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Chapter 13 after Chapter 7

By Jonathan on July 13, 2006

I received an email today from a potential client asking about the rules for filing a Chapter 13 after a Chapter 7 that has been discharged.

Section 1328 of the Code says that a Chapter 13 debtor my not be granted a discharge if he received a discharge in a Chapter 7, 11 or 12 filed within four years of the filing of the pending Chapter 13 case.

Interestingly, this Code section does not appear to bar the filing of a Chapter 13 case within four years of a Chapter 7 discharge, but a case filed within this four year period would not result in a discharge. My colleague, Scott Riddle, has written in his Georgia Bankruptcy Law blog about two Southern District cases where the Judge found the debtors to be eligible for Chapter 13, despite their ineligibility for a discharge. One of the factors in the two cases Scott writes about is the proposed 100% dividend to unsecured creditors.

What does this mean? Would cases that propose less than a 100% dividend face more judicial scrutiny? Does it mean that a plan that proposes a 10% dividend to unsecureds would pay the 10% dividend in the plan, but not discharge the remaining 90%, which would survive the bankruptcy? What about a 100% dividend plan – would accruing interest survive the close of the Chapter 13 estate? I suspect that we will find out the answers to these questions within the next few years.

Now, what about the percentage dividend to unsecureds in a Chapter 13 filed after a Chapter 7 discharge? I have always used the “best efforts” and “good faith” requirements of the Kitchens case (In re Kitchens, 702 F .2d 885 (11th Cir . 1983).

The Kitchens case sets out a list of factors to be considered in determining good faith:

(1) the amount of the debtor’s income from all sources;

(2) the living expenses of the debtor and his dependents 411 U .S .C . §1325(x)

(3) the amount of attorney’s fees

(4) the probable or expected duration of the debtor’s chapter 13 plan

(5) the motivations of the debtor and his sincerity in seeking relief under the provisions of chapter 13

(6) the debtor’s degree of effort

(7) the debtor’s ability to earn and the likelihood of fluctuation in his earnings

(8) special circumstances such as inordinate medical expense

(9) the frequency with which the debtor has sought relief under the Bankruptcy Reform Act and its predecessors

(10) the circumstances under which the debtor has contracted his debts and his demonstrated bona fides, or lack of same, in dealings with his creditors

(11) the burden which the plan’s administration would place on the trustee

It is my position that the Kitchens case is still good law in the 11th Circuit (includes Georgia Bankruptcy Courts). So, as a rule, I do not think that Chapter 13 debtors who have recently received a Chapter 7 discharge must pay back their unsecureds at 100% but I will warn them that the Chapter 13 trustee is more likely to demand a higher dividend to unsecureds in one of these cases than in a first case.

Full Disclosure on Bankruptcy Petitions a Must

By Jonathan on July 9, 2006

My colleague attorney Scott Riddle recently posted on his Georgia Bankruptcy Blog an important reminder to both debtors and their counsel about the importance of full and complete disclosure of assets and debts in bankruptcy petitions.

The last paragraph of Scott’s post merits repeating:

The lesson to debtors is, obviously, disclose all of your assets and answer all questions truthfully (truth + fully). You cannot over-disclose to your lawyer or on the schedules. For debtors’ counsel, explain the criminal and civil (bankruptcy) penalties for false schedules, and get a signed statement that it has been explained. It can’t be good marketing when a client is denied a discharge and gets indicted, especially if the client defends by claiming he/she didn’t understand what is supposed to be disclosed.

All of us who represent stressed out and anxious debtors have heard a request that “let’s just keep this between the two of us” and a confession about some hidden asset or loan repayment (in cash) to a relative. My response, as would be the response of most of my colleagues in the consumer bankruptcy bar, is to the effect that (1) I am an officer of the Court and I will not participate in a scheme to mislead the bankruptcy court and (2) I am not going to put my livelihood in jeopardy for any client, ever.

In the case discussed in Scott’s blog entry, the omitted assets would not have created a problem for the debtor, but the judge or trustee in that case sent the file to the U.S. Attorney for criminal prosecution for Bankruptcy Fraud. Because the debtor intended harm, he committed a crime – and ended up serving time in federal prison.

So, if you are considering bankruptcy, keep in mind this requirement of total and complete disclosure of all information, good, bad or indifferent.

Credit Reporting Agencies Deleting Positive Information?

By Jonathan on July 9, 2006

One of my recent Chapter 7 clients (case successfully discharged) wrote me to say that he has noticed a disturbing occurrence on his credit reports. He advises that positive credit information (a paid off home mortgage and five other paid in full accounts) are no longer showing up on his credit report. Positive credit, of course, helps your credit score go up.

