“I’ve Changed My Mind – I Want to Surrender My House”: What Effect Does Post-Confirmation Surrender Have on the Debtor’s Discharge?
If a confirmed plan provides that the debtors will cure arrearages through the plan and maintain ongoing payments on a mortgage or long-term car loan, and the debtors complete plan payments and get a discharge, those section 1322(b)(5) debts are not discharged per section 1328(a)(1). The debtors still have personal liability on those debts after discharge, just as if the debtors signed reaffirmation agreements in chapter 7 cases.
But what happens if after confirmation the debtors change their mind – they can’t afford the house or the car, and they let the creditor get relief from stay. Is the claim still a 1322(b)(5) claim that is excepted from discharge?
Even if a creditor gets relief from stay on a 1322(b)(5) claim after confirmation, the creditor’s claim remains a 1322(b)(5) claim according to In re Holman, 2013 WL 1100705 (Bankr. E.D. Ky. 2013). Taken to its logical conclusion, any resulting deficiency claim would not be discharged.
What about a post-confirmation plan modification to surrender the house or car – will that change the claim from one provided for under 1322(b)(5) into something else? Is such a plan modification permitted under the Sixth Circuit Adkins/Nolan doctrine? The debtors can try to modify the plan, but it may not be sufficient to protect the debtor from post-discharge collection calls and letters. See In re Spata, Case No. 09-52154 (Order Entered April 22, 2016, Doc. #122) (Bankr. E.D. Ky. 2016).
Is there a solution to protect the debtors? Maybe. Try including something like the following special provision in the original plan:
In the event that relief from stay is granted to any creditor addressed in Section II, or in the event that the Debtor surrenders the collateral to the creditor after confirmation, any resulting deficiency, after liquidation of the collateral, shall be classified and paid only as a general unsecured claim, but only up to the amount of said deficiency. Any amount unpaid on said deficiency claim shall be discharged upon completion of the plan. This special provision is intended to cover any and all secured claims, whether payment on the claims are to be made through the plan by the Trustee or to be made directly by the Debtor.
A plan with this provision was confirmed when no creditor objected. See In re Ratliff, Case No. 14-21064, Order entered Nov. 10, 2014, Doc. #43 (Bankr. E.D. Ky. 2014). The adequacy of the provision has not yet been tested, but it’s (probably) better than nothing. However, if a creditor objects to the provision, who knows what the result will be.
For a more detailed discussion, click here for a handout I prepared on Postconfirmation Mortgage Issues Affecting Discharge for a recent seminar. Part I of the handout discusses this issue (Part II discusses an issue mentioned in an earlier post, that a debtor who is delinquent in postpetition mortgage payments may not be able to get a discharge at all).
This is a more complex issue than what I’ve described here. Creditors’ attorneys, don’t assume that you and your clients have a free pass to collect on these 1322(b)(5) debts after discharge, because it’s not that clear. Debtors’ attorneys, be aware of the issues, and counsel your clients on the risks of changing their minds after confirmation.
NOTE: SAVE THE DATE – THE UK JUDGE JOE LEE BIENNIAL BANKRUPTCY INSTITUTE WILL BE JUNE 8-9, 2017, at the Campbell House in Lexington.
I see A LOT of what I call “fixit” court orders: orders directing parties to fix something or to do something. What really surprises me is the number of show cause orders entered when the parties don’t comply with the first order. If you think this doesn’t apply to you, read on.
I wonder whether attorneys are aware of how frequently they are the subject of fixit orders or show cause orders. If they are, why do they continue to ignore (or allow staff to ignore) court orders? If they aren’t aware of it, shouldn’t they be so they can take corrective action?
Here are some simple tips to help attorneys identify and prevent some common recurring errors:
First, determine if you have a problem. For debtors’ attorneys, spot-check the docket in a few cases you’ve filed within the past six months. Creditors’ attorneys, look at the docket in some cases in which you have recently filed motions or objections. If you’ve had one or more fixit orders (or heaven forbid, show cause orders) in several cases, you have a systemic problem that needs to be fixed. You and your staff are wasting time and money.
