.

My own clients report that the credit counseling is basically a waste of time. If Courts around the country adopt Judge Stair’s reasoning, deserving but unfortunate debtors – especially those facing home foreclosure – will find the doors of the courthouse closed to them.

According to the SplitCircuits blog, several other bankruptcy judges have refused to follow Judge Stair’s interpretation of Bankruptcy Code Section 109(h)(1). Until we see how this shakes out, my advice is to get your credit counseling early and avoid this 109(h) issue altogether.

Are Life Insurance Proceeds Exempt in a Chapter 7 Filed in Georgia?

By Jonathan on September 18, 2006

A recently widowed, elderly woman qualifies for Chapter 7 under the median income/means test but is concerned that the Chapter 7 trustee will assert a claim on the $35,000 insurance proceeds she is expecting following the death of her husband. The woman needs to file a Chapter 7 to get rid of credit card and medical debt. Are the insurance proceeds exempt?

Here is my take: I read 44-13-100(11)(C) as the applicable Code section. The statute reads as follows:

A payment under a life insurance contract that insured the life of an individual of whom the debtor was a dependent on the date of such individual's death, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.

It appears therefore that the potential debtor must must qualify as a "dependent" and that the funds are "reasonably necessary" for her support.

I suspect that the question of whether she is a dependent will be a facts and circumstances test. I don't know what the case law says about this but my guess is that if the widow can show that she relied upon her husband for support then she would qualify as a dependent.

With regard to the "reasonably necessary" issue, I have been involved in several cases where a lump sum workers comp settlement of $75,000+ or a Social Security past due benefit check of $25,000+ was declared fully exempt based on the argument that the debtor would need this money for future medical care and to make up for loss of work capacity.

In all of these cases the bankruptcy judges were willing to exempt the full amount of the settlement. What we did was to make a math argument that the funds would be used for (1) regular living expenses, (2) future medical care (3) housing modifications, etc.

Here, I suspect that the prospective debtor could identify a monthly figure by finding out how much the debtor could expect to receive from an annuity if she took the life insurance proceeds and invested them or by dividing the settlement by the number of months left in her expected lifespan and plug that into her budget.

The bottom line – I think the debtor needs to be advised that there is some risk that her bankruptcy judge will find some of her life insurance proceeds non-exempt. I don't think that it is a big risk but there is some risk nonetheless. She also needs to be advised that this issue will probably have to be argued. My sense is that the US Trustee has been using the IRS as a model for addressing assets in Ch. 7 cases and in an IRS setting (Offer in Compromise or Installment Agreement) the insurance proceeds would be in play for the IRS. How much influence the IRS policies are having on the U.S. Trustees is an unknown.

Thanks to my colleague Scott Riddle for raising this interesting and relevant question for discussion. Scott and I frequently engage in e-mail discussions to brainstorm possible issues in cases and this blog post is derived from one of those discussions. Any errors in this analysis is mine alone. Scott publishes a very comprehensive and interesting blog called the Georgia Bankruptcy blog which I recommend to any lawyer or potential debtor who is interested in Georgia bankruptcy law.

[tags] insurance proceeds and Chapter 7 bankruptcy, life insurance proceeds and bankruptcy exemption, Scott Riddle, reasonably necessary for support of the debtor [/tags]

New Official Bankruptcy Forms Required as of October 1, 2006

By Jonathan on September 13, 2006

You may wonder who it is who creates the bankruptcy forms that we fill out. In 1922, the United States Congress established the “Conference of Senior Court Judges” – now called the “Judicial Conference of the United States” – to make policy and establish procedures for the operation of federal courts in the United States. The Chief Justice of the Supreme Court is the presiding officer of the Judicial Conference.

Periodically the Judicial Conference modifies the official bankruptcy forms. The forms underwent a fairly substantial revision in October, 2005, on the effective date of the new bankruptcy law.

With the new law almost a year old, the Judicial Conference is about to modify the forms again. Most of these changes are fairly minor, but these revisions will require the software vendors who provide case managment software to bankruptcy lawyers to release new versions of their programs.

One of the biggest changes I see has to do with reaffirmation agreements – what used to be a one or two page document now is now a 10 page document that requires both the debtor and the lawyer (with associated liability) to verify that the reaffirmation is in the best interest of the debtor.

In any case, these new forms will go into effect on October 1, 2006.