I did some research on this issue and found the Federal Trade Commission’s Official Staff Commentary Section 607 item 7, which reads:

Consumer reporting agencies are not required to include all existing derogatory or favorable information about a consumer in their reports. (See, however, discussion in section 611, item 14, infra, concerning conveying consumer dispute statements.) However, a consumer reporting agency may not mislead its subscribers as to the completeness of its reports by deleting nonderogatory information and not disclosing its policy of making such deletions.

I read this as meaning that credit reporting agencies may delete favorable information as they wish, just as they may delete unfavorable information before the 7 year maximum reporting time for unfavorable information. Presumably, however, it is misleading for a credit reporting agency to purge your file of positive information before the 7 years period but retain adverse information without disclosing its policy about how it retains and deletes information.

My client indicates that he has written a challenge letter to the credit bureau in his case – I would suggest to him that he include in his challenge a request for a copy of the policy statement about how the credit reporting agency purges data that was sent to the credit bureau’s members.

Beware of Bad Faith Collection Efforts by Bill Collectors

By Jonathan on July 5, 2006

I read an interesting article in the New York Times about illegal collection tactics used by collection agencies. Collection agencies sometimes buy old debt from established companies for pennies on the dollar, then pursue aggressive collection against the consumer, even including lawsuits.

Sometimes, however, the debt itself is stale (meaning the statute of limitations for collections has run) or was never valid in the first place.

Often consumers are misled by the aggressive collectors and agree to pay without confirmation that the debt is collectible. I have seen several instances where a consumer will authorize the collection agency to draft the consumer’s bank account – which is always a bad idea.

If you receive a call or a letter from a debt collector about a debt that you don’t recognize or that you dispute, you must assert your rights. First, demand a written verification of the debt so you can review whatever documentation exists. Second, never authorize the debt collector to access your bank account or a credit card. Third, you can assert your rights under the Fair Debt Collection Procedures Act to stop all phone calls and communication. Fourth, if you do get served with a lawsuit, contact a lawyer immediately for guidance – it is far easier to stop a judgment than to undo one.

As a rule, if you receive a call or letter about an old debt, do not assume that the bill collector is accurate or truthful. Get a copy of your credit report to conduct your own investigation. If you owe the money, you can usually negotiate a payment for pennies on the dollar – I have done this type of negotiation and we usually end up at 40 to 60 cents on the dollar for recent, verified debt.

Physician’s Failure to Comply With State Malpractice Insurance Requirement Does Not Give Rise to Non-dischargeable Debt

By Jonathan on June 26, 2006

The 11th Circuit (Federal Courts in Georgia must abide by 11th Circuit precedent) recently issued an interesting decision denying the appeal of a malpractice victim in a bankruptcy petition filed by a Florida doctor, Dr. Fernandez-Rocha. The case arose from a malpractice verdict won by a couple, the Guerras, whose newborn baby died under the care of Dr. Fernandez-Rocha. Although Florida law requires obstetricians to maintain a minimum of $250,000 of malpractice insurance, Dr. Fernandez-Rocha was not insured. After the judgment was issued, the doctor filed for bankruptcy in an effort to discharge the debt. [Read more…] about Physician’s Failure to Comply With State Malpractice Insurance Requirement Does Not Give Rise to Non-dischargeable Debt

Am I Allowed to Include in my Means Test Calculation an Allocation for Payments to Secured Creditors When I am Surrendering the Collateral?

By Jonathan on June 10, 2006

Thans to Judge Homer Drake, we have an answer to this question in the Northern District of Georgia. In the Walker case (2006 Bankr. LEXIS 845, Case No. 05-15010 (Bankr. N.D. Ga. May 1, 2006), Judge Drake overruled an objection by the U.S. Trustee. In this case, the debtor’s Chapter 7 Statement of Intentions provided for the surrender of his house and vehicle. The Means Test filed by the debtor had allocations for payments to both the mortgage and vehicle lenders. The Trustee objected to the inclusion of these allocations when the debtor intended to surrender the collateral.

Judge Drake found that the Means Test was intended as a snapshot of the debtor’s financial situation at the instant of filing and that at the time of filing, these payments were contractually due to the lenders. Further, Judge Drake found that since the Means Test could potentially penalize the debtor by using a six month look back as evidence of future income then the Means Test is by its nature is not intended to reflect the debtor’s current reality.

Judge Drake also noted that the trustee can still object to discharge under Section 707(b)(3) which allows the Court to consider the totality of the circumstances.