Second, review your procedures and make sure you and your staff have a basic understanding of certain local rules and the administrative procedures manual. Make a checklist, or print and highlight relevant provisions of the local rules if you have to. To avoid some common fixit orders, you should know, at a minimum, that:
- You must attach a proposed order to every motion (or objection if that’s the form of your initial request for relief);
- If a motion is filed on notice and opportunity (N&O) and you object to the motion, you have to notice your objection for an actual hearing (date, time, and location);
- Whenever you do a notice of hearing or N&O, the hearing date or deadline for objections that you put in your document must match the hearing date or deadline for objections you enter in ECF;
- You have to give at least 14 days’ notice on all motions or objections, unless:
- There is a longer period required in the federal rules;
- You file a motion to shorten the notice time; or
- Your request is listed in KYEB-LBR 9013-1(c) as one that does not require notice;
- When you file a chapter 13 plan, you must serve it on all creditors and file a certificate of service.
Add to your checklist that the “Chapter 13 Order to Debtor to Turn Over/Produce Documents” entered in every case requires documents to be provided to my office within 14 days of the petition. This is a court order and should not be disregarded, even if you are not “show-caused” for failure to comply.
Third, implement a procedure for promptly dealing with all orders and make sure everyone in your office is aware of the importance of complying with orders of the court.
- Understand that many docket entries are in fact court orders.
- The docket text will say “This Notice of Electronic Filing is the Official ORDER for this entry. No document is attached.”
- If you or your staff think that’s not a “real” order (and more than one attorney has told me that!), pretend you are standing in the courtroom while the judge is reading that docket text to you. Then respond accordingly.
- When you get any order, read it immediately. If it applies to you or your client, calendar the deadline, and do what the order says before the deadline. If you need more time to comply (particularly if you are waiting for information from your client), file a motion for an extension of time.
- If you get a show cause order for failing to comply with the first order, fix the problem immediately, file a response, and show up for the hearing (unless the matter is remanded). If you get a show cause order for failing to show up at a show cause hearing, you’ve got a huge problem.
Of course, deadlines get missed on occasion. Clients don’t always do what the attorney tells them to do. Spam filters eat ECF notices. A key staff person gets sick and the email inbox gets overloaded. Mistakes happen. But take steps to prevent recurring mistakes, which are time-consuming (for all of us) and costly.
Try to get things done correctly and timely the first time. Use checklists. Calendar deadlines. Train staff. Read and follow the rules. Do ECF training again if necessary.
But if you get an order to do something, even if it starts with “Deficiency – Action Required,” comply with it.
This is my last post on practice tips and “OMG!” lessons we picked up at the NACTT Annual Conference a couple of weeks ago, and it’s to give debtors’ attorneys some practical information from the session on tax issues in chapter 13 cases.
- Learn how to get information from and communicate with the IRS on behalf of the debtor by using Form 8821 (“Tax Information Authorization”), Form 2848 (Power of Attorney), the fax number for the IRS (in the instructions for each form), and the Practitioner’s Priority Hotline, 1-866-860-4259.
- Learn how to request and read a “record of account transcript” from the IRS.
- The transcript will show information that is not reflected on the tax return, such as whether there are any missing tax returns, or what collection efforts have been made (which might toll the time periods for determining whether a tax debt is priority or nondischargeable).
- Also get the IRS Transaction Codes Pocket Guide for assistance in reviewing the tax transcript.
- If you file the petition without getting an account transcript from or otherwise communicating directly with the IRS to verify that the client has filed all required tax returns, schedule the IRS and the state taxing entity. If you don’t give notice to the taxing entities, you have no opportunity to deal with tax problems, and all tax debts will be nondischargeable. (Is there any reason not to give notice to the IRS and state taxing entity in every chapter 13 case?).
- Review federal tax liens to ensure the IRS sent the required Notice of Federal Tax Lien to the debtor’s last known address in the time required under the statute. If not, the debtor may have grounds to challenge the validity of the tax lien. A recent report found that the IRS did not have procedures in place to update last known addresses for purposes of sending notices of tax liens.
- Understand that certain prepetition events such as short sales, foreclosures, and repossessions result in “cancellation of debt” (COD) income. Debtors’ attorneys need to be able to counsel their clients on the tax impact of those events and should make the review of possible COD income part of their intake procedures.
Although there were really no “OMG!” lessons in the session on representing debtors with tax issues in chapter 13 cases, there were some great practical tips in the session. To order a video of any of the presentations at the seminar, go to www.considerchapter13.org. Mark your calendars for July 12-15, 2017, for the next NACTT annual conference in Seattle, WA.
Don’t ignore this topic; it’s important for bankruptcy practitioners to know about the Consumer Financial Protection Bureau (CFPB) and educate their clients (whether consumers or creditors). Here are a few tips we learned about the CFPB at the 2016 NACTT Conference a couple of weeks ago.
- Consumers, debtors’ attorneys, and creditors’ attorneys really need to know about the CFPB!
- The CFPB has supervisory, regulatory, and enforcement authority over various consumer financial services and laws.
- Activities and entities covered include: debt collection, credit reporting, mortgage servicers, private student loan lenders and servicers, payday lenders, and many others.
- The CFPB website (www.consumerfinance.gov) has lots of useful information.
- Debtors’ attorneys might want to print out some of the brochures and give them to their clients.
- Everyone should peruse the Consumer Complaint Database to see what some of the hot issues are (like collection of medical debts). Consumer complaints are very effective.
- Creditors’ attorneys need to follow CFPB enforcement actions. Consent orders may not be binding on other parties but they offer guidance on what conduct the CFPB finds improper or unlawful.
- Recent CFPB consent orders with debt buyers and sellers offer guidance on issues that might be grounds for objecting to claims in bankruptcy. For example, one consent order demonstrated how a debt buyer took collection action against consumers based on inaccurate account records.
- The CFPB is expected to issue new rules governing debt collection (and on July 28, 2016, announced its proposal. http://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-considers-proposal-overhaul-debt-collection-market/).
- In the long run, the quality of claims filed in bankruptcy cases should improve due to the actions of the CFPB in its oversight of the debt buying and selling industry.
- OMG!: Attorneys are not necessarily exempt from CFPB oversight and enforcement.
I’m sharing a few practice tips and “OMG!” lessons we picked up at the NACTT Annual Conference last week in Philadelphia. This post is on two important case decisions affecting the debtor’s chapter 13 discharge (both warranted “OMG!” reactions from my staff attorneys and I).
- OMG!: The discharge injunction does not prevent the collection of a DSO claim that was disallowed by the bankruptcy court, which had sustained the debtor’s objection to a portion of the DSO claim, per a recent decision of the 8th Cir. BAP.
- The court held that a DSO claim is nondischargeable in chapter 13, whether or not the claim is allowed or disallowed.
- Even though the debtor paid the allowed DSO claim in full through the plan and received a discharge, the child support enforcement agency did not violate the discharge injunction by garnishing the debtor’s wages for the disallowed portion of the claim.
- OMG!: A debtor who is making mortgage payments directly (“outside” the plan) and who is delinquent in those postpetition mortgage payments at the end of the chapter 13 case is not entitled to receive a discharge of any debts because the debtor has not completed all payments under the plan as required by section 1328, per a recent decision of the Fifth Circuit Court of Appeals.
- The issue arises when the mortgage lender files its Response to the trustee’s Notice of Final Cure under Bankruptcy Rule 3002.1(f) and (g). If there is an unpaid postpetition amount reported in the creditor’s response, courts so far have unanimously ruled that the debtor gets NO DISCHARGE AT ALL. Scary stuff.
- Debtors’ attorneys need to counsel their clients on the risks of not making postpetition mortgage payments.
- Don’t assume you’ll find out about a postpetition mortgage arrearage before the end of the case from a creditor’s motion for relief from stay; many creditors are choosing not to seek stay relief during the case.
- One speaker suggested that debtors’ attorneys might want to send annual Requests for Information under RESPA on behalf of their clients to find out if the debtors are postpetition delinquent so the issue can be dealt with before the end of the case. (Sounds onerous to me).
- Is the only real solution conduit mortgage payments through the trustee?
Stay tuned for more practice tips and OMG! lessons from the NACTT annual conference, and mark your calendars for July 12-15, 2017, for the next NACTT annual conference in Seattle, WA.
I want to share a few practice tips and “OMG!” lessons we picked up at the NACTT Annual Conference last week in Philadelphia. I’ll break this out into four posts over the next few days: student loans, discharge issues, tax issues, and the CFPB.
STUDENT LOAN ISSUES:
- OMG!: $100,000 in student loans at 8% interest will grow to almost $149,000 at the end of a 60-month chapter 13 case.
- OMG!: If a federal student loan is in default (no payments for more than 270 days), there is an assessment of collection costs of up to 18.5% (and could be 25% in some instances) of the outstanding principal and interest.
- Use caution when proposing to make student loan payments directly “outside” the plan:
- When a debtor files chapter 13, the Department of Education puts student loans in “administrative forbearance” which is like a deferment, but interest continues to accrue.
- OMG!: The Department of Education (and maybe other lenders or servicers) may refuse to accept payments from the debtor even though the plan says the debtors will make student loan payments directly. They think the payments should be coming from the trustee. Chances are the debtors don’t tell their attorneys and think they don’t have to make any student loan payments while they are in chapter 13, not realizing how much interest (and collection costs) can accrue in the meantime (all of which are nondischargeable).
- Plans may need to have more specific provisions to require the student loan lenders/servicers to accept payments and apply payments per the contract. At a minimum, debtors’ attorneys need to warn their clients about these issues.
- Should the trustee make conduit payments on federal student loans to protect the debtor?
- The Department of Education does not permit chapter 13 debtors to participate in any income-driven repayment (IDR) plans available to non-bankruptcy borrowers, unless the chapter 13 plan contains certain specific provisions. See, for example, the “Buchanan Provisions” negotiated by North Carolina attorney Ed Boltz and the Department of Education. http://ncbankruptcyexpert.com/2015/10/02/student-loan-options-and-chapter-13-bankruptcy/
Stay tuned for more practice tips and OMG! lessons from the NACTT annual conference, and mark your calendars for July 12-15, 2017, for the next NACTT annual conference in Seattle, WA.
What To Do With Insurance Proceeds When a Car Securing a Claim Being Paid Through the Plan Is Damaged or Destroyed
What do you do when there are insurance proceeds payable on the loss of a car that secures a claim being paid through the plan?
Here’s the setup: The chapter 13 plan provides for the payment of a claim secured by the debtor’s car through the plan. Months after confirmation, the car is wrecked, and there are insurance proceeds from a full coverage policy. The secured creditor has a lien on the proceeds and is a named loss payee on the policy. The debtor has an exemption, and in addition has acquired equity in the car by paying down the debt through the plan.
Who gets the proceeds? How much does each party get? What law determines each party’s entitlement to the proceeds? Does it matter if the claim has been bifurcated (split into a secured claim and an unsecured claim based on the car’s value) or if it’s a “910-claim”? What if the debtor needs a replacement vehicle?
This is an incredibly common occurrence. I don’t have all of the answers to every situation, but I can tell you how I think the issues are best resolved. The short answer is that there needs to be an order from the Bankruptcy Court directing how the insurance proceeds are to be paid.
In the attached document, Insurance Proceeds on Car Securing a Claim Being Paid Through Plan – EDKY, I give Tips for Debtors’ Attorneys and Tips for Creditors’ Attorneys on how to deal with insurance proceeds. I hope it helps, but don’t forget my disclaimer at Read This First.
When you are calculating what it takes to make a plan feasible, you have to know how to account for the trustee’s percentage fee.
My office’s percentage fee (for now) is 6.8% of receipts. That means if a debtor’s plan payment is $100, I take $6.80, which leaves $93.20 available to disburse to creditors.
But more often than not, you are trying to figure out how much the debtor’s payment needs to be in order to pay a certain amount of claims through the plan plus my fee. To do that, you need to add about 7.3% to the amount of claims in order to come up with the “pool” amount necessary to pay the claims and my 6.8% fee on receipts.
When I say claims, I mean the total of: principal amount of secured claims to be paid through the plan, projected interest, priority claims, attorney’s fee, and any amount of general unsecured claims that needs to be paid.
Unless the debtor is on a very tight budget, you can’t go wrong with using an 8%, 9%, or even 10% fee when you are calculating what it will take to fund the plan.
Why use a higher fee? Let’s assume you use a 60-month amortization schedule to calculate interest and a 7.3% multiplier for my fee. If during the case the debtor is slow or late with plan payments, interest on secured claims will continue to accrue, and the case is not going to pay out in 60 months because of that additional interest. Now your plan is no longer feasible. Using an 8% to 10% fee in your calculations helps build in a cushion for that additional interest.
If you think 8% is going to yield an unnecessary windfall to unsecured creditors while making it difficult for your clients to make ends meet, then try 7.5% or 7.8%.
But whatever you do, even if the debtor is on a shoestring budget, don’t add 6.8% (my fee) to the amount of claims and expect to have a feasible, adequately funded plan. The math doesn’t work. Use 7.3%.
(If you really want to know why you have to pay 7.3% of claims to cover a 6.8% fee on receipts, let me know and I’ll show you the math. The exact multiplier is .07296137).
(Additional note: when I speak of “feasibility,” I’m talking about whether a plan is adequately funded to pay all necessary claims within the plan duration. The term “feasibility” is also used by courts in discussing whether a debtor can afford to make plan payments).
The interest rate on secured IRS claims increased to 4%, effective with cases confirmed on or after April 1, 2016. The rate is adjusted by the IRS quarterly, but had remained at 3% for more than four years. The higher interest rate could make a difference in feasibility, so make sure you use the new interest rate in your calculations.
Per 11 U.S.C. § 511, the interest rate payable on secured tax claims is determined by applicable nonbankruptcy law as of the calendar month in which the plan is confirmed. You cannot modify the interest rate on a secured tax claim through the plan.
By the way, the IRS tax lien (if notice is properly filed) encumbers everything, including exempt property. 11 U.S.C. § 522(c)(2)(B). Keep that in mind when determining the secured value of the IRS’ secured claim.
Debtor was in a chapter 13 case but couldn’t make plan payments. Case got dismissed. Debtor files a second case within a year. How is the automatic stay affected?
When a debtor files a chapter 13 petition within a year after a prior bankruptcy case was pending but was dismissed, the automatic stay terminates on the 30th day after the new petition is filed. While it is a commonplace practice to request an extension of the stay, there are some pitfalls to be aware of, and I’ve seen debtors lose the protection of the automatic stay because of the attorney’s errors or complacency.
- The hearing on the motion to extend the stay must be completed before the 30th day after the petition is filed. 11 U.S.C. § 362(c)(3)(B).
- The stay can be extended only if the debtor demonstrates that the later case is filed in good faith, 11 U.S.C. § 362(c)(3)(B); BUT –
- There is a statutory presumption that the later case is filed NOT in good faith. 11 U.S.C. § 362(c)(3)(C).
- The presumption can be rebutted by clear and convincing evidence to the contrary. 11 U.S.C. § 362(c)(3)(C). Most often, the evidence will need to show that there has been a substantial change in circumstances since the dismissal of the prior case, and that the debtor will be able to fully perform under the terms of a confirmed plan in the new case. See 11 U.S.C. § 362(c)(3)(C)(i)(III).
Don’t delay. File your motion to extend the stay as soon as you file the petition. Get it set for hearing as quickly as possible, making sure the hearing can be concluded before the 30th day after the petition. Call chambers and ask for a telephonic hearing if necessary.
You have to give notice of the hearing to creditors. If you can’t give 14 days’ notice of the hearing, file a motion to shorten notice (for good reason). Make sure you give good notice to creditors who are repossessing a car, setting a foreclosure sale, garnishing wages, etc., and be prepared to explain to the court how you gave shortened notice (by phone, fax, email, etc.)
In order to rebut a presumption, you need evidence. That is why the court here expects, at a minimum, an affidavit from the debtor, even if no creditor has filed an objection. The attorney’s assurances in the motion that the new case will be successful is not evidence; it’s merely argument. Even if a creditor doesn’t object, the court has to ensure the presumption of “not in good faith” is sufficiently rebutted as required by the statute.
The debtor’s affidavit should be specific and detailed. Don’t use a generic form affidavit where the debtor simply states, “I couldn’t afford my plan payments in the first case but I can afford them now.” Such a statement is not clear and convincing evidence that there has been a substantial change in the debtor’s circumstances.
Read the full text of section 362(c)(3) every time you file a second case within a year of a previous case that was dismissed. It can be a tricky statute to comprehend, and it is much more comprehensive that what I’ve mentioned here.
[In a later post, we’ll talk about what happens if the debtor had two or more dismissed cases within the preceding year of the new petition (hint: there is no automatic stay. 11 U.S.C. § 362(c)(4)).]